Iraq’s expansion goals under pressure from lack of investment
Ambitious production expansion plans under threat as a lack of investment in southern Iraqi infrastructure disrupts progress
The Iraqi government is sticking to targets for oil production capacity expansion that were drawn up before the global price collapse. But a combination of fiscal pressures and disruption to oil operations caused by the Islamic State insurgency in the north of the country is likely to force a reassessment.
The Basra Oil, Gas and Infrastructure Conference in Istanbul heard in early November that the energy ministry is still hoping to bring Iraq’s production capacity to 9m b/d by 2020, from today’s 4m b/d, in line with figures contained in its 2013 National Energy Strategy. This is theoretically possible if all the production expansion plans are carried out and all the export infrastructure expansion projects completed. The forecast also assumes that Iraq will resume northern oil production and exports which are frozen by the IS crisis and by a dispute with the Kurdish Regional Government.
Since the international oil companies began operating the southern oil fields five years ago, the region’s capacity has shot up from 1.6m barrels per day (b/d) in 2010 to 3.3m b/d in 2015. But a continuation of this upward trend is by no means assured.
Of all the possible constraints on oil production expansion the financial one is likely to be the most severe. IOCs in southern Iraq, operating on the basis of technical service contracts, receive payments either in cash or in oil.
Over recent months the Baghdad government, faced by mounting costs related to the war against IS and diminishing oil revenues, has had difficulty making these payments. In September it asked the IOCs to present revised development plans for 2016 to take into account the decline in Iraq’s oil revenues.
The companies were told to avoid commitments that were not part of approved work programs and budgets because of the reduced funds available to reimburse costs. The energy ministry is also considering the amendment of technical service contracts in a way that would link companies’ payment to global oil prices. The IOCs would like to see something closer to a production- sharing agreement that would incentivise their investment in oil projects.
In the short term at least the revisions to operating budgets are likely to slow output expansion plans in southern Iraq. The UK major BP, operator of the giant Rumaila oil field, has said it expects production to average 1.3m-1.5m b/d this year, with output in 2016 depending on the extent of budget cuts. Michael Townshend, BP’s regional president for the Middle East told Bloomberg in November that budget discussions were a work in progress, but it was “difficult to see a massive ramp up next year.”
Another possible brake on southern oil production capacity expansion could come in the form of yet more delays to the common seawater supply project (CSWSP), which is urgently needed for water injection to sustain output levels.
According to the head of engineering at Iraq’s state Southern Oil Company (SOC), Salah Abdullah, “maintaining reservoir pressure is a major challenge. At the moment we have three sources of water: the Garmat Ali main water injection plant where the capacity is less than required; aquifer sources; and the country’s main outfall drain. This shortage of water injection leads to loss of reservoir pressure and production, and it’s hindering future production development.”
SOC says it now does not expect the CSWSP to be completed before 2020, rather than the earlier target date of mid-2018. The first phase of this $12bn-project will bring 7.5m b/d of seawater, via a treatment plant, pumping station and distribution manifold, to all the major oil fields in the south. The second phase will see the volume of seawater rise to 12m b/d.
The project is part of a package involving the development of the state-operated Nahr bin Umar and Ratawi oilfields, and the upgrading of Khor al-Amaya terminal.
Negotiations between the energy ministry and a consortium linking the US major ExxonMobil and China National Petroleum Corporation (CNPC) are still at an early stage. SOC says that a decision in principle has been taken to open Nahr bin Umar and Ratawi to bids from IOCs to operate them on the basis of technical service agreements, even if the talks with ExxonMobil and CNPC are unsuccessful.
The coming years will determine whether Iraq can overcome the security and financial challenges in the way of achieving its 2020 goal.
A former oil minister – who is now chair of the advisory commission to Iraq’s prime minister – Thamir Ghadhban says “it is likely that we will have the capability to produce 9m b/d by then. With 1.5m b/d for refining, that would leave 7.5m for export. In the event we may actually produce 7m b/d. But that would still leave 5.5m b/d available for export, depending on the market.”
Iraqi energy consultant Asri Mousa says Iraq could, from next decade, account for as much as 45% of the growth in global production until 2035. At this point “with spare capacity of around 1.5m b/d, Iraq could become a swing producer.”
Achieving that status will be possible only if the country can eradicate the range of problems that the energy sector faces today.