Jiyad: Min of Oil should Withdraw Plan to Offer 12 New Oilfields

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The Ministry of Oil should withdraw its plan to offer 12 new oilfields.

In a rather surprise move, the Ministry of Oil (MoO) announced its “intention” to offer 12 medium and small oilfields to IOCs for development and production.

The most alarming and absurd components of the announcement are the contractual modality and the process of awarding and contracting.

Considering the danger and implications of the announcement I call upon the Ministry of Oil to withdraw this announcement immediately and focus instead on properly manage and monitor what has been contracted already. Otherwise, the Iraqi upstream petroleum could suffer from devastating consequences at a time when the country is liberating its provinces, especially Mousil from Da’esh.

The offered fields are Sindebad, Um-Qaser, Rachi and Abu-Khema (in Basra Governorate); Kumait, Noor, Umara, Dema and Dujaila (in Missan Province); and Merjan, Kifl and West Kifl-all known as Mid-Euphrates (in Middle Iraq).  MoO announcement provides further information which will be addressed in this commentary.

At the outset, this is not a new move at all. After completing the fourth bid rounds, the MoO has at least formally announced three times its intention for new offering. The first was during the former Minister Abdul Kareem Luaibi, who in March 2013 announced a fifth bid round comprising “10 oilfields”, then in October he postponed that round to “next year”.

The second was related to the well-known Nassiriya Integrated Project-NIP, which combines the development of Nassiriya oilfields with a 300kbd modern refinery. Though NIP attracted good number of reputable IOCs, the project was put on shelves and related bid round was postponed indefinitely in June 2014. Recently, MoO offered Nassiriya Refinery for private investors, thus NIP is dead!

The third is related to linking Ratawi and Bin-Umar oilfields (in Basra) to funding the water-injection Common Seawater Supply Project (CSSP) reportedly negotiated with ExxonMobil and PetroChina (CNPC). Since January this year no further information is publically available on earmarking the two oilfields to CSSP.

The current Minister of Oil made many pledges when he took office among them two of particular relevance to this topic: first, he emphasized the “national efforts” in upstream petroleum development and second, decision will be based on “solid and thorough studies and assessment”. The recent announcement by the Ministry is diametrically opposing to what the Minster has recently pledged.

By offering these 12 oilfields to IOCs “whether as independent (individual) company or as consortium of companies” in addition to what was contracted under the previous four bid rounds nothing meaningful is left for the “national efforts” role in this sub-sector. Moreover, where are these “solid and thorough studies and assessment” which the recent announcement was premised upon?   None!

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Mr Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: [email protected], Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

3 Responses to Jiyad: Min of Oil should Withdraw Plan to Offer 12 New Oilfields

  1. Ahmed Mousa Jiyad November 4, 2016 at 1:52 pm #

    Feedback from the Ministry of Oil
    The Ministry of Oil issued on 30 October the following “Clarification”, which is copied as is.
    I might comeback to address this Clarification, which still in my homble opinion suffer from flaws.

    Ahmed Mousa Jiyad,
    Iraq/ Development Consultancy & Resaerch,
    Norway.
    4 Nov 2016
    —————————-

    Clarification.

    The ministry of oil has an ambitious plan to invest the oil & gas wealth perfectly and sustain the national production of crude oil, as well as raising the associated gas investment. And although the financial & economic challenges which faces the country, the ministry kept on working by depending on the national efforts and it supports these efforts strongly.
    The ministry of oil assigned the two national companies which are the south oil company (SOC) and Maysan oil company (MOC) to develop (10) oil fields in the governorates of Basra, Thi-Qar and Maysan and invited recently the global companies to participate in developing and investing (12) oil fields classified as “medium & small” fields distributed as 4 fields in Basra, 5 fields in Maysan and 3 fields in the Middle Euphrates governorates.
    The ministry is aiming through its ambitious plans to make a new experience “oil contracts” with the global companies whom are aiming to invest and develop the Iraqi fields after taking offers from these companies about the method of these contracts which they want to sign, as well as the suggested contracts by them. The ministry also requires that these contracts does not cost any financial obligations or expenses which might be a big burden on the federal treasury at the present time or the future.
    In order to find new formulas better than the past which brings more incomes to the country, the ministry is working on to make oil contracts which can achieve its targets according to the bilateral direct negotiations between the ministry and these companies after the agreement on the conditions and rules of the contracts which obliges these companies to provide the funding, experiences, new technology, equipment, machinery and the other services, in addition to committing the companies to invest the associated gas with the oil operations perfectly which can contribute in raising the national production of gas. According to these contracts, the ministry is committed with providing the necessary facilitations for the companies to work and making sure to let them achieve the “profit” which suits the development plans according to the signed contracts formula. And the ministry will announce soon about the method of the contracts with these companies after finishing the contracting procedures and gaining the necessary approvals according to the rules and directions. And in case of making no agreement with the global companies, the national companies will do the development in addition to the oil fields which they were assigned to develop earlier.
    The ministry of oil encourages the local & foreign investment in order to develop the oil & gas industry in Iraq and sign contracts with the companies which can achieve a quantum leap on the performance, development and results, So that it confirms its keenness to expand the national efforts according to the available capabilities to develop the oil & gas fields in the refining and up-streaming sectors and in applying the projects of developing the infrastructure. This activity is going to give the national efforts bigger role and contribute in the profit as well as developing it and making a quantum leap.
    Send by: Site Manager | Date: 30-10-2016 | Time: 11:54:01 am
    https://oil.gov.iq/index.php?name=News&file=article&sid=711

