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When The Dust Settles Iraq’s Oil Will Flow

By Falah al-Khawaja

The First Licensing Round

On the last day of June 2009, Iraq held its first licensing round for the rehabilitation and upgrading of its major producing fields. The estimated reserves of the subject fields were about 40bn barrels of oil and 33 trillion cu ft of gas, making it the biggest international auction in decades. For Iraq it signals its return to hydrocarbon development after three decades of isolation. It was the same day that marked the withdrawal of American forces from Iraqi cities and towns, which was proclaimed a national holiday. The licensing round was, truly, transparent to all Iraqis, international and local media in the presence of Iraq’s prime minister and the bidding companies, among others.

 

The outcome was the award of the two giant producing fields of North and South Rumaila to BP/CNPC on a service contract basis at the fee set by the Ministry of Oil of $2/B of additional oil produced. On the afternoon of the next day the Council of Ministers approved the award. The fact that only one award was made does not diminish the historical importance of the auction, as the award involved adding 1.9mn b/d to current production of 2.4mn b/d within five-seven years. The two fields have estimated reserves of 16.5bn barrels of oil. Thus the ministry’s targeted increase of 2.1mn b/d within the first five years of the 10-year plan was nearly covered in this one award.

 

The round also revealed important facts and some lessons learnt. These include:

• The Ministry of Oil estimates of recoverable reserves/production plateau were very conservative. The total maximum production plateau offered by bidders was more than double that set by the ministry (over 8mn b/d bid against less than 4 mn b/d specified). The direct reflection of this is that other brownfield developments (producing fields) as well as Iraq’s greenfield projects (undeveloped resources) contain much higher recoverable oil than estimated. This indicates that Iraq, the ‘country of last resort’ for hydrocarbons may be the world’s swing producer within 10 years. 

• There were interesting offers for the two huge southern producing fields, Zubair and West Qurnah Phase 1, but the minimum remuneration required by bidders was too high compared to the fee set by the ministry, which was rather on the low side.
  

• The only offer for Kirkuk field was set at rather a low plateau with too high a remuneration. A more ambitious review is needed.
  

• Double digit remuneration fees are out.
  

• The two gas fields, Bai Hasan and Misan fields are out due to non-compliance or no bids. This paves the way for the direct execution of the rehabilitation/development of these fields with or without technical support agreements as the situation requires.
  

• Bidders other than BP/CNPC should carefully review their remuneration for the fields in the coming round, thus allowing Iraq to diversify and avoid putting all its ‘golden eggs’ in one basket.
  

• Interesting enough, within the first week of July, the flood of diverse political, legal and technical views and public opposition to the Ministry of Oil bidding round strategy, from inside and outside Iraq as well as within the ministry, has notably subsided. Accusations that the ministry would sell Iraq’s oil cheaply have been emphatically shown to be without substance. Later on, some critics came out against the Rumaila deal. These opponents were limited to the parliamentary Oil and Gas Committee, which is biased, the unelected oil workers union, 'Adnan al-Janabi of the Ayad Alawi list and a few others. Mr Ayad al-Samarai, the speaker of the Iraqi parliament announced that if the government believes it has the authority to sign the contract, it can do so, unless parliament objects. In that case, the contract should be reviewed by parliament. The Basrah political council has declared that it is reviewing the situation.
  

• The Rumaila award has set a benchmark with the remuneration fee of $2/B of additional oil produced. Fees for other fields can vary up or down in comparison based on oil API, technology required, expected production rates, impurities content, depth of wells, and so on.
  

The Way Forward

It is time to set aside extreme or unworkable options for Iraq’s hydrocarbon development. These options include:

• Replacing all technical service contracts by engineering, procurement and construction (EPC) contracts, which in the big fields will fragment the rehabilitation/development work into a multitude of contracts for each field that will be very difficult, if not virtually impossible, to integrate.
  

• Production sharing contracts for field development, whether brownfield or greenfield developments, as Iraqi public opinion is united against such models.
  

• Assigning the rehabilitation/development work to the Iraqi private sector, as this sector is virtually absent from the oil and gas development area.
  

• Establishing shareholding public companies with shares owned by all or most Iraqis, as in the disastrous Yeltsin/Gaidar model in Russia or the failed Alberta model.

