Record exports in December and news of a string of positive projects appear to augur well for the new government’s upstream development ambitions – but major challenges remain, writes Clare Dunkley
What: Despite issues with efforts to increase oilfield productivity, Iraq achieved an oil export record in December.
Why: While issues remain at some assets, deadlock was broken regarding exports to the north and meaningful progress was made at two major southern fields.
What Next: To facilitate output growth at several other giant southern fields, a long-awaited water supply facility will be required. Baghdad has been making all the right noises about this, but previous optimism has quickly evaporated.
Baghdad started 2019 on an upbeat note by announcing record crude oil exports in December – buoyed by an increase not only in the bedrock southern sales but also by a marginal rise in volumes piped from the federal north as a result of the tentative rapprochement with Erbil.
A sense of momentum behind further development at the extensive southern fields – stymied for several years by political, financial and contractual issues – was also generated by contract awards related to expansion at two of the largest assets, while the energetic new oil minister talked up the prospect of deals on two other major schemes.
Nonetheless, the tumbling oil price at the turn of the year threatened to stall progress once more – with the government thus unusually fulsome in committing the country to OPEC cuts.
Crude exports through Baghdad’s State Oil Marketing Organization (SOMO) totalled 3.726 million bpd in December. This comprised 3.617 million bpd sold through the Basra export terminals from the southern and central fields and 99,000 bpd exported from fields in the federal north through the Kirkuk-Ceyhan pipeline, according to a notice from the Ministry of Oil (MoO) on January 2.
The figure was 354,000 bpd higher than the previous month and set a new record. New Oil Minister Thamir Ghadbhan reached a provisional deal with the Kurdistan Regional Government (KRG) in mid-November allowing the resumption of exports of 50,000-100,000 bpd from the fields around Kirkuk in the now federally administered north through the Kurdish-controlled pipeline.
Last month, the minister said that such volumes were expected to remain in the 80,000-90,000-bpd range in the near term as the remainder of the roughly 370,000 bpd being produced in the area was being sent to local refineries.
Significant production increases from the main southern fields have been scarce since the oil price crash of 2014. The majority of the IOC operators have yet to agree revised contractual terms with Baghdad to reflect – in the interests of both parties – the changed market circumstances since the signature of the original technical services contracts (TSCs) at the turn of the decade, thus delaying further investment in expansion.
One asset now spared such wranglings is the estimated 12.8 billion barrel Majnoon field in Basra Province – operated by state-owned Basra Oil Co. (BOC) following the withdrawal of Royal Dutch Shell in June 2018 and the MoO’s failure to reach a deal on an IOC replacement.
The UK’s Petrofac was duly awarded an EPC contract shortly afterwards calling for the installation of two new crude-processing trains at the central processing facilities to increase production by a total of around 200,000 bpd to 450,000 bpd.
In late December, the MoO announced two further contract awards by BOC: US oilfield services firm Schlumberger was selected to drill 40 wells at the field, while state-owned Iraqi Oil Exploration Co. (IOEC) was tasked with carrying out a 3D seismic survey.
The statement put current production at 240,000 bpd – compared with an original target in Shell’s 2009 TSC of 1.8 million bpd and a putative revised goal of 1 million bpd.
Italy’s Eni is thought not yet to have settled on amendments to the TSC signed in 2010 for the estimated 4.5 billion barrel Zubair field, also in Basra, but nonetheless has shown signs of moving forward with expansion.
In May 2018, new production facilities were commissioned by South Korea’s Samsung Engineering to raise capacity by 200,000 bpd and in late December, Schlumberger’s US rival Halliburton revealed the award of two contracts by the Italian firm calling for the mobilisation of four to six rigs to drill development wells over the next two years.
Pending further revision, Eni is currently chasing a plateau target of 850,000 bpd – reduced in 2013 from the 1.2 million bpd set down in the original pact.
Merely sustaining – let alone increasing – production at several major southern fields is threatened not only by disputes over the upstream contract model but also by the MoO’s failure to execute the critical, long-delayed Common Seawater Supply Facility (CSSF) infrastructure project. This is designed to treat and distribute the huge volumes of water required for injection to maintain reservoir pressure.
Since the scheme’s launch in the early years of the decade, Baghdad has attempted to persuade the private sector – most likely one of the field operators – to develop the plant to avoid meeting upfront the multi-billion dollar cost, although it is carrying out a parallel contracting process for the two main EPC packages covering the pipelines and the treatment plants.
US super-major ExxonMobil – which relinquished its original developer role on the CSSF in 2012 – and Beijing-owned China National Petroleum Corp. (CNPC) have been negotiating with the MoO for more than three years over an evolving scheme dubbed the Integrated South Project.
In recent reports, this has been described as having included the rights to develop several medium-sized southern oilfields alongside implementing the water supply scheme.
Ghadhban took office in October with promises to galvanise projects across the board and in late December he claimed that a deal was close, but similar assertions by his predecessors give rise to some scepticism. UK’s Biwater, Petrofac and South Korea’s Hyundai Engineering & Construction are understood to be competing for the pipeline’s EPC contract.
Progress on the peripheries
Also long-planned – as a corollary to a gradual improvement in relations with Kuwait over the past decade – is the joint development of shared oilfields along the common border, which were for decades a source of dispute and now offer the hope of contributing to both governments’ ambitious crude production targets.
Kuwait’s then-oil minister, Bakheet al-Rashidi, revealed in August that a shortlist had been drawn up of four consultants to advise on the development of the areas. Speaking on the sidelines of the Organisation of Arab Petroleum Exporting Countries (OAPEC) meeting in late December, Ghadhban said that a selection had been made – without naming the chosen company.
He also asserted that an agreement on the export of Kuwaiti gas to Iraq was imminent.
Both parties have repeatedly made similar claims over the past year without finalisation of the deal – which would see exports starting at 0.517 bcm per year and rising to 2.07 bcm per year – but the urgency for Baghdad has been increased by US pressure to cease imports from Iran coupled with popular protests over power shortages.
In the north, the new minister said that he expected the UK’s BP to conclude a study on the estimated 9 billion barrel Kirkuk field by the end of this year “to re-evaluate … production capacity and how to increase it” – after which a longer-term deal was envisaged.
The British super-major signed the agreement to provide technical assistance to state-owned operator North Oil Co. (NOC) shortly after Baghdad’s re-capture of the under-performing asset from Kurdish forces in late 2017 – at which time raising output to 1 million bpd from current capacity of around 300,000 bpd was mooted.
All such development efforts are threatened by the slide in the oil price witnessed in the final weeks of 2018 – despite an agreement reached in early December by OPEC and 10 non-OPEC states to cut collective output by 1.2 million bpd from January 1.
Iraq – a reluctant participant in a similar deal struck two years previously – enthusiastically welcomed the curb, promising to contribute its 139,000 bpd share and promoting the measure’s necessity.
The MoO’s December data confirmed the deleterious impact of current conditions. Despite the unprecedented sales volumes, monthly revenues sank to US$6.1 billion, down from US$7.9 billion just two months previously – as the average selling price plummeted by more than US$20 to US$52.8 per barrel over the period.