Iraq offers considerable and growing opportunities for the drilling and oilfield services industry. Douglass Westwood’s Isla Parsons and Frank Wright examine the opportunity landscape for 2013
The potential scale of the Iraqi oil sector is unprecedented in recent times and represents a significant opportunity for the drilling and oilfield services industry.
However, limited historical information, coupled with the complex political situation make accessing realistic data and market forecasts extremely challenging.
This has led Douglas-Westwood to produce its first report on the Iraqi drilling and oilfield services market to aid service companies in reviewing the specific opportunities and risks by service line, in addition to aiding operators to build a view of available supply chain capability in the north and south of the country in terms of rig availability and associated services.
Country Overview
Currently estimated to be the 5th largest in the world, Iraq’s proven oil reserves continue to rise and the country is already the 5th largest producer in the OPEC group.
Expanding oil production has been an overriding priority as the country rebuilds its economy and infrastructure. Since 2008 four licensing rounds have been held in Iraq (excluding the semi-autonomous region of Kurdistan), opening up the country’s resources to IOCs and NOCs alike.
Governance
Since 2005 Iraq has been governed by a parliamentary democracy with the most recent elections held in 2010. Iraq is comprised of 18 regional governorates with elected local governments, each of which is given autonomy and powers under the federal government.
The regional governments have authority in many areas, including allocating the regional budget, policing and security, education and health, natural resource management and infrastructure development.
Important regional governorates, in terms of reserves, include Baghdad, Amara (in the region of Misan), Al-Basrah, Kirkuk (in the Ta’Mim region) and Kurdistan. Al-Basrah holds the greatest volume of proven reserves, as well as the only stretch of coastline, so is responsible for all shipping exports.
Southern Iraq
The southern corner of Iraq is the largest oil producing region, holding around 65% of all reserves and accounting for 73% of production between 2008 and 2011.
Fields in this part of the country tend to be on a large scale with several supergiants , some of which have been producing for decades. The majority of licensing activity in Iraq so far has been focused around this region.
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Kurdistan Region
The current Kurdistan Regional Government (KRG) was elected in 2009 and administers three of Iraq’s governorates; Erbil, Dohuk and Suleimaniah.
Tensions between the Kurdish population and Iraq are long-standing and relations remain strained. To date, the two governments have been unable to reach an agreement on how oil revenues should be shared.
Consequently, contracts signed between the KRG and IOCs have been branded illegal by the federal government and offending companies have been barred from participating in any further licensing rounds in Iraq.
Despite this uncertainty, Kurdistan is still attracting major operators, not only due to its significant potential oil reserves but also the more attractive commercial terms.
Some major IOCs have already chosen to forego potential opportunities in Iraq in order to establish a presence in Kurdistan.
Current Status
There is a concentration of supergiant oil fields in the south, which includes Rumaila and Zubair. Southern fields were estimated to account for more than 75% of total Iraqi oil production in 2011.
Expanding production at these fields through rehabilitation of existing infrastructure and extensive development drilling campaigns has been the priority for the federal government. This strategy is starting to pay off with BP and its project partners at Rumaila hitting an incremental production target in early 2011.
Further north there are major fields at East Baghdad and Kirkuk, operated by the North Oil Company, which are producing at levels well below potential capacity. While other fields in the province are also available, they have attracted less interest. The Angolan NOC Sonangol operates here but has faced serious security issues.
The Kurdistan region is a major exploration opportunity, which has already attracted a wide array of independents and NOCs. A major new field has already been identified by Gulf Keystone Petroleum and estimates have also been upgraded by DNO at the Tawke development play.
Despite significant production potential, gas has not been a priority for the federal government due to a combination of high oil prices and lack of domestic demand. As the economy develops, gas will become more of a focus, especially in the power generation sector, which is currently fuelled mainly by oil.
Infrastructure
There are only four large refineries (capacity greater than 100 kbpd) located at Al-Basrah in the south, Daurah, near Baghdad and Baiji in the centre of the country.
Consequently, development of refining capacity is a priority, with several large refineries planned; the furthest advanced being the $4bln 150kbpd refinery at Karbala.
Oil exports are routed either through the Gulf via the Fao terminal or through a northern route into Turkey. At present, the vast majority of exports are via the Gulf, with ambitious plans to expand offshore loading capacity.
Expansion of the internal north-south “strategic” pipeline from its current much-reduced capacity of 200kbpd is also expected, while the east-west pipeline route into Syria has been abandoned, and an export route into Saudi Arabia is in a state of disrepair.
In Kurdistan, the Tawke field is connected to the Iraq-Turkey pipeline but many other prospects in Kurdistan are effectively stranded, relying on transport by truck, either to domestic pipelines or across the border to Turkey.
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Forecast
Douglas-Westwood’s report takes a scenario-based approach to the drilling & associated services market with a high growth scenario linked to the ambitious aims of the Iraqi government and a second, constrained scenario defined by supply chain limitations, infrastructure bottlenecks, and other factors. Market forecasts have been segmented by drilling services area, oil field and operator.
Two Growth Scenarios
Government oil production targets are very high at 12mmbpd by 2020, requiring unprecedented growth in drilling activity. 2,700 new wells, not including water injectors and gas wells, would need to be drilled in this scenario between 2012 and 2016.
In order to meet this demand, Douglas-Westwood estimates that approximately 37 rigs would have to be re-allocated from other regions, along with the addition of 13 new-build rigs over time.
Annual drilling expenditure (including well construction cost, services, rig and crew)would have to rise from levels of $1.6bln in 2011 to $9bln by 2016. Total expenditures over the forecast period would be $31.5bln.
In addition to rig supply, there are many other practical issues including navigating Iraq’s complex oil bureaucracy, importing drilling equipment into the country, the poor state of the infrastructure, and potential OPEC production restrictions.
Based on this combination of internal and external factors, we conclude that this production scenario is highly unlikely to be achieved.
The second, less ambitious scenario, estimates an oil production increase to 5mmbpd by 2016 in Iraq and 1mmbpd in Kurdistan. This scenario takes into account both service industry constraints and the poor condition of the infrastructure.
Even with these reduced production rates it estimates some 1,500 wells would need to be drilled between 2012 and 2016. Rig availability and consumables supply would be challenging with the rig supply/demand gap narrowing towards the end of the forecast period.
In this scenario, operators would not be burdened with such high levels of expenditure and growth rates, although cost pressure on margins would still remain. CNPC and its subsidiaries would have the highest expenditure levels, totalling $4.7bln over the forecast period.
The supergiant brown-fields in the south would continue to account for the vast majority of drilling expenditure over the forecast period. The Douglas-Westwood view of production is in line with forecasts by the IEA, which predict that Iraqi oil output will increase to 6.1mmbpd by 2020.
Market Opportunity
The scale of the ageing supergiant fields and the lifting costs, amongst the lowest in the world, initially attracted many leading IOCs.
However, tough contractual terms and difficult operating conditions have tended to limit the return on investment. Despite the challenges, operators have been awarding significant turnkey contracts for development drilling and well remediation programmes.
Due to the scale of these projects, the large integrated service companies such as Schlumberger and Baker Hughes dominate the southern market, winning the largest contracts and integrated project management deals.
The Rumaila field has been the single largest source of service contracts to date, with West Qurna, Zubair, and Badra following behind.
While oil production from the semi-autonomous region of Kurdistan accounts for less than 5% of Iraq’s total, the potential reserves are thought to be significant.
Kurdistan’s terms of business have been purposefully designed to attract risk-taking exploration companies, with 50 operators already active in the region.
