Development Of Iraqi Oil And Gas Fields

By Falah al-Khawaja

Mr Khawaja is an independent oil consultant, with 41 years experience in the Iraqi oil sector. He is based in Amman, Jordan (email  falahalkhawaja@yahoo.com).

Rather as the International Monetary Fund (IMF) is regarded as the Bank of Last Resort, Iraq, with its huge oil reserves, has since the early part of the 20th century been regarded by the major powers as the Country of Last Resort for Hydrocarbons.

Iraq had no say in the matter until Law Number 80 was proclaimed in 1961. This effectively allowed the Iraqi state to take control of 99.5% of the concessions in its territory and laid the foundations for the establishment of the Iraq National Oil Company (INOC) in 1964. Unfortunately, coups and counter coups blocked the effective implementation of Iraq’s national oil strategy and INOC until the early 1970s. The 1970s was a golden era for Iraq’s national oil industry. A lot was achieved, from exploration to developing new fields as well as enhancing the production capacities of producing fields. Crude oil production capacity rose to above 3.5mn b/d in 1979.

Unfortunately, the work was effectively stopped late in 1980 with the outbreak of war with Iran. Production went on a downward slide as a result of the wars and the severe sanctions, until the fall of the former regime. Maximum production on the eve of the invasion in March 2003 was about 2.8mn b/d. 

The fall of the dictatorship raised hopes that the development of the hydrocarbon sector will be resumed. These hopes were dashed year after year such that Iraq could not even achieve the pre-invasion production figure of 2.8mn b/d (promised within a year). Nearly six years later, the daily production figure is about 2.5mn b/d. Only three EPC contracts for field development (Hamrin, Subha and Luhais, Khurmala Dome) were signed, but none of these are anywhere near completion.

New Hope

The autumn of 2008, however, saw the effective start for up-grading the major producing fields through the launch of a first upstream licensing round. This round aims to boost production capacity to 4.5mn b/d, within five years, through a series of 20-year joint venture service contracts with international oil companies. And on the last day of 2008, the Ministry of Oil announced the fields for the second licensing round, aimed at achieving the 10-year plan production target of 6mn b/d. The list includes 10 oil fields/clusters and one gas field.

Thus, at long last, Iraq hydrocarbon development is on the way.

This article aims to analyze the situation, in light of the parameters suggested in my recent article (MEES, 27 October 2008), as well as to discuss some of the arguments being floated against the Ministry of Oil policy.

The Positives

There is much positive in what the Ministry of Oil has come up with:

  • Contract regime: service contracts, not production sharing contracts (PSCs), are the right choice. The ministry did well to employ a reputable consultancy to prepare the draft technical service contract. It is heartening that a previously recommended ‘risk’ sharing contract model has been abandoned. There really is no petroleum risk in the development of discovered Iraqi fields. Indeed, where Iraq is concerned even exploration involves less risk than elsewhere in the world.  

  • The oil and gas fields in the first round are the optimum selection to increase production capacity to 4.5mn b/d as per the five-year plan.  

  • The expected total production from the fields in the second round is about 2.4mn b/d, which may be increased through the application of improved oil recovery (IOR) techniques concurrent with the start of production.  

  • These figures do not include the expected production from the Kurdistan Region, which may exceed 250,000 b/d, or the planned production from Hamrin, Subha and Luhais fields and the Khurmala Dome. Contract issues for these are yet to be resolved, but planned output from these fields should amount to 350,000 b/d, giving a total approaching 3.0mn b/d.   

  • Demography: hydrocarbon development that allows all Iraq’s communities to participate and benefit from the country’s geological bounty is vital to promote social and political harmony. To the ministry’s credit, the fields offered in both rounds cover Iraq as a whole, assuming Hamrin field and Khurmala Dome contracts are implemented.  

  • Border Fields: most are included. It is hoped that the Naftkhana and Sufiah border fields will be developed further by direct execution by Iraqi state oil companies. Development of the border fields and unitization agreements are important, not just to bring development to these areas, but also to defuse potential future conflicts.  

  • Heavy oil is well covered, as can be seen by the inclusion of the Najma, Qayara, and East Baghdad fields in round two. Furthermore, parts of the Rumaila, West Qurna 1 and Zubair developments in round one are likely to include oil of a heavier type than Iraq has traditionally produced.  

  • Three gas fields are included.  

  • IOR projects in existing producing fields are generally more economic than greenfield projects, as the infrastructure is already there. It is hoped that remaining producing fields will be tackled by direct execution within the coming ten years.

Concerns Remain

However, a number of areas of concern remain:

  • There appears to be direct negotiation between the ministry and certain international oil companies for the development of the Nasiriyah field, outside the context of a bidding round. In the interests of transparency and even-handedness, Nasiriyah should have been included in the list of fields offered in the second bidding round. Nasiriyah’s development should add 250,000 b/d to production, potentially raising Iraq’s capacity to over 7mn b/d in 10 years time. As such was there any need to include supergiant West Qurna 2 in the second bidding round? Its huge reserves make this a particularly strategic field. There may be an argument for including Majnoun, but given that West Qurna 1 is already in the first bidding round, what is the big rush with West Qurna 2? It should be put on hold until Iraq develops its own capabilities to the point where it can effectively directly execute the project on its own.  

  • More thought is need to be given to packaging or integrating upstream development with downstream projects in order to maximize job creation and economic benefit to the country. Such projects could include field developments with refineries, power plants, gas treatment etc. There are quite a few opportunities for such packaging in the upcoming rounds: Qayara, East Baghdad, Diyala, and Nasiriyah fields, for example. The forthcoming contracts should include such integration.  

