Iraq’s government has launched a massive investment drive to boost its domestic refining capacity. However, more needs to be done to attract international capital, writes Abdelghani Henni.
Iraq was among the first countries to establish a refinery in the Middle East, building the first refinery at Alwand in 1927 with a capacity of 10 000b/d. This was followed by the construction of the 6000 b/d Haditha refinery in 1949, later expanded by 10 000 b/d. However, it failed to keep its leadership position due to political instability and a series of wars in the past 32 years, dating back to the Iraqi-Iranian war in 1978 and including 13 years of embargo.
Saadallah Al Fathi, who has worked throughout various departments of the Ministry of Oil in Iraq and became director general of the Daura refinery (1976-1980), and president of the Refineries and Gas Industry Administration (1980-1986), told Refining and Petrochemicals Middle East that much of the damage from the Iran-Iraq war has never been repaired.
“Refineries in Iraq suffered through three wars and 13 years of sanctions,” says Al Fathi, who currently works as an advisor to Dome International Petroleum. “The repairs were modest and very little fresh investment was made,” says Al Fathi.
Iraq has three main refineries including Baiji in the north, Daura near Baghdad and Basra in the south, with combined capacity of about 570 000 b/d.
The majority of these refineries are hydroskimming refineries, one of the simplest process types but also the least efficient, consisting of atmospheric distillation, naphtha reforming and treating processes, as opposed to the high olefin fluid catalyst cracking (HOFCC), and FCC refineries.
There are also smaller regional distillation units with Merox treaters which treat LPG, kerosene or jet fuel by oxidizing mercaptans to organic disulfides.
“Beside these refineries, lube oils production continues in three major refineries, based on furfural extraction and MEK dewaxing,” explains Al Fathi. “Tetraethyl lead (TEL) is still used to boost octane,” he explains.
TEL is a common antiknock additive/octane booster in gasoline (petrol). TEL usage was largely discontinued in Europe and North America because of the toxicity of lead and its deleterious effect on catalytic converters.
The need for improvement is underlined by the EIA. “Iraqi refineries, with a maximum capacity of almost 600 000 b/d, have antiquated infrastructure, and their output does not reflect the current demand mix,” said a recent EIA report on Iraq.
“Despite improvements in recent years, the sector has not been able to meet domestic demand for most refined products, and the refineries produce too much heavy fuel oil,” it read. The result is that Iraq relies on imports for about 25% of the petroleum products it uses, with total consumption averaging about 600 000 b/d in 2008.
Many other factors have affected the refining sectors in Iraq, including the lack of continuously power supply which prevents normal operation of the refineries.
“Looting and pillage in the aftermath of the 2003 invasion and occupation, difficulties in the export of fuel oil products also hampers the operations, along with the lack of a strong central coordinating authority in the country,” Al Fathi explains.
The refining sector in Iraq also suffers from the continuation of outdated control mechanisms, with no supervisory body in place. In addition, the quality of gasoline is poor, as the it is leaded and has low octane level, while diesel and oil have a high sulfur content.
Moreover, the sector is not adept at conserving energy and observing environmental compliance. “Iraqi refineries suffer from poor utilisation rates, says Al Fathi. “In recent years, the rate of utilisation has not been more than 50- 60%.”
Strategic plan
To alleviate product shortages, Iraq’s 10-year strategic plan for 2008-17 aims at increasing refining capacity from 600 000 b/d to 1.5 million b/d.
“Iraq has plans for five new refineries, as well as plans for expanding the existing Daura, Basra and Biaji refineries,” says Imad Nassif Makki, oil refining senior expert at the Organization of Arab Petroleum Exporting Countries.
The scope of work involved in rehabilitating the existing refineries includes the power generation and integration of steam requirements for all refineries as well as increasing the conversion ratio and overall complexity.
“There could be additional units to further improve yields and product specifications,” Al Fathi says. “It also aims to maintain, rehabilitate and modernise existing refineries including the control systems,” adds the expert.
The Iraqi government has revealed plans to build five new refineries in the country. “The new refineries will add 840 000bpd, and will be located in Karbala (140 000 bpd), Nassiriyah (300 000 bpd), Kirkuk (150 000 bpd), Maysan (150 000 bpd) and East Bagdad with a capacity of (100 000bpd),” says Makki.
Referring to facilities at Karbala, Kirkuk, Maysan, and Nassiriyah, Iraq’s Oil Minister Hussain Al-Shahristani said that “the investment in the new refineries will be around US$20 billion. Each one will cost around $4 billion.”
The building of new refineries around the world has slowed dramatically, and sometimes banned due to environmental legislation. But in Iraq, nothing will stop the government from executing such projects. “Refinery investments in Iraq are guaranteed more than anywhere else in the world,” said Al-Shahristani in early July, adding that his country wants “real partners.”
“With the planned new refineries, Iraq has a leading position in the region’s downstream capacity development,” says Yassir Ghiyati, sales manager at Haldor Topsoe, which is involved in refining projects in Iraq. The country has recently awarded several contracts in connection with the development of its new refineries.
The Shaw Group has been awarded two feasibility study contracts in connection with the development of the 150 000b/d Kirkuk refinery and the 150 000 b/d Misan refinery.
Technip from France is undertaking the front end engineering and design (FEED) work of the 150 000b/d Karbala refinery. Foster Wheeler won the feasibility study for the 300 000b/d Nasiriya refinery.
“We will develop the configuration of the new refinery to meet the client’s processing objectives, evaluate proprietary technologies, prepare a report covering the feasibility of the project and the design basis of the refinery facilities, engage the selected licensors and prepare the front-end engineering design package for the total project,” explains Stephen Culshaw, managing director, Commercial Operations, Foster Wheeler Energy Limited and a founder member of the Iraq Britain Business Council.
To secure the necessary funds to finance these projects, Iraq is considering different options, which include direct governmental allocations as well as establishing joint ventures.
In an effort to attract investment, Al-Shahristani said Iraq will allow investors to set prices for refined products, as well as offering a 5% discount on oil and on the land on which the refineries are to be built. “There hasn’t been much success in the last few years in getting direct allocations from the ministry budget,” says Al-Fathi.
“Now the government has proposed a new private investment law to encourage private companies to invest in Iraq’s downstream sector,” he adds.
The private investment law also offers a forty year lease on land, and allows the investor to market the products in and out of Iraq, but with priority provisions for the ministry to buy the product.
In order to qualify for government incentives, Iraqi and foreign companies interested in the refining sector must posses proven financial and technical capabilities, and 75% of staff should be Iraqi nationals.
But even with these incentives, analysts say that the law needs to contain more to attract the required investment needed. “The private investment law must be made more realistic to attract any interest,” observes Al-Fathi. “Refineries must be planned with economic considerations in mind and not the wishes of political groups.”
In spite of the criticism from Iraqi experts, these proposed projects will open great opportunities for engineering and licensing companies in the revitalisation and expansion of Iraq’s refineries.
“The Iraqi oil market is currently undergoing a huge fast track development programme, and this offers excellent opportunities for technology and catalyst companies.” says Ghiyati.
The same view is shared by Foster Wheeler. “We first worked in Iraq in the 1930s,” says Culshaw.
“We see Iraq as a very important marketplace for Foster Wheeler, and one to which our particular expertise and track record in executing large, complex projects in challenging locations make us particularly well-suited. Security is of course a concern and this is regularly reviewed.”
However, due to the current political and security situation in Iraq, executing these proposed projects seems to be very difficult. “Above all, Iraq must get out of its current predicament and regain real independence,” says Al Fathi. “Otherwise, even the best intentions will not be good enough.”