  2. Ahmed Mousa Jiyad November 5, 2016 at 8:39 pm #

    Weak and disappointing response from the Ministry of Oil
    At the outset, the prompt feedback by the Ministry is highly appreciated as it reflects positive receptivity and responsivity in enhancing constructive dialogue between the Ministry and independent oil professionals.
    That said, the substance of the clarification is rather weak and disappointing as it did not address any of the pertinent issues and did not answer the questions posed previously on this offering. Moreover, it did not suggest any convincing argument justifying it intention for the offering. Therefore, the Ministry should suspend or compelled to suspend any action on these 12 oilfields. Here is why.
    In addition to what I wrote earlier I would like to make the following remarks on the Ministry’s recent “Announcement” and this “Clarification”
    First, the list of the offered oilfields differs from what was mentioned in the formal declaration of proven reserves in the country that was made October 2010 by the Ministry of Oil on three counts; first, inaccurate location of one oilfield; second, inaccurate categorization of the oilfield size of their proven reserves: two were categorized as “Large” and three as “Very Large”; now these were downgraded to “medium and small” without clarification; third, three oilfields are now offered but they were not listed in October 2010, though they were discovered much prior to that date.
    The above clearly indicates to the “hastiness” of the recent announcement without the needed due diligence!
    Second, economic rationale suggests, especially for Iraq, small and medium oilfields stand at lower end of priorities mainly due to “economies of scale” and comparatively much higher investment/capital expenditure (capex) per “barrel capacity”; the “barrel capacity cost differentials” is significantly high between these fields and those contracted under the first two bid rounds. That should be the normal unless there are very compelling justification for the contrary, such as the case for “boarder oilfields” and the availability of sufficient “externalities”: logistics and infrastructures in the area of operation provided by other upstream petroleum projects.
    These matters could only be known and assessed through solid and comprehensive feasibility studies with elaborated cash-flow calculations and sensitivity analysis. None of the above issues are available at or done by the Ministry for the offered oilfields.
    Furthermore, all the offered oilfields are “business-risk free” since they were discovered many years ago and, thus, with a few drilled wells the “First Commercial Production” could be accomplished relatively quickly; leading to cost recovery of a very expensive “barrel capacity”. With already limited storage, pipelines and exports capacities and outlets, coupled with the geopolitical and security constrains, it could be extremely uneconomical even to market these “First Commercial Production” at the expense of already contracted, and relatively much cheaper, crude from the oilfields of first and second bid rounds, as the example of block 9, referred to in next item, shows.
    It should be crystal clear, by now, that what matters is not production capacity per se; rather what matters is the monetization of that capacity through exporting and marketing the produced crude.
    Third, the most puzzling element of the “Clarification” is the following, “The ministry also requires that these contracts does not cost any financial obligations or expenses which might be a big burden on the federal treasury at the present time or the future.”
    What is this baseless thin-ice argument? Are the IOCs charity entities and the Ministry expect them to donate their work and their investment is free-of-charge “at the present time or the future”? Even unexperienced young official wouldn’t write such a thing!!!!
    The case of exploration Block 9, that was awarded in the fourth bid round, is very relevant in this juncture. In 2013, a consortium led by Kuwait Energy plc (Kuwait Energy) was awarded the Block 9 Exploration, Development & Production Service Contract (EDPSC).The first exploration well in the Block was spud in March 2014 led to significant oil discoveries in September 2014 and oil production commenced in October 2015, only a year after the first discovery was made. The Export Oil Sales Agreement, signed between Kuwait Energy and the State Oil Marketing Company (SOMO) was signed in April 2016, allowing KE receiving revenue and cost recovery. It is worth mentioning that the Remuneration Fee for this block is US$6.24 per barrel of oil equivalent; the highest among the currently producing oilfields.
    If an exploration block recuperates its cost that fast, discovered oilfield does it faster.
    Consequently, under current and foreseeable future of oil prices “lower for longer” environment, the development of these small oilfields could very well worsen the fiscal crisis of the country and deepen the difficulties it faces.

