Iraqi oil awards signal brighter upstream future
After the award of three large upstream contracts, Iraq's prospects as an oil producer are looking much brighter
IRAQ AWARDED ExxonMobil and Shell a contract to develop phase one of the West Qurna oilfield last month. The agreement signals genuine progress in the country's upstream development – and suggests this month's licensing round will be much more successful than the previous one.
The West Qurna-1 contract presents the two companies with a significant opportunity. Its reserves amount to 15bn barrels; the upside potential for reserves is good; production costs are low; production-growth potential is excellent; and the field is in the relatively stable Basra governorate, close to existing infrastructure and export points.
IHS Global Insight, a consultancy, describes West Qurna-1 as one of the "big prizes" in the oil industry. ExxonMobil and Shell plan to increase production to a plateau of 2.1m barrels a day (b/d) within seven years, from 270,000 b/d.
The West Qurna-1 agreement follows two other large upstream deals in the country. Under a services contract with state-owned South Oil, BP and China National Petroleum Corporation (CNPC) plan almost to triple crude production from the Rumaila oilfield, near Basra, to 2.85m b/d.
And Italy's Eni has been awarded rights to develop Iraq's Zubair field, in a partnership with the US' Occidental Petroleum and South Korea's Kogas. Near Basra, Zubair holds an estimated 6bn barrels and produces 195,000 b/d, but Eni says this should reach a plateau level of 1.125m b/d within seven years.
All this is extremely encouraging for Iraq's oil, and wider economic, prospects. At the start of the year, Iraq had hoped to boost capacity from around 2m b/d to 4m b/d as a result of field awards under the first licensing round and to 6m b/d following a second round. But the three contracts already awarded could alone add 6m b/d to capacity.
"The landscape has been completely changed," says Alex Munton, a Middle East analyst at Wood Mackenzie, a consultancy.
The positive outlook contrasts with the pessimism that followed the June licensing round, the first since the US-led invasion in 2003. Then, most bidders viewed Iraq's proposed contract terms as too onerous and Rumaila was the only contract awarded. ExxonMobil and Shell, for example, balked at the oil ministry's $1.9 a barrel production fee, offering $4/b. Similarly, Eni and its partners proposed to pay $4.80/b per barrel of incremental oil.
Their stance has changed, although the terms do not appear to have been significantly improved in their favour since the summer. The ministry has changed the way the country will apply a 35% tax, only levying it on profit oil and not on the part of the remuneration covering cost recovery, notes IHS Global Insight.
However, the fee the ExxonMobil and Shell consortium will receive for oil produced at West Qurna-1 – $1.90/b – has not been improved since the summer. Says Munton: "It looks as though the companies have moved significantly towards the Iraqi position and it's not clear that there have been any material concessions from the Iraqi side."
One reason for the apparent shift in the majors' position is that BP and CNPC had set a precedent by agreeing to undertake the Rumaila contract at a remuneration rate of $2/b.
Another is that, at 115bn barrels, Iraq's proved reserves are simply too large for the majors to ignore. And now is probably the time to secure access to them, says Munton; there may be relatively few opportunities to gain access to Iraqi reserves in the future, especially for such large fields.
Iraq is offering 10 projects, with reserves estimated at 41.3bn barrels. The two largest fields on offer – West Qurna-Phase 2 and Majnoon – are very large indeed. West Qurna-Phase 2 is estimated to hold up to 12.9bn barrels and Majnoon 12.6bn barrels. Also, much of Iraq remains relatively unexplored, so reserves have considerable potential to increase. Production too: the long-term national production-capacity target of 10m-12m b/d identified by the government may eventually be achievable, says Munton.
The Rumaila, Zubair and West Qurna-1 awards suggest next month's licensing round is likely to be a success. The interest of several other large companies in the West Qurna-1 contract – including ConocoPhillips, Total, Chevron and a Chinese consortium – is indicative of intensifying interest in Iraq's upstream and a growing acceptance of the terms under which companies will be expected to operate. Around 45 firms are qualified to participate (bids are due to be submitted on 11-12 December).
The enthusiasm is likely to cut both ways. The positive outlook for upstream growth – and economic recovery – resulting from the latest contract awards should generate greater political support for the involvement of the majors in Iraq.
But risks remain. Although agreement on the development of the three fields "will significantly strengthen the government", says IHS, it will also "draw the ire of its hardest opponents, both in parliament and among insurgents, raising the risk that the oil industry will be increasingly targeted during the run-up to the [January's national] election".
Security also remains a significant concern and could be impaired if results in the January election increase political fragmentation. The election result also has the potential to undermine efforts to finalise the oil law and increase opposition to private-sector involvement in Iraq's oil sector, although neither of these outcomes appears likely at present.
Then, there is Opec: Iraq remains outside the cartel's quota system, but substantial upstream growth will increase pressure on the country from within the organisation to agree a new production cap. Iraq will oppose any such measure, given that other Opec member states have benefited for years from the country's below-par production. But if an output cap were implemented, it would limit the prospects for upstream expansion and make the country a less attractive destination for investment.
Nonetheless, optimism about Iraq's upstream prospects should be as high as it has been since 2003.