Baghdad, IOCs reach field budget deals

23 August 2016, Week 33 Issue 589

Baghdad is reported to have finalised long-awaited agreements with the operators of its largest southern oilfields on their development budgets for the remainder of the year. In doing so it has promised to galvanise the work to increase production that has stalled over the past year and a half, as the financially-struggling government has wrangled with the international oil companies (IOCs) over the dramatic spending cuts demanded while allowing arrears for current output to mount.

Progress on fulfilling a commitment to the IMF – made in return for a multi-billion-dollar loan package agreed in July – to clear such debts by the end of the year had already shown signs of encouraging renewed activity, in the form of a flurry of contract awards at major fields over the past two months.

Agreements on field budgets were reported to have been reached between the government and super-majors BP and Royal Dutch Shell and Russia’s LUKoil with the three firms accepting spending during the remainder of this year of around half of their proposed 2015 budgets.

Respectively, they operate the Rumaila, Majnoon and West Qurna 2 fields in Basra province which together account for more than half of total production from the federally-controlled southern fields.

Officials from state-owned South Oil Co. (SOC), which oversees the province’s oil sector, claimed that the deals could kick-start delayed projects, thereby potentially adding 250,000-350,000 barrels per day to production during 2017. This represents a substantial improvement from the marginal gains registered over the past two years at the fields concerned.

Critically, BP was said to have reached a deal for spending of US$1.8 billion at the supergiant Rumaila field – currently producing around 1.4 million bpd and where the target for plateau production is 2.1 million bpd.

The firm was reported last year to be awaiting approval for the award of two major contracts – covering new central processing facilities, a gas processing plant and several cluster pump stations – worth a combined total of US$1.4 billion.

An early signal of intent to proceed with development after an 18-month virtual standstill was sent in June with the selection of the UK’s Amec Foster Wheeler for a three-year services contract on facilities at the field. The work, covering conceptual studies and pre-front-end engineering and design (pre-FEED), is deemed “crucial … to sustain and increase production” at the 65 billion-barrel field, which BP operates in partnership with Beijing-owned PetroChina and SOC.

LUKoil had likewise been trailing a resumption of investment ahead of the now-reported agreement on spending of around US$1.1 billion this year at the estimated 13 billion-barrel West Qurna-2 field – as a reaction to improved performance by Baghdad in clearing past dues.

First-quarter results showed the company owed US$1.2 billion at the end of March, while two months later CEO Vagit Alexperov claimed that “Iraq is very actively repaying the operators” and suggested that “a new investment cycle” might start by the end of the year.

Production at the field is running at around 420,000 bpd from the first phase of development and the Russian parastatal has expressed impatience to proceed to the second phase, due to deliver an additional 150,000 bpd.

A third and final phase will add 650,000 bpd from a deeper reservoir to reach the plateau target of 1.2 million bpd. LUKoil is the operator and sole foreign partner to SOC in the licence for the field, located around 65 km northwest of Basra.

Relative to its size – with reserves estimated at 38 billion barrels – Shell’s budget for Majnoon is comparatively small, at a reported US$740 million. Development at the field had long moved slowly well before the effects of the mid-2014 oil price crash were felt, with production only reaching its initial 175,000 bpd target in late 2013 – a year late, to Bagdad’s chagrin – and subsequently only marginally increased to 210,000 bpd.

Last year, Shell postponed its full-field development decision until 2017, amidst heavy cost-cutting and asset sales resulting not only from the global market downturn but also the Anglo-Dutch giant’s merger with the UK’s BG Group.

A provisional agreement to cut the plateau production target to 1 million bpd from 1.8 million bpd was reached in 2015 after protracted negotiations. Shell operates the field, located close to the Iranian border, with Malaysia’s Petronas and state-owned Missan Oil Co.

The documents outlining the terms of the IMF’s mid-July agreement to extend a US$5.3 billion financial support package put Baghdad’s arrears at the end of March at US$4.7 billion and committed the government to clearing the debt by the end of September and “to not accumulate any new external arrears” – inevitably likely to improve relations with the foreign firms and encourage renewed investment.

Meanwhile, Baghdad’s ability to fund both the repayments and its share of the  development budgets will be aided by the initial disbursements from the IMF funds and the corollary bilateral loans from institutions such as the World Bank and the G7.

Mohammed Saleh, economic adviser to Prime Minister Haider al-Abadi, claimed in a press release issued on August 7 that Baghdad would receive around US$2 billion of the IMF funds in three instalments by the end of the year, with the first payment of US$634 million made in early July.

 

Edited by

Ian Simm

Editor

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