Years of fierce battles with terrorists and a prolonged internal sectarian strife has meant that Iraq’s oil revenues-reliant economy has not just suffered financial damage, but the oil and gas industry itself has severely borne the brunt of conflict.
Today in Iraq, which is estimated to have the fourth largest oil reserve in the world, the oil belt in the north, whose control the military recently claims to have wrestled back from an extremist group, is almost in a dilapidated state; the semi-autonomous Kurdistan region continues to operate in defiance of Baghdad, having established its own parallel oil sector; and investments from international oil companies and other global stakeholders is under jeopardy due to the critical security situation.
“To put this into context, capital investments have been broadly deferred in recent years, with field expansions on hold and large-scale infrastructure projects delayed on the back of the security situation. Militants continue to pose a threat to exports from northern Iraq and northern exports are reliant on the Kurdistan export pipeline and the Iraq-Turkey pipeline. As such in general, safety is of paramount concern for oil and gas institutions in Iraq with the lack of capital investment being the major impediment to growth,” says Ehsan Khoman, director, Head of Research and Strategist for MENA at MUFG.
“Safety is and continues to be of paramount importance for the development of the oil and gas segment and especially for the international oil and gas players in Iraq. Many of the IOCs have expressed apprehensions about the need to hire private security to safeguard their assets and workforce and this definitely adds to their costs and not to forget the challenge in attracting workforce (towards the energy sector) in Iraq,” believes Vinod Raghothamarao, director consulting, Energy Wide Perspectives, at IHS Markit.
According to one such security consultancy firm – Al Murabit Security Services, which provides the full range of security and risk management advisory in Iraq for IOCs, oilfield service companies and infrastructure development players – the concept of HSE assumes a whole new meaning in the country. “Oil and gas (sector) has led the way in health and safety, which in places like Iraq, becomes HSSE – Health, Safety, Security and Environment,” Simon Barry, director of Al Murabit Security Services, states.
“To be fair, environment is not a major issue in the eyes of many Iraqis at the moment. Security can be like HSE; going through the motions to tick a number of boxes, or actually designing and providing a service that enables people to get things done with a minimum of risk. It is the application of security, and at times its control and oversight, that often affects activity and growth, not the need for security itself. The bottom line is whether it is treated as a commodity or as a critical enabler,” Barry says.
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Despite the many adversities, Iraq unarguably has withstood the test of resilience to remain a prominent oil producing nation in the world, and a formidable stakeholder in the global energy market. The country’s output is estimated to be about 4.5mn bpd at present, with estimates suggesting that output level could touch 5mn bpd by the end of the year. More than 80% of the production comes from the southern region. Around 1.4mn bpd of production comes from the Rumaila oilfield, while West Qurna is responsible for almost 800,000 bpd. The rest of the output comes from the oilfields of Majnoun, Zubair, Halfaya, Missan, Gharraf and Badra, with about 500,000-700,000 bpd coming from the North, where Kirkuk is the key contributor.
The security risk that the situation poses to life, limb and industrial operations has been repelling a number of foreign players, causing Iraq to lose out on investments it desperately needs to bolster its upstream sector. The few IOCs that remain are reportedly content with simply continuing operations without disruptions, and not planning expansion of their activities in the country.
“Among others, three oil majors, BP, Royal Dutch Shell and Lukoil invested in Iraq,” Ehsan Ul-Haq, director – Crude Oil and Refined Products, at London-based Rescource Economist Ltd, says in retrospect. “BP operates Iraq’s largest field, Rumaila, Lukoil operates West Qurna 2, running at around 400,000 bpd and Shell operates Majnoun, which is producing a little over 200,000 bpd. There is also an agreement on the Halfaya field, operated by PetroChina, where the third development phase was put on hold in 2014, but will now move ahead to double production to its target of 400,000 bpd. In the North, Kurdistan has invited several companies to invest in its territory.”
The situation concerning foreign investment into Iraq is going to improve soon if the government’s ambition to invite IOCs to bid in a licensing round for nine key oil assets is realised. According to reports, a number of the blocks on offer contain trans-border fields which are shared with Iraq’s neighbours, Kuwait and Iran. While in recent history there has been limited appetite between the neighbours to seek to jointly develop blocks as unitised fields, Iran and Iraq are reported in Q1 2017 to have signed an MoU for the development of certain joint fields and facilities, including the Sindbad and Naft Khana blocks.
