Risk and Reward: Iraq O&G business profile

Yet ever since this process has been beset by stifling bureaucracy, rampant corruption and the very real security threat that remains present to one extent or another to this day.

Under its $186bn National Development Plan, the government developed a comprehensive reconstruction plan, which look to address a damaged infrastructure increase industrial productivity and diversify a ravaged economy.

Iraq’s Oil Ministry estimates the country’s reserves at 143 billion barrels, placing the country second in the region to Saudi Arabia. It may be a surprise to some, however, given its inefficient drilling, that Iraq is already a Top 10 oil producer, and holds gas reserves of 3.2 trillion cubic metres. In fact, oil accounts for half of Iraq’s GDP, with the country now exporting over 3 million barrels/day.

Such figures make it less than surprising that the Oil Ministry has announced an ambitious target to increase production by 2020 to 8 million barrels/day. The evident potential has not been missed by companies such as Marsh, an insurance broker and risk assessment firm.

“From a macro perspective, Iraq’s prodigious wealth of oil and gas reserves, continues to drive massive inward foreign investment and production levels as a result”, says Simon Boxall, Managing Director at Marsh Energy Practice.

“These revenues are fuelling a resurgence in domestic investment….Overall, Iraq has the opportunity to build a new golden age, beckoning economic renewal for its people and massive opportunity for investors.”

To deliver oil in such volumes, it is unsurprising that some of the region’s largest upstream development projects are taking place in the country, which holds some of the largest oilfields in the Middle East.

In November 2009, an Exxon Mobil led consortium won a $50 billion contract to develop the 9 billion-barrel West Qurna Phase 1. In December 2009, Russia’s Lukoil and Norway’s Statoil were awarded the rights to develop the 12.88-billion-barrel West Qurna Phase 2 field.

Lukoil, which is leading development after Statoil’s exit earlier this year aims to increase output capacity from West Qurna 2 to 1.8 million barrels/day and keep it there for a period of 13 years.

Under this development, Baker Hughes won a contract to offer full drilling and completion services for 23 wells, whilst in May 2011 Schlumberger secured a contract from Exxon Mobil to drill 15 new wells at West Qurna 1. Halliburton and Fluor also both secured contracts at West Qurna 1 and 2.

In 2010 Royal Dutch Shell and Petronas signed a $20 billion, 20-year contract to provide technical assistance in the development of the giant Majnoon oilfield. The field is thought to hold in excess of 12.6 billion barrels of oil with Shell, the lead operator with a 45% share, along with Malaysia’s Petronas holding 30%. The consortium targets a production plateau of 1.8 million barrels/day, up from its current level of 45,000 barrels/day.

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Before these awards, in November 2009, a BP and CNPC consortium won the $17.9bn contract to develop Iraq’s largest oilfield Rumaila. The companies accepted reduced remuneration of $2 per barrel.

The principal aim is to increase oil production from 1.35 million barrels/day to 2.85 million barrels/day. The field, which has an estimated reserve of 15.5 billion barrels featured in the first oil and gas licensing round, held by the Iraq Oil Ministry.

Australia’s Worley Parsons was awarded the FEED and project management contract for Rumaila.
Iraq’s crude oil export expansion project has been one of the most talked about, and important strategic projects in the Minsitry of Oil’s masterplan.

After all, little of the oil produced from massive field expansions in the south would be able to get to market through the dilapidated terminal which the country inherited after years of mismanagement and sanctions.

South Oil Company appointed Leighton Offshore as the main contractor, which subcontracted to UnaOil Group. The crucial civil construction phase was awarded to 100% homegrown Iraqi firm Al Fayha Group. Oil & Gas Middle East met with Sarmad Al-Khudairi, Al Fayha’s CEO, on his way to the OPEC seminar in Vienna.

“We have had success with pretty much everybody operating in Iraq to date,” he says. “In the last six months, through the primary contractors we have worked on projects for Shell, Eni, BP, LukOil, and in terms of the EPCs we’ve worked directly with Petrofac, Samsung and most of the others active there.”

Al-Khudairi says that the overriding trend to date has been for the major IOCs to allocate the development packages in one lump sum, to eliminate potential problems with project coordination.

To date, the Al Fayha Group has been primarily engaged in the sale and delivery of ready-mix and precast concrete. “All of the big oil and gas projects are in their infant stages. The IOCs are building the early works packages, so concrete is in big demand,” he says.

