Reuters, citing official documents, reported yesterday that Shell is in talks with Iraq’s oil ministry over potential revisions to the planned production plateau at the Majnoon field from 1.8 million barrels per day (bpd) to 1 million bpd.
Latest figures show that Majnoon is producting at a rate of around 90,000 bpd, up from 45,000 bpd at the time the technical services contract for the field was signed. The field is reckoned to hold 12.6 billion barrels in reserves.
Reuters also reports that as a result of a reduced target, Shell will look to dramatically cut their capital expenditure at the field, by around $10 billion. Currently Shell plans to drill a total of 40 development wells with associated gas separators and crude processing plants at the field.
There will need to be an extensive reappraisal of the technical services contract under which Shell (45%) – together with non-operating partner Petronas (30%) and the South Oil Company (25%) – work the field. Shell won the contract as part of the second round of oilfield auctions in December 2009.
Currently Shell is obliged to raise production capacity to 1.8 million bpd and hold it there for 10 years. In return, the consortium recovers all its costs, and after tax of 25% shares a fee per barrel produced of $1.39. The consortium is obliged to spend at least $300 million on the field. One or more of these contractual variables will need to change, although Reuters reports that the oil ministry will unprepared to raise the fee per barrel.
Officials at the SOC are, however, in agreement about the need to cut the headline production capacity target, though irritated that Shell has elected to go over the SOC’s head and speak with the oil ministry.
If successful, the negotiation could trigger similar talks between the other IOCs developing Iraq’s oil fields and the oil ministry.
From an asset management and national resource perspective, lower and more sustainable production plateaus make sense. Iraq’s national oil production target of over 12 million bpd by 2017 has long been derided as unrealistic, with the potential to damage long-term recoverability from oil fields if implemented. Companies have been spending at a frenetic pace – protected by contract terms which cover all their expenses – to meet a target which seems to suit consumer countries in its OPEC-breaking scale rather than Iraq itself.
While Iraq’s oil ministry has quietly disclosed a revised target of 8 million bpd, the most immediate target will be 6 million bpd, by which point Iraq is expected to negotiate its full re-entry to OPEC.
Oil exports are up 20% since January to 2.5 million bpd, after the opening of two marine oil terminals offshore Fao in Basra.
Majnoon, which nestles the the south-east corner of Iraq, 60km north-west of Basra near the border with former enemy Iran, proved to be heavily contaminated with mines and other ordnance, requiring an extensive sweep.
