BaghdadKicks Off Production Target Talks
Iraq’s oil ministry has begun talks with international oil companies about reducing over-ambitious contractual plateau production targets, MEES learns. Initial meetings have been held with both Shell, lead operator of the 1.8mn b/d Majnoun project and Lukoil, operator of the 1.8mn b/d West Qurna-2 field development, as Rafiq Latta reports.
At this stage only rough scenarios have been discussed, but it is clear a major reduction is being envisaged, with an eventual Majnoun plateau of around 1mn b/d on the table, and a not dissimilar target eyed for West Qurna-2. In return, ultimately produced volumes from the projects would be radically increased, with a potential plateau production duration on Majnoun of 20 years or more, compared to the current contractual 10 years.
There are unassailable arguments in favor of a major plateau reduction. Firstly, it has become increasingly clear that building the contracted 10mn b/d plus of new capacity, and more importantly the associated transportation and water injection infrastructure required by 2017, as stipulated in Iraq’s service contracts, is simply not viable. Even if it were possible, it would not be desirable, either from a reservoir management perspective or in economic terms.
Under current plans, output would dip sharply after the plateau production periods, without expensive enhanced oil recovery measures being put in place, impacting ultimately recoverable production. And for the Round 1 ‘mega-projects’ – the 2.8mn b/d BP-led Rumaila project, ExxonMobil’s 2.825mn b/d West Qurna-1 increment and the Eni-led 1.125mn b/d Zubair field development – contractual plateau durations are only seven years.
This would leave Iraq facing the prospect of building massive infrastructure at huge cost only to have it lying idle a few years later. An 8 May Reuters
report, citing Iraqi Ministry of Oil documents, talks of cost savings of $10bn over Majnoun’s lifetime at a reduced 1mn b/d plateau. Total Majnoun spending had been estimated at $50bn.
Perhaps more serious from a developmental perspective, is the impact these short plateau durations will have on gas supply and electricity generation, given that most of the new gas output that Iraq will depend on to fuel its economic growth is projected to come from gas produced in association with Basra’s new oil projects. And here too, there is the issue of investing in infrastructure only for it to become unused when gas volumes once the contractual plateau period ends.
These are likely to be tough negotiations. Companies are paid on a per barrel basis for every extra incremental barrel they produce. Foreign operators argue that keeping the per barrel fee unchanged, but compensating for a lower production level by simply lengthening the plateau duration is not justifiable as it does not take inflation or the opportunity cost of capital into account. The low per barrel payments are a highly politically charged issue – the current government uses them to demonstrate it has exacted highly attractive terms from international oil firms. But there are other, less controversial levers, for changing the contracts, including changing the contractual stake held by state firms in contracts, taxation rates and the R-factor (or the way the per barrel fee is reduced following cost recovery).
“I should think the ministry is talking to all the companies about cutting plateaus,” notes one executive. The Round 1 projects would appear the priority. Round 2 major projects Majnoun, West Qurna-2, the CNPC-led 535,000 b/d Halfaya increment, and the Petronas-led 230,000 b/d Gharaf project all have 13-year contractual plateau durations. However, no news on either Rumaila or West Qurna-1 could be obtained by MEES press time, and soundings indicate that no discussions have been initiated as yet with the Zubair partners.
At this stage, renegotiation on the timing for plateaus to be reached – 2017 – has not begun. According to the Reuters
report a first meeting with Shell was held on 15 March, with a second scheduled for mid-May in Beirut. But timing also will likely become part of the discussions. A 4.2mn b/d first phase of the Common Water Supply project, vital to supply the water needed to maintain reservoir pressures on the main Basra projects, especially the Mishrif reservoir on West Qurna, has slipped to beyond 2017, effectively making this contracted timetable untenable (MEES, 30 April).