“Specially-designed precast components, such as pipe sleepers, are also in strong demand, and we are benefitting from this rush because everything we provide is certified to international standards; our door is always open to spot testing.”

Al Khudairi stresses that oil and gas companies and their primary EPCs don’t deviate on compliance. “They are happy to pay for quality, but they insist on the appropriate certification, if nothing else to guarantee and protect their investment.”

The Iraqi-born CEO says that, in terms of production gains, the firms at smaller sites are the ones that have seen large production growth, as these fields largely just needed rehabilitating.

“The real boom in production will come when the bigger projects get underway. At the moment we are still carrying out the early works on those. The fact we are so busy is indicative of the fact that big investment really is starting now. I think judging from the types of work we are being engaged in right now, the real ramp up will begin around 2014,” he says.

“Our strength is really in the South. We used to work in the Kurdistan region, but today we are focused on operating solely in the south. We are positioned exactly where all the action is.

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The main obstacle in Iraq is human resources. Money and materials isn’t as problematic as people think, its really about attracting people back to Iraq. We’ve had most success with attracting well-trained Iraqi’s who are currently working in the rest of the GCC.”

Working under Leighton Offshore on a nationally-important project was Al Fayha Group’s flagship success to date, and a memorable one for Al-Khudairi.

“It was a hugely significant project for Iraq,” he says, “and a great thing to have on the company books. It was a profitable bit of work too.”

“Upstream projects and related investments have led to this regeneration and there is significant evidence of the momentum being maintained in this critical area,’ says Boxall.
“For example, Iraq’s Oil Ministry is preparing a licensing round to develop the Al-Nasiriya oil field.

Petrofac, the international oil and gas service provider, recently contracted to provide offshore services for the Iraq Crude Oil Expansion Project, and the discovery of a new field in the Ezair district has been announced by Maysan’s Provincial Council.

Importantly, we continue to see new foreign entrants to the market, such as 4th licensing round Block 8 winners Pakistan Petroleum, adding to an already rich pool of investors from across the globe.”

But as mentioned, Iraq’s business climate is not necessarily stable or an easy one in which to operate in. As Albine Horiot, director of communications at Hart Security explains, Iraq presents a unique, but rewarding challenge.

“Iraq is an exciting yet challenging place to do business. With the right preparation and a realistic understanding of the political, cultural and business nuances, it can be very rewarding,” she said.

“It is imperative that assets and reputation are protected from the onset using licensed and ethical security experts. Establishing a good working relationship with your client to promote a full understanding of Iraqi law and policy regarding security and local national manpower will help produce a realistic project timeline.”

Boxall agrees: “Ultra large reserves coupled with a relatively low extraction costs make it easy to see why Iraq is proving such an attractive proposition to foreign energy investors (compared for example, to the Arctic or deepwater Gulf of Mexico regions).

However, where there is reward there is risk, and the risks facing all stakeholders in Iraq’s developing energy arena are significant indeed. To realize the golden future, substantial risk management skill and expertise will be required,” he said.

Boxall advocates that any major investment in Iraq is viewed through ‘a holistic’ risk, that ensures all significant threats to the value chain are identified.

“Risks will include threats to personnel, supply chains, operational and maintenance integrity, production forecasts and ‘hazard’ risks such as blow-outs, polluting events, fires and explosions – the list is long.

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Many risks can be transferred to regional and international insurance markets, whilst others can be avoided or mitigated through planning and intervention. In Iraq, risk insight, analysis and preparedness are the keys to successful investment.”

Boxall says Marsh’s services have been increasingly in demand, helping clients to map and quantify risk, arrange pertinent and effective insurances, whilst navigating a compliant path through the regulatory environment.

Boxall adds: “At the same time, we demand of ourselves that in building our own business in Iraq, we behave professionally at all times and provide services to clients that are also naturally supportive of Iraq’s broader economic goals.”

Horiot explains that Hart, which has been in Iraq for a number of years, the focus of work has shifted noticeably towards the oil and gas sector. “Hart has over eight years experience supporting engineering, logistics, construction and oil and gas projects right across Iraq.
The focus has gradually moved from reconstruction and logistics contracts to oil and gas,” she says.

