Baghdad offers former Kurdish oilfield Bai Hassan to BP

13 November 2017
13 November 2017, Week 44, Issue 650

Baghdad has offered Bai Hassan to BP as a first step to new deals and new contracts in the north. Simon Watkins reports from Kirkuk.

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Baghdad will not be returning to Erbil the key oilfields in and around Kirkuk that had been seized by Peshmerga fighters from Daesh in 2014. 

Instead, it intends to offer the fields to IOCs under terms modelled on neighbouring Iran’s new Integrated Petroleum Contract (IPC) format, prior to rolling the new-style contract out across the rest of the country next year where it can.

According to a senior source who works closely with the oil ministries of Iraq and Iran, BP has been informed that the first of these new deals for previously KRG-controlled sites – Bai Hassan – is for the taking, as part of a wider involvement with similar fields in the north of the country.

“Iraq wants BP to get involved in the north, as it is seen as representing the best of British characteristics in terms of being fair and guided by the highest legal and financial principles, which would give Baghdad’s extended presence in the north a sort of seal of approval,” he told NewsBase Intelligence (NBI).

“It is also seen as being closely connected to the US, with Bob Dudley as CEO and a lot of its staff also being American, which would make it more difficult for the US to take actions against Baghdad’s activities in Kurdistan,” he said.

“This is all the more important given that the US was previously heavily invested in a plan to give Kurdistan independence within five years. After that, it would be encouraged to accrete further territory in Kurdish areas in Iran, Syria and Turkey, with the aim of effecting regime change in Tehran in the first instance,” he told NBI.

Forced stability

Any security concerns that BP might have about operating in such a potentially volatile area have been alleviated by assurances from Iraq of a continued heavy presence of Iraqi forces in and around the Kirkuk area for the perpetuity.

BP is also well aware that the current presence in the region of Iran’s Quds troops from the Islamic Revolutionary Guard Corps (IRGC) – which were decisive in recovering all federal territory from the KRG in the past couple of weeks – will continue and will be augmented to around 3,000.

This will ensure that the Iraq-Iran pipelines, for oil in the first place and then a parallel one for gas, can be constructed without impediment from what has been an historically lawless area even before it was invaded by Daesh.

It will also allow for the repair of the Baghdad-controlled pipeline that also runs from Kirkuk to the Turkish Mediterranean port of Ceyhan, bypassing any Kurdish influence.

It will also ensure that there are no breaks in the temporary supply chain along the lines of what was seen a week or so ago when crude oil from northern Iraq, including from the Kurdistan Region, completely stopped flowing from the oil pipeline between Kirkuk and Ceyhan.

Although the flows resumed after a few hours, the volume was reduced for a while to around 220,000 bpd rather than the usual 600,000 bpd. As it stands, Baghdad has started pumping oil from the Avana field in Kirkuk via the Kurd-operated pipeline to Ceyhan and the North Oil Co. (NOC) has been working on expediting flows from nearby Bai Hassan.

Baghdad also officially told the KRG at the end of last week that it wanted Erbil to stop all and any independent crude exports and to hand over sales operations to the State Oil Marketing Organization (SOMO).

In addition, SOMO’s acting director-general, Alaa al-Yasiri, said last week that the firm was talking to Turkey to allow SOMO to be the only seller of Kurdish crude that arrives by pipeline in Ceyhan.

Track record

Aside from BP’s ongoing successful development of the supergiant Rumaila field, in conjunction with partners PetroChina and Iraq’s South Oil Co. (SOC), the super-major was present in the Kirkuk region from 2013 until the security situation made this untenable. During this period, it was assessing the optimal methods to halt and then reverse output declines across the fields.

At that point, it estimated that the Kirkuk fields had around 9 billion barrels of recoverable oil remaining, although in-house estimates at Iraq’s Ministry of Oil (MoO) are around double that, according to the source.

Of this, Bai Hassan is estimated to have just over 2 billion barrels officially – unofficially it is slightly more than 3 billion – and was producing an average of 195,000 bpd before output was hit by ongoing security problems.

The other Kirkuk region field where Baghdad wants BP’s urgent involvement is Avana, which was producing around 80,000 bpd before security issues took their toll.

“Getting BP involved on these two sites is a key part of Baghdad’s plan to increase production from the Kirkuk fields to more than 1 million bpd, in keeping with its overall plan to boost output across the country to 6 million bpd by 2020,” said the source. This target is seen as reasonable, considering that production at the Kirkuk fields was around 900,000 bpd in the early 2000s.

“After this, Baghdad would look to broaden international participation in the Baba Dome [the southern part of the Kirkuk field formation] and the nearby Jambur and Khabbaz fields, for a combined output of around 150,000 bpd from those fields in the early stages of new development,” he added. 

Contract terms

The new deals in the northern fields will be along the lines of Iran’s IPC format rather than the Long-Term Service Contracts (LTSCs) that have predominated in the south up until now, the source told NBI.

“During the recent visits to Tehran, senior Iraqi MoO officials sat down with their Iranian counterparts to go through the details of the IPC. Two senior officials from Iran’s Ministry of Petroleum will be based in the north to work on the introduction of these contracts for new deals in Iraq,” he said.

One reason for this is that LTSCs are so unpopular with IOCs in general, which prefer contracts more akin to the production-sharing agreement (PSA) template common around the world.

Another reason is that the LTSC format has been largely responsible for the billions of dollars owed to IOCs by Baghdad in unpaid compensation for development work.

At the time they were negotiated the consensus of market players was that Baghdad had driven a hard bargain with the IOCs, given the low maximum remuneration fees per barrel produced attached to the deals.

In the ‘reasonable’ oil price scenarios of the period, these fees meant that the government would keep a very high proportion of the revenues generated. However, as the oil price began to fall but the size and ease of production remained the same, these fixed payments to the IOCs – plus other ‘disguised costs’ (bribery and corruption) – destroyed Baghdad’s finances.

Another advantage in using a more PSA-style format is that it has been used as the standard by the KRG for its own fields.

“Once the IPC style has been introduced in the north then the plan is to roll it out across the rest of Iraq in new deals and to renegotiate existing LTSC arrangements wherever possible along IPC lines over the course of 2018,” the source said.

“The new Iraqi contract will be based on the linkage between oil prices and cost recovery and remuneration due, on a sliding scale, so that both sides take the risk and enjoy the reward,” he said.

“These will not be PSAs as such but will be based on a moving average price over the previous six months prior to a contract being signed, plus a risk-weighted adjustment metric for oil price forecasts over the next six months, with the contract terms automatically renewed on this basis every six months thereafter,” he concluded.

Edited by

Ian Simm

Editor

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