Iraq’s cabinet has agreed to making the costs of IOC-led construction of a water desalination plant for oilfield injection recoverable, showing willingness to remove all future “mission creep” fears as IOCs could increasingly be forced to take on midstream projects to ensure bottlenecks do not develop said IHS senior Middle East energy analyst Samuel Ciszuk.
Massive additional needs
Since development contracts for a number of Iraq’s megafields were awarded to IOCs during the latter half of 2009, it has become obvious to the industry that the simultaneous execution of so many world-class upstream projects in a rather small area—with only a few exceptions the projects pursued are in the country’s prolific south—would create very challenging logistical and infrastructural challenges.
As IHS Global Insight has written repeatedly, perhaps the most worrying aspect for the progress of the forthcoming Iraqi oil boom has been the development of its midstream transport and export facilities, as well as utility infrastructure, which needs to progress simultaneously to the upstream projects if bottlenecks are to be avoided.
Building oil and gas transport infrastructure such as trunk pipelines and export terminals has not been included in the projects’ scope under the field development deals, while Iraq’s remaining project management and execution capabilities throughout the state industry—after decades of war, sanctions, insurrection, and brain-drain—has from the outset looked insufficient to meet the upstream development pace required by the IOCs’ contracts.
Hence, the prospect of costly shut-ins developing as soon as late 2011 and 2012, as the first significant production capacity increases start being delivered to a grossly under-dimensioned pipeline and export terminal system, started to look very real, while the only solution seemed to be a “mission creep” situation, increasing the IOCs’ contracts’ scope to include the midstream and utility construction and expansion necessary to avert the bottlenecks.
With “mission creep”, however, would come significant capital expenditure (capex) addition on the part of the IOCs, raising the prospect of lengthy price and compensation negotiations with the Oil Ministry. Nevertheless, a broader solution appears to have been found.
Injection
The redevelopment and massive expansion envisioned for the oilfields in southern Iraq requires a significant parallel growth in water supply for reservoir injection systems.
Given the shortage of potable water in southern Iraq, using the already insufficient existing freshwater supply by tapping the ground water has been out of the question, forcing the IOCs to look at constructing expensive desalination facilities.
A joint-venture (JV) project supplying several of southern Iraq’s megafields was launched at an early stage of planning by a group of IOCs in order to reach economies of scale. Supermajor ExxonMobil is taking on the lead developer role at the project, with future demand from the Rumaila, West Qurna, Majnoon, Zubair, and Halfaya calling for a plant with the capacity to produce 10-15 million bpd of fresh water.
The project, which is already said to be likely to come in over US$10 billion in costs, will also include the water pipes necessary to pump its production from the coastal plant to the oilfields. ExxonMobil will be partnered by all the companies involved in the oilfield development contracts to be connected to the facility.
Outlook and Implications
The Iraqi cabinet has taken a very important and proactive step to remove obstacles to its forthcoming oil development projects through enlarging the cost recovery possibilities of the long-term technical service contracts (TSCs). While the decision for now is only for the water injection project, it opens the door for other utility and infrastructure projects to be included—where needed—in the schemes, meaning that the IOCs know from the outset that their added investments not only will ensure that their future production runs less risk of being shut in, but also will always be reimbursed under the existing cost recovery scheme in the TSCs.
This will make it possible for the companies to draw much more freely on their project management and technical skills to manage the necessary expansion of all aspects of Iraq’s midstream sector, at a time when the state industry is woefully inadequate to deliver projects at anything near the speed required.
The choice of using the cost recovery mechanisms in the TSCs to compensate IOCs for increases in the projects’ scope means that added projects do not have to be negotiated separately in time-consuming exercises to determine prices and compensations, but that they can be handled within the IOC consortia, which already include state oil company partners.
If this measure is extended to other projects than the water injection scheme—and there is currently no reason to see why that should not be the case—the prospect of costly and long bottlenecks developing because of the lack of crude transport and export capacity has been significantly diminished.
The scale of work being planned simultaneously in southern Iraq over the coming seven years is still so vast that systemic shortages, bottlenecks, and overheating should be expected, but the worst effects of Iraq’s brain-drain and loss of capabilities can at least be avoided through IOCs stepping in and drawing on their world-class project management skills to organise and execute the necessary work to develop Iraq’s midstream capacities.
