BaghdadStruggles To Spark Refinery Investment Bonanza

Iraq is planning an ambitious overhaul of its existing refineries and aims to build at least four green-field plants, which alone would require a minimum investment of $30bn. A new investment law has been promulgated and amended, detailed design on the new refineries is complete or close to complete, and the oil ministry is in advanced talks with several potential investors. But there remains a lot of work to do to before any deal with a credible foreign operator can go ahead. Rafiq Latta reports from the Iraq Refinery 2012 conference in London.

The Ministry of Oil has been touting for some time a downstream plan, which aims to double overall Iraqi downstream capacity to 1.5mn b/d by end-2013. But, while the political opposition to the process is definitely less marked than that which frustrated Iraq’s upstream opening in 2006-09, the refinery investment plan is if anything more fraught. Investors have been put off by a range of factors including: a lack of security; a lack of regulatory clarity; bureaucratic challenges; a deficit in governmental financial backing; and sub-optimal locations leading to lost export potential. While upstream investment largely involved interfacing with only the oil ministry, prospective refiners will have to deal with a multitude of ministries and local authorities. To date, there has been little interest from any of the major oil companies in any of the projects, with the exception of the planned 300,000 b/d Nassiriya refinery (which has the lure of an associated field development).

None of the four planned refineries is in Basra province, which would be the ideal location for an export refinery that could potentially be built in tandem with an integrated petrochemical complex. Deputy Prime Minister for Energy Affairs Husain al-Shahristani did state that Iraq was starting to develop a Petrochemicals Master Plan and would be open to proposals for such a project. While no figures were given, Iraq is provisionally eyeing eventual petrochemical production of around 10mn tons/year. Egyptian investment house Citadel together with a US partner had also proposed a 150,000 b/d refinery to process heavy oil from the Qayara field. A memorandum of understanding (MOU) has been signed, but this project is at a relatively early stage compared to the four planned projects.

‘Grim Picture’

There is a clear imperative to develop the sector and improve what Dr Shahristani called the “grim picture” of Iraq’s refining industry. “There is no economic basis on which these refineries are run,” Deputy Minister for the Downstream Ahmad al-Shamaʹexplained. Refinery feedstock prices have no relation to crude prices. The price the refinery gets for products has no relation to the price the products sell at. And neither has any relation with international prices. “It is an equation that needs to be corrected. And the only way to correct that is to go for new refineries run on a private, commercial basis,” he argued.

The current aging and dilapidated refining system delivers only 60% of Iraq’s gasoline and 75% of its gasoil needs and demand is rising sharply. Refinery yields of high quality light products are low: 2% LPG, 15% gasoline, 10% kerosene, 1% jet fuel, 20% gasoil but 50% fuel oil are poor in good quality light products. The average utilization of refineries in Iraq is about 70%, and even this poor performance is flattered in the light of 85% utilization at the 300,000b/d Baiji plant. Furthermore the average operational cost of units that supply poor quality products is a hefty $7/B, Dr Shahristani noted. In contrast, Baghdad is aiming for the new refineries to produce around 35% gasoline and to limit heavy products to no more than 20% of output.

However, despite the overwhelming arguments in favor, the obstacles to pushing through refinery development are considerable and are frustrating for both foreign investors and Iraqis. “We have been having a lot of bureaucratic hurdles, quite frankly,” said Dr Shahristani at a keynote address on 18 April. In a thinly veiled criticism, Mr Shamaʹ, noted that the front end engineering and design (FEED) for the planned 140,000 b/d Karbala refinery would have to be redone, after the Ministry of Electricity decided unilaterally to switch the fuel source for a planned power station from fuel oil (to be supplied by Karbala refinery) to gas. Another Iraqi oil manager bemoaned the extra bureaucracy and consultation involved since 2003 as Iraq’s 18 governorates acquired political influence. “We used to have one system and we knew what was wanted. We now have 18 systems and there is no coordination,” he complained. “Each one of the governorates wants a big refinery, an airport. That doesn’t make sense. It is no way to do planning.”

And the prospect of dealing with multiple agencies and power centers has proved daunting for prospective investors. Current efforts to streamline and facilitate processes are just inadequate, argues one foreign oil executive. “The National Investment Commission (NIC) is being presented as the solution, a one-stop-shop, but you know what? You go to NIC and everything stops. That is how it works at the present,” he argued.

