Iraqi Oil Sector Set For Change As Political Crisis Intensifies

Iraqi Oil Sector Set For Change As Political Crisis Intensifies

Statoil is seeking an exit from its stake in the giant 1.8mn b/d West Qurna-2 field development, MEES learns. The move, if realized, would be significant in that this would be first such divestment from the Iraqi bidding round projects, which when awarded in 2009 constituted the most highly sought after acreage in oil industry history. But happen or not, Baghdad’s oil strategy looks set to take a hammering, with at least one more major set to join ExxonMobil in its controversial investment in Kurdistan Regional Government (KRG) acreage. These developments will likely influence and be influenced by the deepening crisis in Iraqi political governance, as Rafiq Latta reports.

Statoil was tightlipped on the issue. “We are working with Lukoil as the operator to move the project forward and we never comment on any rumors regarding potential adjustments,” spokesman Bard Glad Pedersen told MEES. While Statoil may well be dissuaded from exiting Iraq and/or indeed use the negotiations to improve terms, it is MEES’s very clear understanding that this is no mere rumor, and the Norwegian firm does intend to meet with the Ministry of Oil in the immediate future to discuss the issue.

It is not clear what exactly is motivating Statoil to look to leave West Qurna-2. Certainly wider company issues, such as a focus on new discoveries in the North and Barents Seas and non-conventional resources in the US could be part of the story. But it is hard to escape the conclusion that if all was going well in Iraq, Statoil would not be seeking to divest from its strategic 18.75% stake in West Qurna-2.

Foreign oil operators all testify to an extremely tough operating environment in southern Iraq. Rates of return are unattractive. Exceptionally expensive and stringent levels of security combine with stifling bureaucracy and rampant corruption. Obtaining visas for vital personnel has been a major problem for investors; waits at airports are typically hours long, and medevac is impossible with helicopters banned from landing anywhere else apart from official airports.

Decision making has been far too slow – Lukoil and Statoil are still waiting on a cabinet green light for a 400,000 b/d first phase of West Qurna-2, which should have been approved months ago (MEES, 5 December 2011). These issues, coupled with major differences with Iraqi partners over procurement, and delays in payments have meant that Iraq has proved to be a less than stellar oil investment opportunity.

The country’s undoubted geological bounty could well yet reap rewards for those investors with the stamina and resources to stay the course. And despite the political turmoil, operational difficulties and delays, it is important to note progress is being made, considerable capacity has been added with much more to follow (see page 13) and payments are being processed. But in the short term, Iraq’s newest political crisis poses an additional potential threat to oil investments. In October, ExxonMobil defied Baghdad’s ban on investing in the KRG to take a stake in six blocks, of which half lie in disputed territories (MEES, 21 November 2011). This investment, the lack of an effective response from Baghdad (KRG oil investors ExxonMobil, Repsol, and Korea’s KNOC all lifted Iraqi crude cargoes in November), and continued problems in the south appear to have galvanized investor sentiment as regards the KRG, hitherto the preserve of risk-taking smaller independents and mid-sized companies.

ShaMaran Petroleum’s 11 January announcement that it was suspending operations on its Pulkhana and Arbat production sharing contract (PSC) license areas looks set to add two more blocks to the five open KRG blocks (the Canadian independent is reportedly selling its office equipment, indicating it will no longer be a KRG operator). But most of these are in politically difficult areas bordering Iran. The most recent well results from Pulkhana were disappointing and KRG oil sources tell MEES that challenging community relations made operating in the southern parts of the block very difficult at the best of times. The real KRG oil opportunity lies with those 40-plus PSCs already awarded.

Major Interest

A major, possibly in partnership with a large European oil company currently operating in southern Iraq, is in advanced talks for a stake in the Atrush block, operated by US independent Aspect, MEES understands. By the end of the second quarter, 20,000 b/d of production is planned for Atrush. The UAE’s TAQA, which last October bought a 20% stake in Western Zagros, is the most active suitor for the 40% available in the Canadian firm’s Garmian block, one source says. Other firms in discussions for the Garmian stake include Chevron, a European major and Lukoil, the source adds. Output from Garmian’s Sarqala-1 well is currently running at 4,000 b/d, but this is expected to rise later this month and could go as high as 9,000 b/d.