“The oil industry has changed significantly in the past five years. In short, we have moved from a sellers’ market to a buyers’ market and Iraq faces a lot more competition from other regional emerging markets and other emerging oil and gas regions (whether it be Africa, Asia, the Eastern Med, deep water, the Arctic, etc),” Jason Rosychuk, a senior associate at law firm Pinsent Masons, remarks.
“Of course, the largest challenge has come from unconventional sources. Giant fields, such as in the Middle East, boast development budgets in the billions, with lead times of around five years. So IOCs have many more options to consider now than they did a decade ago. In terms of Iraq, most development is in line with stated goals of the IOCs and the government to increase oil production on the producing fields, so these development projects have continued,” Rosychuk says.
His advice to Iraqi oil authorities: “Iraq would be well served by not focussing on the supermajors, as they tend to have done in the past, and tailor their licencing rounds to independent and junior companies. This is because the smaller companies tend to dedicate more care and attention to proving up the assets, as the value to the company of any particular asset is much higher. The Kurdistan region was very successful with this approach.”
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Despite several impediments, Iraq still stands tall as one of the major oil producers and exporters in the world today. However, the country reportedly faces a lack of economically-viable natural gas resources to develop, which has resulted in Baghdad having to import gas from countries like Iran. More than the availability of gas resources, it is the lack of the required infrastructure that has proved to be a major hurdle in Iraq attaining self-sufficiency in gas production – an obstacle that the energy authorities are seeking to overcome.
“Iraq does have massive gas resources, as majority of the associated gas is flared till now. Having said that the Basra Gas Company (the local JV with Shell) has made significant progress in capturing and processing gas as well as exporting it to generate much needed cash to rehabilitate ageing plants and equipment. There is a major focus in Iraq to expand capacity for capturing and progressing gas and I am certain you will see a lot of progress on the gas front in the near future. I am certain that in the medium to long-term, Iraq can build the capacity to become self-sufficient in gas,” Vikas Handa, managing director of energy consultancy firm Beas DWC-LLC, states.
The government has already started taking steps to give impetus to its gas sector, and has identified the problem of Iraq losing significant amounts of gas as a result of flaring. Following extensive discussions, the Iraqi Ministry of Oil has in July awarded a contract to the newly-formed energy services giant Baker Hughes, a GE Company (BHGE) to provide mechanisms to help recover flare gas.
An advanced modular gas processing plant has been recommended for Nassiriya as part of the initiative by BHGE, which will develop advanced systems to recover flare gas at the Nassiriya and Al Gharraf oilfields, using modular gas processing technology developed in the United States, with the project to be undertaken in two stages.
In the first stage, the advanced modular gas processing solution will be deployed to dehydrate and compress flare gas to generate over 100mn standard cubic feet per day (scf/s) of gas. The Nassiriya plant will be then expanded to be a complete natural gas liquid (NGL) facility to recover 200mn scf/d of dry gas, liquefied petroleum gas (LPG) and condensate. The project will create direct and indirect jobs for Iraqis and help grow the local supply chain requirements that supports Iraqi small and medium enterprises.
It is evident that irrespective of the numerous difficulties Iraq has to contend with, in the form of both violent conflicts and economic hardships, the oil and gas industry has somehow not been allowed to languish in terms of the standard of upstream technologies at play in the global
industry.“Iraqi oilfields are generally large conventional fields that do not pose great technological challenges at present. This is one of the factors that makes Iraq’s oilfields attractive and means that the cost of production is quite low,” Rosychuk tells this magazine. “There was a time when Iraq’s domestic technology may have been behind international standards, but after a decade of massive investment by the IOCs, the level is commensurate with the complexity of the fields. EOR, IOR and more advanced techniques will become more important in the future when these fields mature.”
“The Gulf Wars and before that the sanctions during Saddam Hussein’s time did deprive Iraq of resources, talent and technology, and pushed the country back by many decades,” says Handa, who is also the UAE representative of the Iraq Britain Business Council (IBBC). “However the Iraqi oil contracts for E&P companies have ensured that foreign oil companies bring their technology and experience to achieve early production targets and enhanced oil recovery. With almost all of the oil majors operational in Iraq, the country has taken one giant leap in terms of attracting latest technology to the country and training Iraqi nationals.”
