October’s Iraq Megaprojects 2010 conference in Istanbul will focus on the challenges facing firms building operations in the world’s oil and gas superpower in waiting.
For a country that had been ravaged by three decades of sanctions, two Gulf wars and ongoing civil unrest, the announcement in December 2009 of a successful second oilfield bid round by the Iraq Oil Ministry was a significant step forward in its bid to attract the investment it needs to modernise its oil infrastructure and rebuild its ravaged economy.
Of the second round of bids for 11 oil and gas field contracts, seven were awarded to consortia led by Shell, China National Petroleum Coprporation (CNPC), Lukoil, Petronas, Gazprom and Sonangol. Coupled with the three major deals awarded from the first rounds (BP with CNPC on the Rumaila field and ExxonMobil and Eni on West Qurna Phase 1 and Zubair) it stands to double its existing output in the next few years.
According to Iraq’s Oil Minister Hussain al-Shahristani, the fields announced by the government could increase oil production by up to 2.5 million barrels per day (bpd) in a few years, up from the current 2.3 – 2.4 million bpd. In total, the undeveloped fields are estimated to contain 41 billion barrels of oil, more than a third of Iraq’s total reserves. Iraq hosts the world’s third largest oil reserves.
While the per-barrel profit of these fields to oil companies is very low – ExxonMobil and Occidental Petroleum signed deals at prices similar to that which they had rejected in the summer 2009 – the chance to get a foot in the door of Iraq’s oil industry is too good to miss. On the West Qurna field, the ExxonMobil-Shell partnership accepted US$1.90 for each barrel of oil produced above the field’s current production level, precisely what the government asked for in June 2009 and less than half the $4 a barrel the IOC’s were after.
Those fields being bid for included the massive Majnoon and West Qurna 2 (with an output target of 1.8 million bpd, Halfaya, Qaiyarahand Badra. The Eastern Fields and East Baghdad field (located in part under Sadr City) received no bids and could now be developed directly by the state.
Following the results on 11 December, a number of international players are now gearing up to capitalise on the greater willingness of the Iraqi government to exploit its natural resources and attempt to kickstart its economy and social structure following years of conflict and stagnation.
So confident is the ministry that Al-Shahristani recently announced a third round of bids will take place on 1 October. According to the oil minister, Iraq will invite all 45 international companies, which were prequalified in the two oil auctions in 2009 to develop three further gas fields. The fields on offer are Akkas in Iraq’s western desert, Mansuriya in eastern Iraq and Siba in the southern oil hub of Basra. The gas produced will be used to develop for domestic power generation as well as export revenue (an estimated 50% will be exported).
But securing contracts is merely the start. The reality of operating in Iraq means that safety is just one of many practical issues confronting those looking to operate in the country. Political, social, legal and technical challenges are just as pressing. According to the Economist Intelligence Unit, once its current orders have been delivered, Iraq will have 46 drilling rigs available, which would be barely capable of delivering the production increase for one of its fields, let alone 10.
IOC’s will also face other constraints. Prices for steel, for example, are expected to rise dramatically in the face of increased demand. A shattered infrastructure means roads and bridges will need upgrading. There are bottleneck fears and access to the prodigious quantities of water required to conduct operations could be another major obstacle. Loss of technical expertise, with many Iraqi experts either having left or been pushed out of the country means another key resource is lacking.
A further possible conflict with its oil-producing neighbour, Saudi Arabia over OPEC quotas will surely transpire if Iraq brings its production up towards 7 billion bpd. Since 1990 Iraq has been exempt from quotas due to imposed sanctions. Concerns have been raised by OPEC members that should Iraq double its output, it could have a destabilising effect OPEC and the oil price. It is therefore imperative that those firms looking to enter Iraq are well-versed in all the practical, procedural and logistical challenges inherent in such a market.
The Iraq Mega Projects 2010 conference aims to focus on these inherent challenges that accompany firms operating in Iraq, identify the strategies to ensure quotas are met and highlight the operations that are essential to help rebuild the country.
Those expected to attend the conference will be operators, ministry representatives, local governors, service providers and Iraqi experts with the express aim of highlighting the requirements needed to enable Iraq to ‘support society, jumpstart economic growth, improve security and become one of the world’s largest oil producers’. CWC Group, the organisers of the event in Istanbul has announced it has included a panel discussion on Corporate Social Responsibility into the programme, highlighting the benefits to the contract winners of adopting a suitable social responsibility approach when conducting business in Iraq.
Two sessions will be dedicated to the full range of issues involved with this issue, including the focus on training, technology transfer, recruitment, community engagement, security, local suppliers and human resources.
Falah al-Khawaja, former director general of state-owned oil company, SCOP (State Company for Oil Projects), which operates the design and engineering of upstream and downstream projects in Iraq, and chairman of the conference committee, explained the conference aimed to not just highlight such problems but look to deliver solutions to operating in the Iraq market.