In fact, the technical service contracts and EPCs are the available ways to encourage the Iraqi private sector to establish itself in the hydrocarbon area through subcontracts to the main contractors, as suitably covered in the large local content requirements embodied in the final tender protocol, as well as the ministry’s EPC terms.

 

So, when the dust settles, Iraq and the international and national oil companies (IOCs and NOCs) are left with the following options:

• Review by qualified IOCs and NOCs of offers for Zubair, West Qurnah Phase 1 and Kirkuk fields based on the $2/B benchmark of Rumaila. Significant improvements can be made when the margins for risk are reduced to meet the actual Iraqi situation. If this can not be affected due to legal or other reasons the remaining option is two-five years technical support contracts.
  

• Review by the Ministry of Oil of the fields announced for the second licensing round. Going ahead with the fields initially offered will provide Iraq with a production capacity of about 12-14mn b/d in 10 years. This is huge, and neither the Iraqi civic infrastructure nor expected world demand can take it. Remember that the Energy Information Administration’s (EIA’s) best estimate for world consumption is that this will rise by only 7mn b/d by 2014.
  

• The strategy of technical support agreements, such as those under negotiation with the oil majors in 2008, should be revisited. These could include the proposed offers, where applicable, which the ministry received last year as well as for other fields, green and brown, medium and large.
  

• Consolidation and speeding up the EPC contracts that the ministry is considering for Nassiriyah, Rafidain, Tuba and 'Ajil fields.
  

• The Hamrin, Subba and Luhais contracts can be executed by Ministry of Oil subsidiary companies.
  

• Misan and Bai Hasan fields may be tackled through EPCs with international technical support.
  

• Akkaz, Mansouriah and other gas fields can be developed in the same way: EPCs with technical support from qualified international companies to mitigate Iraq’s lack of experience with developing non-associated gas.
  

• With the experience acquired through the long discussions in the first licensing round, the model contract for the fields in the second licensing round can be quickly drafted to allow awards within six months.
  

• The Ministry of Oil drive for direct execution in drilling, well workovers, water injection and infrastructure should be driven forward to raise existing production capacities by at least 250,000 b/d within two years.
  

• Taking into account demographic considerations and the need for the gradual exploration of the unexplored 70% of Iraq, some blocks should be offered with due attention to the risk (although small) and specific conditions of exploration work to arrive at an optimum model contract.
  

Thus, Iraq’s oil production capacity can pass the 3mn b/d mark in 2010, going up at a rate of roughly 500,000 b/d in each successive year to cross the 4.5mn b/d target by 2014, climbing up to over 7mn b/d by 2019. In the meantime, targets for later years are subject to carrying out the following:

• A strategic plan should be developed for 25 years (up to 2040), based on reducing the economy’s dependence on hydrocarbon revenues to around 50% of the budget within the first 10 years, going down to around 30% in 2040 through diversification.
  

• Full utilization of the associated gas in the oil fields as well as the non-associated gas expected from the gas fields, to be developed to both satisfy local demand and provide for the Iraqi share in the Nabucco pipeline as promised by the prime minister.
  

• An exploration plan covering the unexplored areas of the whole of Iraq should be included within the 25 year plan to aim for at least doubling Iraq’s proven reserves and allow for compensation of the resulting depletion. Thus could strengthen arguments in favor of increasing Iraq’s future quota in OPEC.
  

• The simultaneous development of Iraq’s civic infrastructure to facilitate the huge requirement for hydrocarbon development as well as the needs for industry and tourism.
  

• Establishment of a national revenues fund when sufficient revenues become available.

With such expectations, in this election year, there is strong hope that Iraq will be more stable and that Iraqi politicians and oil professionals will learn and practice pragmatism for the good of our long suffering country.

 

 

Falah al-Khawaja is an independent oil consultant, with 41 years experience in the Iraqi oil sector. He is based in 'Amman, Jordan (Email: falahalkhawaja@yahoo.com). Petroleumworld not necessarily share these views.

Editor's note: This commentary was originally published by Middle East Economic Survey (MEES) , 15 2009, Posted by Gail the Actuary on July 27, 2009. Petroleumworld reprint this article in the interest of our readers .

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Petroleumworld News 07/26/ 08

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