Iraq and Iran move further apart
Baghdad’s pivot away from its neighbour is increasingly extending to their shared resources
Iraq has been giving Iran the cold shoulder in recent months as the new government in Baghdad cosies up to Washington and pivots to build closer ties with Riyadh. And the divergence is also evident in field complexes that sit on both sides of the border.
The western part of the giant Iraqi Majnoon oilfield and Iran’s Yaran and Azadegan fields are parts of a shared formation. The overall Majnoon field holds c.38bn bl of oil in place and has been earmarked to reach a production capacity of 500,000bl/d in 2021.
The fields on the Iranian side are part of the West Karoun oilfield cluster, along with the giant Azar and Yadavaran fields.
A source who advises both oil ministries tells Petroleum Economist that West Majnoon and Azadegan are “examples of coordinated work and targets” between the neighbours. But the reality appears somewhat different.
Iraq has benefitted from the presence of IOCs and international oilfield services and equipment (OFSE) firms to develop its fields, But Iran is hobbled by sanctions—the lifting of which is unlikely be an immediate priority even if Joe Biden takes office as president in the US in January—and continues to share its field development work among local firms.
Baghdad has therefore been able to rapidly increase output from joint fields, resulting in swift depletion and pressure loss. Tehran has been unable to keep pace, having relied too heavily on Russian and Chinese companies to provide capital for joint field developments that have, in most cases, not come to fruition. The imbalance has resulted in a production ratio of 3.2/1 in Iraq’s favour.
“The increased presence of IRGC contractors has added to the threat of additional punitive measures by the US” Iranian government source
The West Karoun region is thought to hold 50-100bn of oil in place. But its recovery rates have fallen to just 6pc and are unlikely to improve unless and until IOCs are allowed to return and deploy cutting-edge technology
With Iraq’s enthusiastic drilling draining resources, Tehran has awarded a flurry of contracts to try to redress the balance. But these may serve more to hinder Iran in the longer term than help it.
Strategic talks remain ongoing with Beijing, and reports have emerged that state-controlled Cnooc and PetroChina may sign new contracts for projects in West Karoun. But Iran’s state oil firm NIOC and its subsidiaries have instead handed contracts to local firms. Deals have been signed in the last few weeks that promise production increases at Yaran and South Azadegan, from which PetroChina was expelled in 2014 for lengthy project delays.
Tehran has no intention of stopping there. Oil minister Bijan Zanganeh expects contracts to be agreed for all of Iran’s shared border oil and gas fields by the end of President Hassan Rouhani’s term in mid-2021.
Discussions are ongoing on contracts for the oil layer of the giant South Pars gas field (which, on the other side of a border, is Qatar’s North Field, and again is the subject of more intense exploitation by an Iranian neighbour), as well as for the Changuleh, Forouzan, Reshadat and Sohrab oilfields. Zanganeh also told Iranian media that a local firm would “soon” be contracted for the 12.5tn ft³ offshore Farzad-B gas field.
While Tehran will likely herald the success of local companies and of its so-called ‘resistance economy’, the deep involvement of these domestic firms is likely to pose problems for any future partnership with foreign players. Of the 23 new contracts awarded so far, “19 have been awarded to domestic firms—15 [of which have] connections to Khatam-al Anbiya Construction and other businesses connected with the Islamic Revolutionary Guards Corps (IRGC),” an Iranian government source tells Petroleum Economist. “The increased presence of IRGC contractors has added to the threat of additional punitive measures by the US.
Iraq has also been contracting for drilling work as it continues to raise production capabilities, despite commitments it has made to cut output under the new Opec+ deal. US OFSE firm Weatherford has been recently hired to drill 20 wells at the Al-Nasiriyah oilfield over the next 18 months.
c.22pc – Increase in flows from Iraq’s northern fields
But with the country having cut just 650,000bl/d of production in May compared with an Opec+ requirement of 1.06mn bl/d, Basra Oil Company and the IOCs developing the country’s southern oilfields were asked to trim a further 300,000bl/d and 350,000bl/d, respectively. And, to make up for historic non-compliance, Baghdad also agreed to make further compensatory cuts of 70,000bl/d in July, 314,000bl/d in August and 313,000bl/d in September.
However, data firm Refinitiv suggests that, despite these pledges, Iraq’s oil exports have increased through July, with flows from northern fields growing by c.22pc and those from the south remaining unchanged.
It remains to be seen whether Iraq will eventually be forced into line, most likely by its new ally in Riyadh. But even if it manages to avoid further cuts, its momentum towards its lofty production targets of 8mn or even 9mn bl/d has been checked. And this perhaps not just by the cuts it has made. There are, for example, growing concerns about the commerciality of the third phase of the West Qurna-2 concession, which was due to have doubled production to 800,000bl/d by 2025.
But Iraq’s key issue to realising its full production potential remains water. Its giant southern fields require vast volumes to maintain well pressure and increase recovery, a problem for which the Common Seawater Supply Facility (CSSF) was intended to be a silver bullet. However, years of delays caused by civil unrest, political instability, corruption and commerciality concerns mean the CSSF remains a distant prospect and, with it, so do Iraq’s dreams of joining the big league.