“Notably there is the huge infrastructure that will be required for petroleum projects as well as civic infrastructure. Is the timeframe achievable? And what about other aspects such as conducting exploration?’ he said. ‘Companies from all over the world will be working in a new environment. There has been lots of change, disruption, people have changed, how will they react?”
The conference, he continues, will be about talking about working in Iraq and what it could offer. “For the contractors it is about opportunities. It is about opportunities for service companies, for Iraq’s private sector, for manufacturing companies and drilling companies.” Al-Khawaja says a conscious decision was taken to ensure that Iraqi politicians attended the conference to offer their expertise though not in an official capacity. “We avoided making the Iraq government’s involvement official and went for non-government sponsorship so there can be free and non-restricted discussions. But we were keen to get government officials so there could be a discussion of ideas and solutions.”
Furthermore, the well-publicised environmental disaster in the Gulf of Mexico which has so damaged BP’s international standing has merely highlighted the need for a greater awareness of corporate social responsibility and the need to engage with the community, he added. The question of how it is to be done will also be addressed at the conference (speakers include NOC’s, stakeholders and the Iraqi private sector). The focus of the whole event will be on implementation, consequently, one aim of the conference will be to draw up a draft of what can be done.
For example, on day three of the conference, there will be workshops where a number of top Iraqi lawyers and bankers will be present and will provide a clear and detailed description of national regulations affiliated to the banking and legal sectors. Furthermore, there will be an interactive exchange covering legal, financial, accounting and insurance issues.
The lack of any clear oil law is one concern which will surely be addressed. The sector was nationalised between 1972 and 1975. The lack of any law means firms have little legal recourse, should the government decided it doesn’t like the deals. A situation that prevented a number of firms from bidding for the latest rounds of contracts.
Relying on previous experience is not a green light to efficient and successful practice in the country, however. Peter Lalor, director oil and gas solutions with the Olive Group – the first security firm to enter Iraq following the US-led invasion in 2003 –and who is speaking at the conference explained the likelihood of a firm entering the market is predicated on three key issues. “To me, the conference will enable those attending to develop a better understanding of the environments and whether they can adapt. In particular, there is the question of a security budget, risk appetite in terms of due diligence and corporate responsibility and perception of threat,” says Lalor.
“Conferences are important so that potential customers can come and hear first hand what is involved and what choices need to be made,” he explains. “All companies that are looking to get involved need to make decisions. Some may feel it is not an appropriate operating environment whereas some may say now is the ideal time.”
What is essential, Lalor says, is that international oil firms can work alongside national oil companies to enable suitable technology transfer. “This will go some way to relieving the stagnation caused by conflict and sanctions. But there is no panacea, no quick fix,” he warns.
“Our job is a business enabler. To allow other industries to focus on their core business efforts while we carry out best practice solutions. As a result of these bids, a lot of firms will be deployed to brownfield and greenfieldsites. Before thinking about large mega projects, you need to look at initial methods of security, both deterrent and detection abilities.”
Ultimately such events, which gather like-minded people who can acquire information that can then be used to make informed decisions before entering a potentially volatile market can only be beneficial. Alan Baird, director, plantweb and wireless marketing, Middle East & Africa, Emerson Process Management, agrees that the presence of such events are important for those businesses wishing to get involved.
“Such conferences are essential and a very good opportunity to engage directly with the customer and collect and compare information. Customers have the opportunity to now see who can be key to helping them through this difficult period and they will get the opportunity to meet the experts.”
More directly, it is a chance to engage with those multi-nationals who will be operating on the oil fields and consequently will require additionally expertise to work effectively. “We are looking at meeting end users and making contacts with the oil majors working on the different concessions on Iraq. We are also looking to meet potential services partners whom we can identify are capable of providing us with resources in the field specialised in our automation industry,” he says.
Iraq as a market, while promising, suffers from a lack of any systematic approach or transparency for those firms considering whether to risk entering. “It has a very promising potential but currently we see it is moving in a very erratic manner where we are getting requests from everywhere (especially traders) without knowing who is serious and what projects have real financing
capability and will happen,” explains Baird.
“What is needed is a clear master schedule that connects the different projects together, for example the development of the fields, the pipelines, gas processing, refineries amongst other practical matters,” Baird says.
Safety concerns apart, Baird adds that the key issues are identifying capable resources and being able to support the multi-national companies and to meet their aggressive schedules. “The country as a whole is attractive, but especially the south region, which features most of the oil reservoirs and which has proportionally more projects and developments we are interested in.”
Despite the obvious risks, Iraq is facing a surge of interest in the wake of the oil bid rounds held last year. If it can capitalise and secure much needed investment, the country could well see its oil output increase rapidly and strengthen its damaged infrastructure. Conferences such as Iraq Mega Projects are fundamental in ensuring those willing to participate in the next chapter of Iraq’s oil history are prepared for all the challenges ahead.
