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Kurds Warn Over Oil Payment, Kirkuk Field Rehabilitation

Kurds Warn Over Oil Payment, Kirkuk Field Rehabilitation

Tensions between the Kurdistan Regional Government (KRG) and Baghdad are rising, with the Kurds on 26 March threatening to cut off oil exports if payment continues not to materialize. The KRG further warned Baghdad that any plans to develop the strategic Kirkuk field required its “cooperation and approval.” The statement comes as Baghdad tries to bring in BP to help boost falling capacity at Kirkuk, the historical mainstay of northern Iraqi production, as Rafiq Latta reports.

A few days earlier, KRG President Masoud Barzani slammed federal Prime Minister Nuri al-Maliki for “monopolizing power.” Claiming power sharing agreements have been violated and were now virtually “meaningless,” he threatened action. “It is time to say enough is enough,” Mr Barzani said. “The current status of affairs in unacceptable to us and I call on all Iraqi political leaders to urgently try and find a solution otherwise we will return to our people and will decide on whatever course of action that our people deem appropriate.” In addition to a standoff on disputed territories, such as Kirkuk, and payment for their contribution to Iraqi oil exports, vital to pay foreign oil operators, the Kurds are demanding progress on oil legislation.

The agreed KRG contribution to northern Iraqi exports this year stands at 175,000 b/d, but non-payment has seen lower volumes – the KRG claims 90,000-100,000 b/d. The 26 March KRG statement said these have now been lowered to 50,000 b/d “and may terminate within one month if the federal government in Baghdad continues to withhold payment.” Baghdad now owes the Kurds $1.5bn, the statement said. Since KRG exports restarted early last year, the Kurds have only received two payments, totalling $514mn, the last in May, it continued. The following day, federal Finance Minister Rafi al-΄Isawi told Reuters Baghdad had approved a payment of $560mn to the KRG. “That is all well and good, but we would like to see the color of their money,” a KRG official tells MEES .

Mr Maliki has emerged strengthened from the recent government crisis that saw Deputy Prime Minister Tariq al-Hashimi escape to the KRG in December. Federal revenues have been boosted by bumper oil prices. Iraqi production is rising, although faces serious obstacles to meet targeted levels (see below). But northern Iraqi output faces special challenges. Foreign oil company involvement, in contrast to Basra, is limited to smaller projects, and despite efforts elsewhere capacity is stagnant on the back of falls at Kirkuk. Kirkuk production stands at 270,000 b/d, one source says. This is slightly up on five weeks ago, but 20,000 b/d down on last year and 130,000 b/d lower than a few years ago (MEES , 27 February). Last year, state-owned North Oil Company (NOC) shortlisted Schlumberger and Baker Hughes for a Kirkuk rescue plan and earlier this year began talks with BP to rehabilitate the field.

The KRG said its warning to NOC “followed reports” that NOC “had signed or was about to sign a preliminary agreement with BP to increase production at the Kirkuk field.” But reports of any sort of a deal with BP having already been signed are far off the mark. Talks are at a very preliminary stage, MEES understands. But BP visited NOC late in March to assess surface facilities.

A Shell-led effort arising from Iraq’s June 2009 upstream bidding round committed to boost Kirkuk output to 825,000 b/d, but this included the Khurmala Dome, currently under operatorship of Kurdish firm Kar. Subsequent studies by NOC have pointed to a 300,000 b/d possible capacity increment, indicating final Kirkuk output in the 550,000-600,000 b/d range. But a new study will have to take place, MEES understands. And BP and NOC are yet to discuss final targets. While BP is NOC’s preferred partner, MEES learns, Schlumberger and Baker Hughes remain in the running.

Of the two Kirkuk domes operated by NOC, Avana is strictly under the control of federal forces, MEES understands, but sovereignty of Kirkuk is disputed. Avana “lies within the district of Makhmour, whose administrative status is expected to change soon so that it rejoins Irbil province,” the KRG statement argued. Needless to say Iraqi nationalists dispute the Kurds’ claims and resent the KRG’s award of areas lying outside the green line to foreign oil operators, most notably late last year with the award of three such blocks to ExxonMobil (MEES, 21 November 2011).

Citing Article 112 of the constitution, the KRG demanded both the governorate of Kirkuk and the KRG “be present with the federal government in any discussions and agree over the Baba structure’s development.” Kurdish Peshmerga forces control parts of Baba, which also lies close to NOC headquarters, MEES understands.

Kurdamir Breakthrough

There is mounting investor confidence that the KRG oil industry has reached critical mass with the ExxonMobil investment and will be difficult to derail. But at the very least, a lack of a resolution to the Baghdad/KRG oil dispute could seriously further delay development of the sector and even if the Kurds manage to bypass Baghdad by striking a separate deal for exports with Turkey, this would leave them vulnerable to Ankara’s control. Kurdish production is set to rise to around 750,000 b/d by end-2013 and foreign operators continue to make commercial discoveries that could potentially push the output further.