Third party interests of 20-25% remain open on practically all the blocks awarded, with investor interest focused heavily on Gulf Keystone’s Shaikan block. Oil at Shaikan is heavy with high levels of sulfur and the AIM-listed independent’s PSC gives a relatively high level of profit oil to the KRG, compared to its peers. But such has been the scale of discoveries made – a 400,000-500,000 b/d development is envisaged for Shaikan – that it is rightly considered the jewel in the crown of the region’s blocks. At one point Korea’s KNOC was in the frame for the Shaikan third party stake, MEES understands, but industry talk is now focused on Chevron, new KRG oil investment firm Genel Energy (Vallares) and ExxonMobil, with unconfirmed talk of efforts towards an outright purchase of the block.

Crunch Time

Since fighting between themselves in the mid-1990s, the KRG’s two ruling parties have managed to forge a political accommodation that, whatever its faults, has proved durable and has given Iraq’s Kurds considerable stability. This bi-partisan political elite has emerged from a months-long wave of popular protests centered around Sulaimaniya earlier this year essentially unscathed, if somewhat chastened. While Masoud Barzani, head of the KDP party, is president, the position of KRG Prime Minister has rotated between the KDP and the less powerful Sulaimaniya-based PUK – current Prime Minister Barham Salih belongs to the PUK. A governmental change is expected by the end of the month, which should see Mr Salih replaced by his predecessor Mr Barzani’s nephew, Nechirvan Barzani. “It should have happened at the end of December,” notes one Kurdish source. “The only thing that might not make it happen, is if the political situation in the rest of Iraq makes Masoud decide that a change at such a sensitive time would not be another good idea,” he adds.

In stark contrast, political stability has deteriorated to the point that Iraqi politicians are openly talking of the prospect of civil war or break-up. Tensions have been mounting all year, amid a continued lack of basic services and calls for more regional autonomy. But the departure of US troops in mid-December appears to have catalyzed Iraqi Prime Minister Nuri al-Maliki into acting against his Iraqiya party rivals. An arrest warrant was issued against Deputy President Tariq al-Hashimi, who fled to the KRG on 18 December, and Mr Maliki has called for the dismissal of Deputy Prime Minister Salih al-Mutlak and Finance Minister Rafi΄ al-Isawi. Violence has escalated sharply, with a wave of bombings in Baghdad and a number of apparent assassination attempts made against Iraqi politicians, including Iraqiya parliamentary speaker Usama al-Nujayfi and the governor of Anbar province.

Mr Maliki would appear to have been planning to make a move against his rivals for at least several weeks prior to the exit of US troops. For months, Mr Maliki’s Dawa Party has been strengthening its hold on security forces in Baghdad and especially the International Zone, with the prime minister’s son Ahmad talked of as taking a leadership role in the process. A couple of weeks prior to issuing the arrest warrant for Mr Hashemi, Mr Maliki halved the number of bodyguards allocated to key Iraqiya leaders. Senior Iraqi politicians typically have forces of well over 1,000 guards (“practically a private army,” notes one source). Mr Maliki has without doubt thoroughly alienated Iraqiya and the Kurds. Mr Barzani too is understood to be close to complete loss of faith in the prime minister. The ExxonMobil deal proved a turning point in Mr Barzani’s view of the federal prime minister, MEES understands. The KRG president informed Mr Maliki of the KRG negotiations with ExxonMobil as early as May and received, Kurdish sources say, no indication that Baghdad would object, as it did.

Options such as holding a vote of no confidence have been discussed, but Dawa Party control of security around the parliament building in Baghdad has made this option unworkable, one analyst notes. Mr Barzani has opposed holding a proposed national reconciliation conference in Baghdad. Opposition may be mounting, but Mr Maliki remains strong. Some Iraqiya politicians have ignored their party calls for a boycott of parliament and, notes Iraq expert Reidar Visser, attendance of 192 MPs on 5 January was not far different from 2011 averages. Essentially, it is going to be very difficult to unseat Mr Maliki without the cooperation of the Sadrists, and this is not realistic at present, analysts argue. Then the only way forward is for Iraqi politicians to somehow step back from the brink and compromise. Escalating regional tensions will make this difficult task even harder. One obvious and very necessary area for compromise is oil, but for Deputy Prime Minister for Energy Husain al-Shahristani federal control of oil contracts is non-negotiable. Meanwhile, the KRG under the Barzanis and Minister of Natural Resources Ashti Hawrami sees an independent oil policy right at the heart of Kurdish aspirations for greater autonomy.

Copyright MEES 2012.