Iraqi Oil Sector Faces Year Of Challenge And Promise

Iraqi Oil Sector Faces Year Of Challenge And Promise

The year 2012 will be critical for Iraq’s oil sector. In both the Kurdistan Regional Government (KRG) and federal areas of Iraq major oil and infrastructure projects are set to hit key milestones or begin. However, the massive planned oil industry expansion comes amid a sharp deterioration in oil relations between Baghdad and Irbil in the wake of October’s ExxonMobil upstream agreement with the Kurds, writes Rafiq Latta.

While 2011 began with the restart of Kurdish oil exports and the promise of a resolution to the four-year-old dispute over the KRG’s independent oil policy and contracts, relations soon soured, leading to a drop in KRG export levels in the summer. But just prior to the ExxonMobil deal announcement, renewed efforts to broker an agreement that could lead to the passage of a federal Hydrocarbon Law sparked hopes of reconciliation. “We have given the contracts and company accounts to Baghdad to audit,” a Kurdish source said at a November oil conference in Irbil. The federal Ministry of Oil had been complaining that Irbil was withholding key information in contravention of the agreement that allowed KRG exports to restart.

Baghdad is yet to make a definitive response to the ExxonMobil deal, which covers six blocks in the KRG area, of which at least two and possibly a third lie in disputed territories (MEES, 21 November). A joint management committee meeting for the ExxonMobil-led 2.85mn b/d West Qurna-1 oil field development took place subsequent to the KRG deal announcement, with not a single mention of the deal, MEES understands.

So far the only sanction against ExxonMobil has been its barring from a forthcoming upstream bidding round – a round in which terms are viewed as unfavourable. Iraq’s Deputy Prime Minister for Energy Affairs, Husain al-Shahristani, told Reuters on 4 December that Baghdad was in discussions with the US government over the issue. “Now we have several options,” Dr Shahristani said. “There is no deadline, these are grave decisions that need time...the company is studying its options and the Iraqi party is studying its options.”

Dr Shahristani rejected comments by KRG President Masoud Barzani in which he claimed he had fully briefed Iraqi Prime Minister Nuri al-Maliki over the deal, and had received no objection. “There has been no approval by the prime minister over any contract that was not presented to the cabinet,” he said. While no independent confirmation of Mr Barzani’s claim was possible by press time, MEES does understand that Mr Maliki has taken a more dovish position on the issue than Dr Shahristani, who has made rejection of KRG deals a cornerstone of Baghdad’s oil policy.

The ExxonMobil defiance of Baghdad’s ban on oil investors in the KRG, if successful, could spark a rush to invest in the limited remaining opportunities in Iraqi Kurdistan. But it could have been much worse. Shell was initially involved in the talks, and the deal on offer was bigger than the six blocks awarded, and at one point included the Shakrok and Dinarta blocks awarded in July to Hess, MEES understands.

Southern Surge Awaits Export Outlet

The dispute with ExxonMobil is unfortunate for Baghdad. The US major has proved on West Qurna-1 that its reputation for world-scale project management is merited. Output on the project is currently at 380,000-400,000 b/d, a source from state owned South Oil Company (SOC) says. This is up from 350,000 b/d in late September and 244,000 b/d when it was awarded the project in 2009 (MEES, 3 October). On the other bidding Round 1 awards, capacity on Eni-led Zubair stands at 290,000-300,000 b/d, up from 183,000 b/d in 2009, while the giant 2.85mn b/d BP-led Rumaila project has hit capacity of 1.4mn b/d, up from around 1mn b/d in 2009. The focus next year on Rumaila in the first half of the year will be to ensure this 1.4mn b/d capacity is sustainable. And the joint venture is to target rehabilitation of gas treatment plants. It is also working on expanding capacity at the Qarmat Ali water treatment plant from 300,000-400,000 b/d at present to 1mn b/d by end 2012. In the second half of 2012, the Rumaila partners will push to add another 10% to capacity at Rumaila by year-end, MEES understands.