    Fourth, the “transparency-reversal” is an alarming component of the “Clarification”; it says, “And the ministry will announce soon about the method of the contracts with these companies after finishing the contracting procedures and gaining the necessary approvals according to the rules and directions.”
    So the Ministry will make the announcement after the “harm has been done” by concluding absolutely not needed but bad contracts. The case in point here is the concessions given by the Ministry to the IOCs when reducing the production plateau target without having anything in return benefiting the country and the Ministry did not publically announce these concessions or post them on its website (though I traced them in a report related to international obligations for disclosure).

    Fifth, the “gas utilization” argument for these small oilfields is unconvincing at a time when gas flaring from the currently producing oilfields is 61% of the produced associated gas (as per latest data of August 2016). In this respect it is much better economically and environmentally for the Ministry to eliminate such huge gas flaring as per its commitment to the World Bank’ Zero Flaring Initiative.
    Under the light of the above regarding such shaky, weak and confused “Clarification” I call upon the Prime Minister, the Speaker of the Parliament, all parliamentarians, senior officials of authority and oil professionals to stand fast against the Ministry of Oil and force it to withdraw this unworthy announcement and suspend any action related to it, before it is too late and could cause the country devastating consequences.

    Ahmed Mousa Jiyad,
    Iraq/ Development Consultancy & Research,
    Norway.
    [email protected]

    5 Nov 2016

  3. Ahmed Mousa Jiyad November 10, 2016 at 5:54 pm #

    Important and pleasant update
    The Ministry of Oil made today an important and pleasant announcement regarding this issue (see the text below).
    For the time being this is a step in the right direction and the Ministry deserves all supportive efforts to remain on and pursue the right direction.
    In my humble view the following issues pertaining to upstream petroleum deserve the focus of and attention by the Ministry taking into consideration the complexity of the situation Iraq is facing today and most likely face in the coming few years.
    1- Self-imposed moratorium on new oilfields development until 2020/5. By that period the already contracted oilfields (as per bid rounds 1 &2) could reach final development and the contracted production plateau targets attained and sustained (assuming the Ministry and all involved IOCs finalize field-related plateaus); the exploration blocks ( of 4th bid round) might come on stream by realizing the First Commercial Production-FCP or even further probably except Block 8, while Block 9 is already on stream; post Da’esh area might witness a speedy return of NOC production (from Kirkuk, Bi-Hassan, Hamreen etc) and possible return of Sonangol at faster pace to development of Najma and Qayara and possible resumption of work on Akkas and Mansuriya gas fields.
    These could lead to more availability of oil but also require good deal of technical, managerial and legal efforts in addition to substantial financial requirements. The Linked-Oilfield Development, such as NIP, SIIP and CSSP should be excluded from such moratorium.
    2- Address seriously and effectively the systemic and human resource skill gaps by utilizing efficiently the annual Funds that are earmarked in the concluded service contracts. Needs-based and targets- oriented training should be pursued to close already identified gaps; solve bureaucratic problems between the Ministries of Oil and Finance that hindered utilization of these funds.
    3- Deal with increasing “Local Concerns” specifically those related to “Environmental Impacts”, “Provincialism” and “tribalism”, which are impacting oilfields development.

    All the above are complex not easy issues and many oil professionals, like me, are willing and ready to support the Ministry whenever needed.
    Ahmed Mousa Jiyad,
    Iraq/ Development Consultancy & Research,
    Norway.
    [email protected]

    10 Nov 2016

    Announcement
    Following to the previous Ministry of Oil Announcement dated 23rd October 2016 concerning its intention to lunch a Project for the development and production for number of medium and small oil fields that exist in governorate of Basra, Missan and Middle of Iraq.
    Ministry of Oil announces that there are essential changes in the previous announcement, where some of the fields mentioned in the said announcement will be developed by the national efforts of Ministry of Oil, in addition to new fields will be added to this Project.
    Therefore, Ministry of Oil will iterate its announcement of this Project by mid-2017.
    Director General
    Petroleum Contracts and Licensing Directorate
    Send by: Site Manager | Date: 10-11-2016 | Time: 02:10:46 pm

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