“Despite this the fundamental basics of how we do business has not changed greatly with the emphasis remaining on employing as many Iraqis as possible and maintaining an ethical and legal position.”

The security environment isn’t the only endemic challenge in Iraq.

A lack of infrastructure is threatening to hold the country back. A lack of port capacity or alternative export facilities is a major bottleneck that must be resolved. “On the ground operations are being managed and maintained by a cosmopolitan array of nationalities (albeit Iraqi led) that complicate an already demanding risk management environment.

Finally, we must mention the socio-political environment, which, be it through acts of political violence or the wider complexities inherent in Iraq’s political landscape, throws up added hurdles for investors to overcome,” adds Boxall.

Despite these challenges, companies continue to purse opportunities in the country, and contracts are being awarded. Things are improving.

In late August, the UK’s Petrofac signed a $100 million contract with the state-owned South Oil Company (SOC) to support offshore operations on Iraq’s oil expansion project. Petrofac will carry out operations and maintenance services for new oil export facilities, located approximately 60 km off the Al-Fao peninsula, including a platform, meeting station and subsea pipelines.

It brings the UK engineering firm’s value of contracts won in Iraq to $630 million so far. It follows a $240 million deal for work at Majnoon for UK/Dutch Shell and a $63 million contract with BP for inspection, repair and maintenance work at Rumaila.

In July, the UK’s Mott MacDonald won a project management contract with Russia’s Gazprom for its $3bn Badra oil field development in southeast Iraq.

Finally, the Basrah Gas Company was formed by a joint venture of Shell, Mitsubishi and the state-owned South Gas Company. The $17bn project will capture more than 700 million cubic feet/day of gas being burned off at three southern oilfields; Rumaila, Zubair and West Qurna Phase One, and is already capturing gas.

Yet despite these contracts, the work environment, which is challenging by its very nature, is not made any easier by the Iraqi government, states Horiot. In fact, the whole business climate that companies find themselves in could be more efficient and streamlined, with less layers of excessive bureaucracy.

“The laws governing the use of security companies are driven by the Ministry of Interior. However, the Ministry of Oil’s companies set further rules for the use of security within their own concession areas e.g. SOC, MOC, NOC,” said Horiot.

‘The level of bureaucracy that must be dealt with on a daily basis has a major impact on the flexibility of services to clients and is costly and protracted. The key is to ensure clients are aware of the time line so that efficient planning is conducted to meet the Government of Iraq’s requirements and approvals.

Last minute changes and increases in services problematic and we have seen extensive delays in visa approvals. Realistic planning for long term security requirements is essential,’ she said.

Away from the debate over security, the issue of the semi-autonomous region of Kurdistan to the north of the country continues to attract attention. On September 13 Iraq’s federal government and Kurdish authorities have agreed to patch-up a dispute over oil payments after Baghdad agreed to pay $858 million to oil companies working in the region (For more analysis see page 24).

In return, Kurdish authorities have agreed to export 200,000 barrels of oil per day through Iraq’s national pipeline network in return for 147,000 barrels per day of refined products from central government controlled refineries.

The agreement was reached during a meeting between Kurdistan’s Minister of Natural Resources Ashti Hawrami and Iraqi Deputy Prime Minister Roj Nuri Shaways and the Iraqi ministers of finance and trade.

In March, the semi-autonomous Kurdistan regional government condemned the signing of a development agreement for the disputed Kirkuk oil field between Baghdad and BP, and threatened to cut off international export routes.

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News Update

Shell is planning to restart production from the Majnoon oilfield in the first quarter next year after a planned stoppage for maintenance. The company says it can meet its end of year production capacity milestone, despite experiencing logistical delays and more de-mining than it anticipated.

A new Basra International Oil and Gas Hub has been approved for construction next to the port at Khor Al-Zubair.

The 11 million square metre manufacturing, storage, and servicing hub will be administered by Iraq’s General Commission for Free Zones and once built should see a significant improvement in the pace of customs and visa clearances.

The Hub is expected to offer 100% foreign ownership, free repatriation of capital and profit and tax and customs exemptions to companies taking leases.

The Iraq Oil Ministry has announced its formal target of exporting 6 million barrels a day by 2017, up from 2.6 million barrels a day now.

