Untapped potential

“There are no proper policies in place in Iraq for oil, there is no Hydrocarbon Law,” says Dr Ali Mahdi Al Dabbagh, former state minister and official spokesperson for the Iraq government.

“It has not yet been approved or adopted. Plus the federal council of oil & gas is not yet established, which is exclusively responsible to adopt and develop the hydrocarbons policies,” he said.

“We do know that there is a gap between the old regulations and the existing oil & gas contracts, there was no proper hydrocarbon law.”

The country must also overcome political unrest and ongoing security issues to create a federal council capable of overseeing existing oil & gas contracts and creating laws and regulations for exploration and extraction of oil.

Dr Al Dabbagh said that it could be five years before these regulations are put in place in the country.

Data from the US government’s statistics and analysis body, the Energy Information Administration (EIA), although Iraq has begun to develop its oil & natural gas reserves following over 20 years of sanctions and wars, it still needs to develop its infrastructure in order to reach its production potential.

According to Iraq’s deputy prime minister for Energy, HE Hussain Ibrahim Al-Shahristani, capital expenditures of $30 billion per year until 2020 in Iraq’s energy infrastructure is required to meet Iraq’s production targets.

“The lack of infrastructure can present significant problems for developing oil markets. In Iraq for example, infrastructure upgrades are needed to develop new pipelines and to increase storage capacity.

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Poor transportation and distribution networks can cause problems in meeting contractual obligations and present roadblocks to further development in the industry.

New investments and pro-energy government regulations are vital in order for Iraq to become a high performance energy supplier,” said Omar Boulos, managing regional director, at analyst firm Accenture.

Iraq is currently focussing on building new terminals in the south to cope with demand from Asia, Al-Sharistani told communications firm Gulf Intelligence, that he expects these terminals to have a total loading capacity of over six million barrels within the next few years.

The country is also moving rapidly to build a new pipeline to Aqaba on the Red Sea through Jordan. As soon as the situation in Syria stabilises, Iraq will use the old pipeline through Syria augmented by new pipeline infrastructure, Al-Shahristani said.

Iraq is also implementing its master pipeline programme to help the country connect all of its fields and move redundant crude from north to south and from the centre, to the east, to the Mediterranean and to connect with its regional neighbours, Al-Shahristani said.

Iraq is also working on developing its storage capacity to protect production against unplanned delays caused by, for example shore destruction due to bad weather in the Gulf.
However, progress on these developments has been hampered by political disputes and the lack of a legal framework to govern development of Iraq’s oil & gas sector.

The proposed Hydrocarbon Law, which would govern contracting and regulation, has been under review in the Council of Ministers since October 26, 2008, but still has not received final passage.

Currently Iraq’s oil & gas contracts are approved by the council of ministers, under a formal agreement basis.

According to Dr Al Dabbagh this type of agreement does not have the power of a government law, however the agreements bind the government and the exploration or production entity to comply with the contract.

The setting up of an oil & gas council and subsequent laws currently depends on the political stability in the country. Dr Al Dabbagh predicts that only after the next election will there be real change in the country’s oil & gas policies.

The elections and, hoped for stability, would also allow the country to bring in and develop qualified people and companies to fix its oil & gas extraction issues, as well as fix the problems of internal service delivery of energy, to the population.

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“In terms of the time line it is very difficult to assess, but I would say nothing will be put in place for the next five years. We have to be patient when we have to be very conservative when we are talking time-wise,” he said.

Currently Iraq’s exploration and extraction industry for crude oil is at saturation point, and will remain so for the next 10 years. This means that there will be no more oil exploration or production contracts awarded for the next ten years.

Dr Al Dabbagh predicts that while the country will not sign any more oil contracts for the foreseeable future, it will focus on developing its gas industry.

“For gas there is a great opportunity in Iraq. The country is rich in non-associated gas, which could supply Europe, and the Far East with their demands. Everyone knows that Iraq is the future in the hydrocarbons industry, there are huge reserves of oil and gas, but the opportunities for investment in the country are also huge.

Iraq is passing a critical transitional stage. We are not talking about the oil & gas industry in the short term, we are talking on the medium and long term. Iraq will be a golden opportunity,” said Dr Al Dabbagh.

Iraq also has associated gas in huge quantities, unfortunately it has been flared instead of being utilised for its industry and power generation capabilities.

It also has quantities of non-associated gas in a promising reserve in the western desert and other regions, according to Dr Al Dabbagh, Iraq’s proven natural gas reserves as of January 1, 2013 were the 12th largest in the world at 112 trillion cubic feet (Tcf), according to the Oil and Gas Journal.

Over 66% percent of these reserves lie in the south of Iraq. The majority of non-associated reserves are concentrated in several fields in the North, including Ajil, Bai Hassan, Jambur, Chemchemal, Kor Mor, Khashem al-Ahmar, and al-Mansuriyah.

“Iraq is going to develop that non-associated gas because definitely Iraq wants to be a major producer of gas for export and internal use. The ministry of oil is doing its utmost in order to be on the map for the gas producing countries as well,” Dr Al Dabbagh said.

Iraq first needs to satisfy its domestic power needs with its own gas reserves. Currently, the country is burning crude oil for energy at a massive cost to the country in terms of lost oil export revenue.

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“Iraq’s gas will not only be used for power generation in-country, but for all petrochemical and fertilisers and other industries. The excess or surplus will definitely be exported. Iraq is looking to fulfill its domestic needs first, then looking towards export,” said Dr Al Dabbagh.

According to the EIA, the current shortage of adequate gas feedstock has resulted in idle and sub-optimally-fired electricity generation capacity in Iraq. Iraq’s crude output target for 2012 was 2.9 million bpd, which was not achieved, according to Dr Al Dabbagh. One of those reasons was that Kurdistan did not deliver its quota.

“They were supposed to deliver certain quantities, but because of the political problems they couldn’t. Again there was an agreement, but it was not approved because there was a problem of how to split and deposit the money. There was a dispute,” said Dr Al Dabbagh.

“The problem with Kurdistan needs to be approached wisely and on a win-win basis. They have to protect their rights and interests in Kurdistan.”

Industry watchdog, the International Energy Agency (IEA) estimated that the Kurdistan Regional Government (KRG) area contained four billion barrels of proven reserves.

However, this region is being actively explored, and the KRG stated that this region could
contain 45 billion barrels of unproven oil resources.

The Iraq government is currently looking at producing around six million bpd production for export ideally over the next few years. This figure does not take into consideration the OPEC quota.

“OPEC needs to recognise that Iraq needs to enjoy its share of the oil quota. OPEC members should understand that Iraq needs money to reconstruct its whole infrastructure. If that has been recognised, Iraq is not looking to violate OPEC,” said Dr Al Dabbagh.

Dr Al Dabbagh expects Iraq to become one of the region’s top fossil fuel producers again in the next few years and says that the country is well able to meet the ever increasing global energy demands.

“Iraq would meet all the demand for energy, whether it comes from the Far East or from Europe, Iraq can meet that need and is looking to gain further traction in the region, but again Iraq needs to work quietly and wisely with the other players in order not to create any unhealthy competition with other oil & gas producing nations in the region,” he said.