On 26 March, Canadian independent Talisman announced its Kurdamir-2 well had hit oil. Well tests of 7.3mn cfd of gas and 950 b/d of liquids do not do justice to the significance of the find, argues Simon Hatfield, CEO of Western Zagros, which has a 40% stake in the block. “Firstly, this is only the first of three target zones. The gas cap is inhibiting flows. And our engineers are telling us it would have tested much, much higher if we had drilled just a little bit away – as much as 4,000 b/d from the well,” he tells MEES .

Contractual time constraints on drilling mean the Kurdamir partners will not test at the second target zone in the Eocene, but drill straight down to the third target in the Cretaceous, Mr Hatfield explained.

Western Zagros is looking to double output at its Garmian block to 8,000 b/d by mid-year/early third quarter. It aims to drill its second Garmian well, Sarqala-2 in the third quarter and its third, Hasira-1, in the fourth, as well as shooting more 3-D seismic from this summer, he said. A 40% stake in Garmian, relinquished by Talisman, is talked of as one of a number of upstream stakes currently being negotiated by the KRG Ministry of Natural Resources. Others include stakes in the Pulkhana, Arbat, Shakal, Atrush and Sarsang blocks, as well as acreage held by Gulf Keystone (MEES , 12 March). Total is linked with discussions on the first three of these, as well as Garmian, MEES understands.

Injection Imperative

In southern Iraq, water for injection is emerging as an ever more critical issue and endangering output targets on four out of five of Basra province’s critical oil capacity expansion projects. ExxonMobil’s exit from leadership of the Common Sea Water Supply Project, bringing together ExxonMobil, Lukoil, BP and Eni-led upstream projects, has pushed a 4.2mn b/d phase one of this critical project back from 2015 to 2017 and maybe further, sources say (MEES , 26 March). Delays in implementing the Common Sea Water Supply Project means these flagship upstream initiatives will also be delayed. But most firms remain able to hit their regional short term production targets. ExxonMobil at its 2.85mn b/d West Qurna-1 project is improvising by taking significant volumes from a nearby waterway, sources say, although there are limits as to how much this can provide.

Of more immediate impact are problems being experienced at Basra’s other key water injection initiative, a 1.3mn b/d expansion to the Qarmat Ali water treatment plant. Qarmat Ali, which currently processes around 300,000 b/d of water, services the BP -led 1.8mn b/d boost at Rumaila and the 1.125mn b/d Eni-led Zubair field development project. The plant’s expansion was to push Rumaila capacity from around 1.4mn b/d at present to 1.5mn b/d soon after mid-year and 1.55mn b/d by year-end. A few months ago, in an apparent bid to intensify localization, Baghdad handed the project over to state engineering firm SCOP. “It has been a disaster. They don’t seem to want to bring in international firms or even visit the facility,” says one source.

Very early on, Iraq’s upstream expansion has hit serious problems. A lack of export infrastructure has meant southern production has been held in. Rumaila has been worse hit, experiencing regular production cutbacks – at times well over 200,000 b/d has been shut in. Iraq this month started pumping to a new 900,000 b/d offshore export facility. Data obtained by MEES show southern export flows of 1.83mn b/d during 1-28 March, a good 100,000 b/d above recent levels. But a lack of storage is constraining throughputs and Iraqi hopes of increasing exports by 500,000 b/d in the short term are very unlikely to be realised, sources say. Curtailments mean “we are entitled to receive compensation,” says one operator. Talks have not yet begun with any of the foreign companies, but “the Iraqis are starting to get twitchy and so they should,” he notes.

Hard Won Progress

The challenges of working in Iraq are serious, but progress is still being made. Targets might not be met but a whole new oil industry is nevertheless beginning to take shape in Basra. “There is so much activity going on. We are now in the phase were you have multiple mega-projects being built,” Shell Iraq country chief Hans Nijkamp tells MEES . The Shell-led 1.8mn b/d Majnoun field development “will be the first of the greenfield mega-projects in Iraq to really ramp up,” he notes.

Majnoun is running slightly behind its original schedule but the ramp-up to first phase commercial production of 175,000 b/d will still begin by year-end. A new jetty, which is bringing in the majority of equipment has been a real success, opening up the Shatt al-ʹArab waterway for commercial traffic for the first time in decades. Cooperation with Basra port authorities has been “critical to our success,” Mr Nijkamp notes. Shell has forged “good” relations with the local community round Majnoun, but this has been a significant challenge, concedes Mr Nijkamp. “We have provided jobs for 1,300 locals...jobs that didn’t exist before. Of course it is never enough,” he said. “The problem is that we have to deliver against expectations, especially as far as jobs are concerned, that are quite difficult to meet. There is 60% plus unemployment in the Majnoun area. You wouldn’t get close to solving the issue. But there is an ongoing dialogue with local authorities, communities and other key players.”

© Copyright MEES 2012.

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