Incentives

Baghdad is offering incentives for the new refineries and is open to discuss commercial structures, other than the build-own-operate scheme currently on offer. Incentives are as follows: a guaranteed supply of crude at a 5% discount to international prices of Iraqi crude, the discount capped between $4/B and $8/B; lease of suitable land for the 50-year lifetime of the refinery; 10 years tax exemption, which would be extended to 15 years if the Iraqi investors’ stake is more than 50%; and three years exemption from import duties. Furthermore, investors can determine prices of their products and establish a retail network to market them. Alternatively the government will guarantee to buy the products. There is free repatriation of capital  and  profits,  a  guarantee  that  the  government  will  not  nationalize  or confiscate investments, and

international arbitration for dispute resolution. Iraqis should make up 75% of the workforce but there is freedom to employ foreign workers as needed.” Following feedback from investors, the government is offering to take up to a maximum 25% stake, but getting permissions from cabinet and parliament for this could lead to further delays.

Talks on Karbala refinery with a UAE-led consortium were the most advanced of the projects. But discussions were temporarily halted after the consortium decided the structure was not commercial enough. An upgraded capacity of 200,000 b/d and a per barrel processing fee payment structure, which will be in place for 10 years while the group recovers costs, has now been provisionally agreed, although the ministry is for the moment officially sticking to the old configuration. However, “the legal and commercial infrastructure to make this project a reality has still not been formed,” says one source. The consortium has engaged Italian oil services firm Saipem for engineering, technical and training services.

A consortium bringing together Japanese, Korean and European groups, but spearheaded by Iraqi firm al-Andalus, has also been given ministry approval to beef up proposed capacity on the planned Misan refinery in order to gain economies of scale. A new FEED based on a 330,000 b/d capacity should be ready within a month, al-Andalus senior advisor Albert Louw says. The associated power station has been upgraded to 600mw, and costs are likely to go up to the $8-10bn range. As with Karbala, Baghdad is being cautious and still advertising the project with the original 150,000 b/d configuration (see table below). For their part, the consortium says Baghdad still needs to do a bit more, given the challenging operating conditions prevailing in Iraq. “What the investors are looking for to open the faucet is one more incentive. And I think this incentive is a sovereign guarantee to protect us from cost over-runs and delays,” argues Mr Louw.

Iraq’s New Refineries – The Provisional Plan (‘000 B/D)

* Not confirmed or part of official plan: Citadel-US joint venture proposal.

Source: Presentations at Symexco Iraq Refinery 2012 Conference.

Infrastructure Battle

In the short term, boosting domestic product supply will have to rely on Iraq’s existing refinery infrastructure. While theoretical nameplate refining capacity is actually over 1mn b/d, aging and accident-prone units and an absence of transportation infrastructure have severely cut throughputs. A large amount of the fuel oil produced has to be reinjected into oil fields for want of an alternate outlet.

The lack of pipeline supply to Daura refinery has kept throughputs there limited to around 70,000 b/d. The al-Jazira topping unit has been off limits to civilian use. But improved security, maintenance programs and a build up of smaller localized topping units have seen output surge from levels of 400,000 b/d or below seen a few years ago. Last year, throughputs stood at 567,000 b/d. Theoretical effective capacity stands at almost 700,000 b/d, but regular incidents (over and above poor utilization rates) mean the ministry is targeting around 610,000 b/d this year.

A new 10,000 b/d topping unit has just been inaugurated at Diwaniya, doubling capacity to 20,000b/d. But this is fed by the same supply line as that to Daura. Until supply to Daura is rectified, hopefully through construction of a new 26-inch pipeline (due for completion imminently) and rehabilitation of Pumping Stations 2 and 3 on the main strategic pipeline from the South (hopefully due by mid-2013), any gain by Diwaniya will be at Daura’s expense and vice versa . While theoretical nameplate capacity at Daura is 210,000 b/d, one of the three 70,000 b/d crude distillation units (CDUs) is very old and the ministry would be satisfied to have Daura throughputs running at 140,000 b/d. There are new 10,000 b/d units being brought in at Kisik and Siniya. And a 30km extension of the strategic pipeline, scheduled to be completed by end-2102, should liberate stranded capacity at the Qayara topping unit, which is currently unoperational.

“The big improvement will happen next year,” said Mr Shamaʹ. In addition to the rehabilitation of the pipeline to Daura, a new 70,000 b/d CDU is scheduled to start up at the Basra refinery by early next year. “Then we will go from 610,000 b/d to 750,000 b/d,” he continued. Additionally, Baiji is going to be upgraded with a new 55,000 b/d fluid catalytic cracking (FCC) unit, due for installation by end-2013. Six new boilers and 54 storage tanks are also due for start-up by the end of this year. And by November next year, a new 400 tons/day LPG facility is due to start up.

Iraq Refinery Capacity – Current And Planned ('000 B/D)

Note : ‘Theoretical effective capacity’ assumes 70% utilization rate of available effective units.

© Copyright MEES 2012.