Contax Partners’ senior consultant, Arsalan Iqbal takes a look at Iraq’s future and the challenges it faces in realising its hydrocarbon potential
The Iraqi oil & gas landscape remains a volatile proposition for investors as optimism over the country’s fortunes remains mixed with speculative unease and caution.
As the petroleum sector continues to thrive against a backdrop of violence, international analysts remain wary of the state of the country and its future trajectory. In this article, Contax Partners looks to study Iraq’s hydrocarbon potential, progress under the latest regime and requirements of the country’s drilling program.
Boasting the world’s third largest conventional reserves of oil (c. 150 billion barrels), Iraq currently produces 3.15 million barrels per day (bpd), with production forecast to grow steadily in the future.
Whilst project delays and violence in key areas makes accurate forecasting difficult, it is expected that oil output will increase to 4.5 million bpd by the end of 2014, with the government’s 2020 ambition expected to be c.9 million bpd.
With low extraction costs, favorable topography and high flow-rates, Iraq relies heavily on an oil-export model, and exports presently contribute 72% to the country’s GDP and 90% to government revenues.
Given these statistics, it is remarkable to note that of the 79 known and proven fields (70 oil and 9 gas) only 23 (29%) are online and producing, which points to inefficiencies and tremendous untapped potential available in Iraq.
As a whole, reserves (2P reserves – proven and probable) are estimated to be 214 billion barrels, setting the country up to challenge Saudi Arabia and Iran as a top producer of the region.
Similarly to conventional oil, domestic natural gas reserves in Iraq are reported to be substantial; proven gas reserves are estimated to be 128 trillion cubic feet (tcf) of which 92 tcf is associated gas and 36 tcf is non-associated. Total probable gas reserves are estimated to be 325 tcf, of which 164 tcf is associated and 161 tcf is non-associated.
Given this potential, it is also unfortunate that almost half of the country’s gas output is wasted via flaring or used only for well re-injection. As the country loses millions of dollars by flaring off c. 700 million cubic feet of gas, there is a need to have a clear energy policy that maximizes utilization of this clean resource.
In infrastructure (i.e. pipelines and refineries), a majority of Iraq’s oil is currently exported from the southern terminals of Basra, whereas c. 400,000 bpd – a quarter of all exports – is pumped through the Kirkuk pipeline to the Ceyhan port in Turkey. Furthermore, expansion of the strategic north-south pipeline is also under discussion.
Existing Iraqi refineries, with a total capacity of almost 600,000 bpd do not meet the current demand for oil, and despite improvements in recent years, the sector has struggled because refineries produce too much heavy fuel oil.
To address this issue and to reduce the load on the four existing refineries located at Al-Basra, Daurah and Baiji, four new refineries with a total capacity of 740,000 barrels per day have been planned for the future, with capacities varying between 150,000 to 300,000 barrels per day.
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The New Iraq
After the 2003 ouster of Saddam Hussein, Iraq awarded exploration licenses to companies such as Shell, Total and BP. During this time, the country experienced an influx of private defense contractors and service companies that established connections within the government on favorable terms but without public disclosure.
In this milieu, promises of a new Iraq have continued to remain unfulfilled and political, legal and economic issues have continuously impeded progress. Lack of formal oil and gas regulations, improper planning, federal confusion, corruption, lagging infrastructure, harsh contractual terms and other barriers to entry remain key problems; however, these have been largely overshadowed by continued security threats to field personnel, assets and facilities.
Security threats
Violence remains a severe problem in Iraq and this has increased cost of insurance and security for oil companies. At present, several armed Sunni-factions remain active in volatile areas such as Mosul and Kirkuk, with al Qaeda Islamist insurgents regularly attacking security forces, strategic energy facilities and oil wells.
In an attempt to undermine the Shiite-led government, attacks have also escalated sharply since the start of 2013 as al Qaeda’s wing, the Islamic State of Iraq, and other Sunni Islamist insurgents look to stoke internal sectarian conflict.
Militants recently also attacked oil export pipelines in the north and crude oil flows to Turkey via the Kirkuk-Ceyhan pipeline were also interrupted in May 2013. Up to June 2013, Iraq foiled an al Qaeda plot to bomb a key Baghdad oil facility and currently, the government is also trying to de-commission land mines that are littered along the Kurdistan-Iraq border.
Oil & Gas regulations
The government has struggled to maintain its sovereignty over oil-producing territories and informal governing set ups have emboldened risk-takers who are trying to break free from Baghdad.
This problem has severely impaired Baghdad’s ability to maintain a firm grip on Kurdistan and other key regions. Whilst Kurdistan accounts for less than 5% of Iraq’s total oil production, potential reserves are thought to be significant, totaling to as much as 45 billion barrels.
The present set up in Iraq follows a loose set of rules that were hurriedly established in 2005 to facilitate easy entry of international companies.
A new draft law has also been pending approval since 2007 and was meant as a step to govern foreign oil companies’ operations in Iraq, addressing revenue sharing among the federal and regional governments, and establishing the Iraq National Oil Company. Due to continuing political tension and differing interpretations of the Constitution, the draft has since remained in limbo in the Iraqi parliament.
Kurdistan has capitalized on the confusion in the government and the Kurdistan Regional Government (KRG) passed its own regional oil and gas law to govern domestic petroleum operations, symbolizing a major victory over Baghdad.
The KRG has independently signed over 40 production sharing contracts with companies such as Talisman, Hess, KNOC, Marathon, and Murphy Oil; this has caused a national debate as Baghdad has declared these concessions illegal and the legality of the agreements is considered void. Kurdistan has nonetheless continued to export limited quantities of oil to Turkey by road in tankers and willingly complicated its relationship with Baghdad.
At present, international companies are offered more attractive commercial terms in Kurdistan via productive sharing contracts where the KRG holds a 20% interest; for international oil companies incentives include greater ownership and more profitability in hydrocarbons extracted from Kurdistan compared to Iraq because via its own competing Technical Services Contracts the state holds a 25% stake.