Delays getting government approval have held up green lighting a contract to build Central Processing Facilities with a capacity of 450,000 b/d for the Lukoil-led West Qurna-2 project. A decision – the size of the contract requires cabinet approval – is expected imminently, one source says. Samsung was the most competitive bidder, offering to build the nine-train facility for around $940mn, MEES understands (MEES, 5 December).

Already southern production capacity is being held up by a lack of export capacity. The ministry has said the first of two 900,000 b/d offshore loading facilities will start operations by year-end. But, MEES soundings all point to a March start-up. The contract winner Leighton Offshore clearly states on its website that start-up will be in March.

KRG Poised For Oil Expansion

The Kurds may have reduced their exports from early summer highs of 175,000 b/d, but KRG production expansion has continued unabated. The Taq Taq field is now producing 90,000 b/d, Genel Enerji CEO Mehmet Sepil said in Irbil in mid-November. Kurdish firm Kar is now producing around 75,000 b/d from the Khurmala Dome. Capacity at DNO’s Tawke field stands at 75,000 b/d. The Norwegian firm reported October production of 42,000 b/d, but its monthly output figures omit any mention of runs at the 6,700 b/d Tawke refinery. And taking into account volumes produced by Crescent (14,000 b/d of condensate and 600 tons/day of LPG), Afren’s Bardarash block and Western Zagros’ Garmian block, KRG output is probably nearer 250,000 b/d than 200,000 b/d.

Western Zagros and Afren will boost output next year and by mid-year the KRG could see production debuts from Hillwood International, OMV, ShaMaran and Aspect Energy – all in the 8,000-15,000 b/d range. DNO is six months away from expanding from 75,000 b/d to 100,000 b/d, CEO Helge Eide says, and is awaiting permission to press ahead. It also has plans to go to 200,000 b/d but this will require a new Central Processing Facility and not be put in place until 2013. Tony Hayward, CEO of Vallares, which is in the process of merging with Genel, told an Irbil oil conference that Taq Taq would go to 110,000 b/d by mid-2012 and 150,000 b/d by 2013, growing to 200,000 b/d in 2014. A new 255km, 400,000 b/d pipeline to tie in with the main Iraqi crude export line to Ceyhan is also planned at an estimated cost of $450mn, Mr Hayward, the former CEO of BP, said.

The Shaikan Effect

Gulf Keystone’s Shaikan field will be the largest single contributor to new KRG supply – and the region is eyeing 1mn b/d by 2015. Shaikan capacity of 440,000 b/d by 2015 in a 196-well preliminary development plan is being eyed, said Todd Kozell, the firm’s CEO. But he conceded this could change and a 500,000 b/d plateau target was a distinct possibility. The definitive “development plan can’t really be done until we get through the seventh well on Shaikan,” he said. By March-April next year Shaikan should be producing 20,000-30,000 b/d and 50,000 b/d should be achievable by around the end of the third quarter or beginning of the fourth quarter 2012.

Gulf Keystone is looking to sell its stake in the MOL-operated Akre Bijeel block to concentrate efforts on Shaikan and Bar Bahar. “In our mind, Bar Bahar can be another Shaikan. And to be standing here as CEO of a company that has had unbelievable, unpredictable success and looking at maybe recreating that success, it is extraordinary,” Mr Kozell said. He predicted the KRG oil sector would see a lot of consolidation over the next year. “There is a lot of M&A potential,” he said. Given the area’s prospectivity, attractive contracts and the fact there are only five-six unlicensed KRG blocks left, the prediction will probably be realized. However, a resolution of the dispute with Baghdad is probably still needed for the KRG to reach its full potential.

Downstream Push

The KRG downstream is also expanding. Kar is expanding its Irbil refinery capacity from 40,000 b/d to 100,000 b/d by next year. WZA, which operates the 20,000 b/d Bazian refinery in Sulaimaniya and the 2,400 b/d Piramagrun refinery is expanding Bazian to 34,000 b/d within a couple of months and is doing a feasibility study to expand it to 75,000 b/d. Genel is planning to build a 60,000 b/d refinery. And private Kurdish firm KAT is also building a 20,000 b/d refinery at Dukhan, which should be operational by mid-2013.

Copyright MEES 2011.