Much work still needs to be done on planning of transportation infrastructure, which has to be done in conjunction with any decision on production plateaus. Lukoil has been coordinating a joint report on all the southern infrastructure needs, a final version of which should be presented to the ministry and state-owned South Oil Company (SOC) in June. And certainly no final decision on targets, and by association the infrastructure needed to take them, will be made before this report and an integrated Energy Plan, being conducted by consultants Booz & Company, is completed (MEES, 5 March). Companies are making a working assumption of a final overall contractual target of 6-8mn b/d, MEES understands.
In theory, with final development plans on projects contractually to be submitted early next year (earlier for the Round 1 projects) timetables appear to be clashing. But in practice, consensus that these plateau decisions are far too important to be rushed means there is likely to be flexibility on the final development plans, MEES soundings indicate.
Infrastructure remains the key bottleneck, despite the recent inauguration of new offshore loading platforms at Basra (MEES, 30 April). This has enabled output to rise to 3mn b/d, a level which is sustainable provided no mishaps occur on Iraq’s ailing existing pipeline system before it can be overhauled. Delays over customs clearances for equipment continue to hamper efforts to revamp this system. And disputes over subcontractor costs have also emerged as a significant issue. For instance, Shell awarded the pipeline contract for the first 175,000 b/d phase of Majnoun to India’s Dodsal for close to $90mn. The Iraqis found this too expensive, and got the contract cancelled, handing the project to state engineering firm SCOP, which awarded the project to a Chinese firm at a cost of around $70mn. But, while Majnoun is on course to hit mechanical completion of the first phase by the contracted year-end, there are now question marks as to whether the pipeline will be ready to evacuate the new supply, potentially incurring losses greater than the savings, MEES understands.
Politics too is having an impact on export infrastructure plans. Turmoil and concerns over sanctions are hitting interest in a proposed 2.25mn b/d pipeline project via Syria. While Baghdad and project manager SNC-Lavalin remain committed to a Syria option, a Jordanian option is now been more actively pursued. As of late April, initial discussions on a 500,000-1mn b/d pipeline to the port of 'Aqaba were being discussed.
Internally, tensions between Iraq’s political parties are ratcheting up again, with oil playing a prominent part. On 5 May, Iraqi Prime Minister Nuri al-Maliki sparked Kurdish fury by holding a cabinet meeting (requiring a significant federal security presence) in the disputed town of Kirkuk. “The identity of Kirkuk cannot be determined through deployment of military forces from Baghdad. Kirkuk is an Iraqi city with a Kurdistani identity,” warned a statement from the Kurdistan Regional Government (KRG). Kurdish press reported the KRG, which has warned off prospective foreign oil companies from involvement in efforts to rehabilitate Kirkuk field, as holding its own cabinet meeting in Kirkuk, subsequent to Mr Maliki’s visit (MEES, 2 April).
Efforts by the Kurds and their allies to isolate Mr Maliki and his ally, Deputy Prime Minister for Energy Affairs Husain al-Shahristani, an implacable opponent of the KRG’s oil sector, appear to be floundering. On 8 May, Interpol called for the arrest of Iraqi Deputy President Tariq al-Hashimi, who is accused by Baghdad of operating death squads and has taken refuge in the KRG, implying international support for Mr Maliki’s position. But he needs to tread carefully. The KRG has been wooing Turkey in a bid to export oil independently of Baghdad’s control. And ExxonMobil, which defied Baghdad in investing in the KRG, continues to work on its blocks. Baghdad says it has received a commitment by ExxonMobil not to start drilling in the KRG. Ostensibly this gives Baghdad a window of a few months within which to either strike an oil deal with the Kurds, or take action against ExxonMobil in West Qurna-1. If not, it risks looking toothless and sparking an investor stampede to the KRG. MEES understands that the KRG blocks ExxonMobil is likely to drill on first are precisely the ones most likely to anger Baghdad – the controversial al-Qush and Bashiqa blocks that lie in disputed territory (MEES, 21 November 2011).
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