  • In the draft model contract, specifying penalties for non-execution of targets should be coupled with incentives for speedy and effective implementation of projects as is standard in many upstream contract regimes.  

  • Training programs should aim at filling the skills gap, with full technology transfer to Iraqis in operations, project design, reservoir management and construction.  

  • Much wider local content and capacity development should be clearly specified and undertaken by the contractors. This effort should include investment in non-oil projects to win hearts and minds in the communities they are working in, and whose resources they are making money from.  

  • The contracts should reflect the fact that considerable exploration and development investment has been made by Iraqi state oil firms in all the fields on offer. Fees for additional barrels produced and signature bonuses should be adjusted accordingly.  

  • The prevailing economic crisis across the world and the present sharp fall in oil prices, which is expected to last until some time in 2010, must be considered for both rounds in order to achieve a win-win situation for both parties.  

  • Exploration blocks are not included. This may be based on the fact that that proven reserves are large enough for the 10-year plan. Another reason may be due to the reluctance of IOCs/NOCs to accept technical service contracts for exploration. Some blocks need to be explored within the 10-year plan, and it is hoped that they will be covered by the state-owned Oil Exploration Company (OEC) directly and via joint ventures.

A Challenging Agenda

The launch of the bidding rounds is vital and long overdue. However, it is only a start and Iraq has a long list of other key tasks it must start addressing if it wants to effectively maximize benefits from its hydrocarbon resources:

  • What about the huge infrastructure needed for the implementation of such huge projects? A governmental coordinated effort is a must.  

  • Breaking up the four oil laws package, to pass the revenues sharing, INOC and Ministry of Oil laws independently of the controversial proposed hydrocarbon law. Delays over passing the latter have unacceptably hampered progress on these other key laws.  

  • Issuing the National Iraqi Code for Hydrocarbon Measurements.  

  • Speeding up the establishment of a planned Ministry of Oil IT and data management center.  

  • Revising the old Law for the Preservation of Iraq’s Hydrocarbon Wealth.  

  • Preparing the necessary regulations for implementation of the contracts for oil and gas (upstream, mid-stream and downstream).  

  • Legislating for a modern accounting system.  

  • Modernizing the Iraqi financial policy and the banking procedures to facilitate investments.  

  • Breaking up the Trade Bank of Iraq monopoly on letters of credit.

Arguments Against Ministry Of Oil Policy

Some of the main arguments are:

  • Iraq does not need foreign investment capital to develop the oil sector and can do it very well on its own. This argument is now history in my view as a result of the precipitous fall in the oil price. Indeed, oil revenues may not be enough to meet basic budget needs. Even if the price/barrel crosses the $75/B mark in 2009, other economic sectors need huge revenues.  

  • Iraqis can do the job as they did in the 1970s. Maybe because most of the advocates of this argument are not actually involved in the present situation in the Iraq oil industry, they do not know that Iraq has barely enough manpower to run normal operations. We have lost two generations due to the wars and to the long years of severe sanctions. There are, definitely, excellent Iraqi professionals abroad; but are they not too old to be workers in distant fields in what are quite often hostile conditions?  

  • New technologies, of the type Iraq’s oil sector needs to apply on a massive scale, require years to be absorbed, especially because a new generation will have to carry out the huge projects. Let us hope that the next five years will generate the manpower needed to operate Iraq’s expanded production and carry out the maximum direct execution of projects.  

  • Some are advocating that the Iraqi private sector should participate as a stake holder with the major contractors. This is an added unnecessary complication. The Iraqi private sector has no experience in field development. However, Iraqi private firms should, as indicated above, be given maximum opportunity to work as sub-contractors.  

  • Some question why gas development has been made a priority. Currently over 600mn cfd is being flared. Obviously, flaring so much gas is tantamount to a huge crime.

Gas Field Developments Essential

A number of points support the prioritizing of gas development: billions of dollars, which is the wealth of the Iraqi people, are effectively being burned; considerable damage is being done to the environment; the electricity sector is importing alternative fuels at huge cost; industrial users of gas are suffering low productivity, losing more revenues and affecting employment; and some of the gas is urgently needed for IOR projects to enhance oil output, so that Iraq is losing more revenues.

Because of this the Ministry of Oil has initiated a lot of projects to utilize flared gas, through the state-owned oil projects company SCOP and the South Oil Company (responsible for North Rumaila). Nevertheless, all the projects are delayed due to the problems with contracts, sanctions and to the terrible security situation.

Be that as it may, developing gas fields is absolutely necessary to decouple the production of gas from that of oil. This requires the development of non-associated gas fields. When oil production is blocked, as it was for many years and months, Iraq must have the gas necessary for cooking (affecting all Iraqis) as well as essential industries, especially the electricity sector. The North Oil Company bore the brunt of providing the required gas for the country during the second Gulf war and the sanction years prior to 2004 – by producing crude, stripping the gas, and re-injecting the stripped crude as well as Baiji refinery crude residue, with certain but as yet unquantified serious damage to the Kirkuk field reservoir. I was part of the North Oil Company leadership then, and from that experience can now see no alternative but to decouple gas from crude production. So, gas field development is not only vital, but should have started back in August 1988, when the war with Iran ended.

Gas is further needed for export to the EU as promised by the prime minister and urged by EU leaders. This is especially relevant in the face of Russia and the Ukraine’s increasingly tortuous gas relationship. Twice in four years Europe has suffered shortages in severe winters. Iraq can provide some of Europe’s needs through the Arab Gas Pipeline (AGP).

Copyright MEES 2009.