Mission: Possible

Iraq’s proven oil reserves are estimated at 115 billion barrels, placing the country in third rank for the largest reserves in the world.

Furthermore, credible estimates of Iraq’s reserves suggest the country may actually contain 200 billion barrels of recoverable reserves, with potential reserves of over 400 billion barrels.

Around 80% of proven oil resources are concentrated in the south-eastern part of the country, and Iraqi crude is typically described as ‘easy oil’.

This is characterised by low production cost, high well productivity and good oil quality. In addition, Iraq also has significant gas reserves, which are estimated at 111.9tcf, with 70% of these reserves located in the southern Basra region.

Iraq is currently producing 1.5bn cfd of associated gas and 60% of it is flared, highlighting the need to quickly place focus on developing the country’s oil and gas industry.

Following years of war and sanctions, the Iraqi Oil Minister is committed to redeveloping the country’s oil and gas industry. This is highlighted by the licensing rounds that have taken place over recent years to further develop the already producing fields, and for the new development of discovered but underdeveloped oil and gas fields.

On this basis, there are expectations that Iraq’s oil output could reach around 12 million barrels per day by 2017, compared to an estimate of around two to 2.5 million barrels per day currently. In order to achieve any of these targets, the challenges will be immense.

In addition to political and security risks in the country, Iraq will also face operational challenges and severe issues with the existing infrastructure that is present there.

Iraq’s roads, pipelines and terminals are in a perilous state, and it is anticipated that a likely shortage of skilled personnel will have a big impact on the progress of various projects.

As such, Contax Partners looks at the current state of play within Iraq, identifying the types of opportunities that may exist in the country, and highlighting the key milestones throughout 2011.

In 2008, two licensing rounds offering more than 83 billion barrels of proven oil reserves were launched. Forty-five international companies were prequalified to participate in these rounds, 27 of which bid
over the two rounds, and 15 of which were successful.

The first round was launched in June 2008, and competitive bidding was carried out in June 2009. In this round, six oil fields and two green gas fields were included.

Four of these fields were finally contracted, containing 33 billion barrels of proven oil reserves, and with production targets totalling 6.8 million barrels a day. The results of the second round were announced in December 2009.

In this round, ten green fields were offered, which included some of the world’s largest, untapped oil fields. Seven fields were contracted with reserves of 32 billion barrels and production targets of 4.8 million per day.

The contracts signed in these two bid rounds were 20-year service contracts based on IOCs accepting a fixed fee per barrel of oil instead of an equity stake.

Under these agreements, the IOC acts as a contractor to the relevant Iraqi Oil Company. In mid-2010, Iraq launched the third energy auction to bid to develop three gas fields in the country.

The three fields offered were Akkas (2.1 trillion cubic feet of gas), Mansuriyah (3.3 trillion cubic feet of gas), and Siba (which was initially offered in the second round but was removed due to the small size of its reserves).

Thirteen companies registered for participation, and in recent months four companies have been successful across the fields. The summary of the first three rounds of bidding are shown in Figure 1 (below), along with other fields that are yet to be awarded.

For example, Kirkuk (which has an estimated 8.5 billion barrels in reserves) and East Baghdad (which has an estimated 8.1 billion barrels in reserves) are supergiant oilfields, and are unlikely to be offered to international firms.

In order to develop the fields released from rounds one and two, thousands of wells are required to be drilled, including both oil production and water injection wells.

In addition, thousands of kilometers of flow lines and pipelines will be laid. This will require hundreds of drilling rigs, which will need to be brought into the country from abroad.

With the rigs, huge amounts of equipment and materials will also need to be imported, starting from casing and tubing material to wellheads, Christmas trees, and valves.

Heavy equipment and trucks for logging, cementing, acidising and coil tubing will be required, along with heavy vehicles such as cranes, low-loaders and forklifts, etc. Thousands of tons of drilling materials such as mud, cement and chemicals will also be required.

The development of new fields and redevelopment of existing fields will require a great deal of civil, mechanical and electrical work to build the surface facilities such as degassing stations, compressor stations, flow tanks, pumps, control rooms, and oil and gas transfer lines.

Emphasis will also be placed on developing field infrastructure, placing a burden on key commodities.

One major challenge to achieving the vision within is Iraq is around security.

Iraq has already begun implementing extra security measures to protect oil fields in Basra, which saw thousands of mines and cluster bombs removed to enable the digging and repair of wells, and to extend the network of oil pipelines.

Security forces have a number of signed agreements with foreign companies that are licensed to develop oil fields in the area.

As a result of the required security measures, prices are at premium for working in Iraq, in order to cover the additional security fees. 

It is believed that for delegates visiting Iraq, a security protection service can cost c.US$4,000 per day, while EPC prices are anticipated to be at least 15 to 20% higher in order to take security costs into consideration.

A second major challenge is around the existing infrastructure and resources in Iraq. IOCs have reported that congestion in Iraq’s ports is delaying work on the ground.

As such, there are some discussions around the possibility of routing big equipment items through Kuwait and other neighbouring countries. Roads need to be improved in the country, in addition to the expansion of oil pipelines and other export facilities.

For example, there are plans to build a pipeline that would carry heavy oil from the Majnoon, East Baghdad, Qayarah and Najmah fields to Turkey, and to rebuild an existing export network to Syria.

Other challenges relate to the availability of field data. For example, at the Rumaila field, 500 of the 800 wells drilled on the field since its discovery in the late 1940s are currently shut in, and there is a requirement to reevaluate these in order to see whether any can be reactivated.

In addition, there is a lack of installed metering equipment which prevents BP/CNPC from knowing how much associated gas is actually produced at the field. As such, there is a need to ascertain how much gas would have to be kept for reinjection as crude production is ramped up.

Operating within Iraq can also be difficult for other reasons. For example, at the Gharraf field, Petronas and Japex were planning to drill several wells, but had to engage in discussions with tribesmen who had allegedly refused to surrender their ancestral lands peacefully without a cash payment from the two companies.

Despite these challenges, operating in Iraq is not impossible, and some progress is being made in the attempt by the Iraq Government, IOCs, Contractors and Suppliers to overcome the challenges.

Progress can be seen at Ahdab, the first major oilfield development contract awarded by the Iraqi government after 2003, which is expected to reach 60,000 barrels per day from July 2011.

At Zubair, the field has reached 265,000bpd, enough to allow the oil companies to start recovering their investment costs, while at Missann, oil output from the field is believed to be on track to rise in 2011 from 100 000bpd to 170 000bpd.

Other projects also appear to be moving ahead, including the engineering, design and supply of mechanical, electrical, instrumentation, telecommunications system, and civil works to expand the LPG storage capabilities at the Hilla, Rusafa and Nassiriya plants.

In Feb 2011, Iraq exported 2.202mbpd of crude oil, which reflects an increase from 2.16mbpd in January 2011. While these examples demonstrate that progress is being made in the country it is definitely slow. As Iraq considers a fourth bidding round, more opportunities across the value chain will open up.

When examining these opportunities, one thing is for certain; it is an interesting and exciting time for companies wishing to pursue opportunities in Iraq.