The country is already exporting at post-Saddam highs after debottlenecking of export infrastructure offshore Basra, and despite of up to 200,000 bpd of Kurdish output due to a payment dispute. The Gharraf, Badra, Majnoon, Halfaya and Ahdab fields are slated to drive production growth.

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Security briefing

For the majority of those approaching any form of contracting or consultancy work, simply operating in Iraq presented myriad challenges. Chief amongst them was the issued of security, which had been met by a plethora of private security contractors – in high demand following the void left after the toppling of Saddam Hussein – operating amongst the various oil fields.

Operating with little oversight or accountability, the reputation of private contractors has always been a negative one.

Of the 109 security companies registered in Iraq, the most notorious and abhorred by Iraqis was Blackwater. On September 16, 2007 the company killed 17 Iraqis at Baghdad’s Nisour Square, in which 17 civilians were killed. That the case was dismissed in 2010 merely heightened hostility and resentment to these firms even more.

On 29 February Iraq’s Oil Ministry issued an order banning foreign security contractors from working on the 12 major oil fields being developed by international companies.

It is unclear how well the new rule is being enforced.

A memo from the South Oil Company stated that ‘All the security services related to the drilling contracts of the subcontractors who are contacting with the lead contractors for the oil fields development…should be cancelled and never accepted from now on’.

At the time oil firms, particularly those operating in the southern fields, felt the Oil Police were too young, ill equipped and inexperienced to provide security to oil and gas plants and infrastructure.

Attacks on oil infrastructure have reduced dramatically, however, despite bomb attacks at the Rumaila field in October and December 2011.

Evidently, the mantra of ‘no risk, no reward’ has real meaning in an Iraq context,’ concludes Boxhall. “It would be difficult to identify many other growth opportunities, geographically, that produce such a diversity of threats to the value chain.

From a risk perspective, we would certainly expect that most investor ROI estimates presume potential for greater volatility in performance than would be typical, producing a significant delta between out-performance and under-performance.”

This is where the difference between good and bad risk management leaves its mark: successful investors will have dealt effectively with a plethora of challenges, including security concerns, human capital risks, a fluid geo-political environment and complex regulation Perhaps what sets Iraqi risk apart is the potential for individual and usually isolated risk silos to ‘cross-pollinate’, giving rise to a more compound risk environment and an attendant higher risk of investment failure.

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DDM & TA’AZ Join Forces in Iraq
DDM Geotechnical Services is based in the UAE, serving the Middle East markets. DDM’s Joint Venture with TA’AZ, will trade as TA’AZ Environmental, offering the Iraq market the complete array of onshore and offshore soil investigation and GeoSolutions services, plus MicroROV inspection and sand & sludge cleaning services.

“Clients are often lead to believe that CPT’s are an expensive option when carrying out in-situ soil testing, but the reality is, a CPT test can be done far quicker than, for example drilling a borehole.

A job site can be tested and processed data issued to the client within hours rather than weeks, meaning no standing time waiting for borehole samples to be tested and reported on,” explains Barrie Youds, Project Manager, DDM Geotechnical Services.

“This allows the Consultant Engineers to make prompt and in many cases time saving decisions regarding any potential requirement for piling, stone columns and or ground improvement.”

Youds says that with the ability to utilise a number of different cone types including Seismic, Electric Vane Tester, Fuel Fluorescence detector, Soil Moisture Probe and Magnetometer cones, TA’AZ Environmental has a solution to virtually any clients requirement for soil investigation.

“TA’AZ Environmental has now added a 200kN deck mountable CPT system for working from a barge or jack-up rig for near shore and shallow water (up to 30m) projects. Designed around DDM’s standard onshore systems, reliability and capability are already well proven,” he says.
Youds says DDM has seen a steady increase in the number of tender invitations during 2012, but we certainly haven’t seen the levels and demand that DDM had experienced prior to the 2008 recession.”

The UAE and in particular the Abu Dhabi market have been the company’s strongest markets.
“This has mainly been due to the consistent development by ADNOC and its subsidiaries. Clients continue to call for the high quality of services offered by DDM, but along with this we are noticing an increase in clients who are forced to be more financially aware than they have been in previous years,”

Looking ahead, Youds says he sees a year of expansion, both in services offered by DDM, as well as the geographical footprint of operations covered. DDM and “TA’AZ are in talks with Iraq clients interested in utilizing the equipment and experience offered by TA’AZ Environmental.”