By Stan Harbison, Vice President of Research and Analysis at energy consultants EPRINC.

The initial steps in new Iraqi production have been well received by the Oil Ministry, but now the heavy lifting is underway. A bevy of oil service contracts is in place. The most important work is taking place in the three large existing fields in the South. We believe that any new oil wells drilled will be very productive. But oil field developments are much more than drilling wells.

Careful “maps” of the oil reservoirs are being constructed. The most sophisticated techniques of reconnaissance are without doubt the first priority. Readings of temperature, volume and pressure in existing or test wells will be a central tool. 3-D seismic will be conducted as called for. On a more basic level, infrastructure at each field must be upgraded. This might involve replacing older pipes; it certainly requires the creation of a “digital” field in which computers have the capacity to measure and monitor all capacity.

Above all, it is certain that the operating companies are focused on building solid and capable field staffs. Many will be found either from the existing and competent South Oil Company or hired from outside Iraq. Skilled and semi-skilled workers from Iraq are being assembled to build expanded field infrastructure: good living camps, roads and new field pipelines. A rapidly developing and entrepreneurial service and support industry is underway in the Basra area. This will be an exciting development for the city. There will be new jobs and the benefits will accrue to the community.

What might slow the pace of work? We read again of difficulty of obtaining visas by required professional personnel. This has been a sore point. It reflects the constraint placed on operations by an understaffed government bureaucracy. Faster decision making processes by the government will be required if the companies are to match the demanding schedules prescribed in the contracts. Another crucial bottleneck appears to be the capacity of the main exit pipeline which brings the produced oil to the ports. This is the responsibility of the oil ministry and the government. No announcements have been made. An accelerated plan needs to be put in place.

The dramatic expansion of production is quite doable, but it is important to appreciate the challenges of the required work on the ground. We and others will be watching to see how it progresses.

Stan Harbison has been an oil and gas analyst since 1982. He has worked as a research investment analyst for a prominent US investment firm for BP, Louis Dreyfus Commodities Energy Trading and for the US. Department of Energy. He has met regularly with top managers in the world’s largest oil companies, key officials in more than ten of the world’s largest National Oil Companies and has attended many OPEC meetings. In the past year, he has devoted all of his time on Iraq’s oil development with EPRINC, (www.eprinc.org), an independent oil analysis firm in Washington DC, which provides analysis on critical emerging issues in the oil industry. Its work is read by the public, the US Congress and key US government officials.

By Stan Harbison, Vice President of Research and Analysis at energy consultants EPRINC.

A year ago, Iraqi oil officials were no doubt justifiably proud of their achievement in 2009. Against all skepticism they had in hand contractual agreements with foreign oil companies to rapidly develop over 60 billion barrels of oil reserves. It was an historic achievement. In the past year Iraq has increased its oil production by 300 thousand barrels per day. Its production level is now over 2.7million barrels per day, the highest level in 20 years. In the past several weeks, this has been confirmed by detailed ship-by-ship export volumes. The incremental production will be worth $10 billion at current prices over 2011. This will bring total Iraqi export revenues to $80 billion, $20 billion more than current government projections in the Iraqi budget.

The greatest achievement is not the increased volumes of oil. It is the concrete confirmation that the Iraq’ new oil setup is working. Contracts ratified in the early months of 2010 are dictating on-time results in the field. Out of view of the press is a tremendous amount of work that has been done. The “Boards of Director” of each project, composed equally of Iraqi and oil company officials, have met on a quarterly basis. They have refined detailed development plans. They have approved the tenders for contracts to oil service companies for drilling, seismic evaluation, assessments of oil reservoirs, construction of field infrastructure, and the installation of production equipment. These are joint government-oil company achievements.

The projects have absorbed most of the thousands of workers of Iraqis largest regional oil company, the South Oil Company. Separately, the Iraqi oil ministry and the existing Iraqi companies under its wing have:

1. nailed down a firm $700 million contract to build large new export facilities,
2. rebuilt much of the country’s damaged storage tank and pipeline infrastructure,
3. established a process to build a massive project which will pipe seawater needed for field operations in the future, and
4. progressed on plans to build critically needed pipeline capacity to export facilities.

We suspect that all the people involved in these efforts feel a combination of pride, satisfaction, determination to proceed, as well as considerable anxiety about the barriers that need to be crossed to achieve continuing success. This is as it should be. The record so far supports a strong prognosis for continuing success.

Stan Harbison has been an oil and gas analyst since 1982. He has worked as a research investment analyst for a prominent US investment firm for BP, Louis Dreyfus Commodities Energy Trading and for the US. Department of Energy. He has met regularly with top managers in the world’s largest oil companies, key officials in more than ten of the world’s largest National Oil Companies and has attended many OPEC meetings. In the past year, he has devoted all of his time on Iraq’s oil development with EPRINC, (www.eprinc.org), an independent oil analysis firm in Washington DC, which provides analysis on critical emerging issues in the oil industry. Its work is read by the public, the US Congress and key US government officials.

By Stan Harbison, Vice President of Research and Analysis at energy consultants EPRINC.

In the past week, the ministry announced that two fields won at Iraq’s 2009 oil auctions had achieved their first significant benchmark. Production at Rumaila and Zubair each met the 10% production increase which allows them to begin to earn their per barrel profit on each barrel of oil they produce. It also allows them to begin collecting the money each has spent on their respective fields.

Both of these elements are critical to the ability of the companies to earn a return on their investment. We expect a third field, the West Qurna 1 consortium to achieve its 10% benchmark within the next several months. These three fields hold roughly half of the prospective production and half of the current reserves of the ten oil fields won at Iraq’s 2009 oil auctions. They lead the other auctioned field because they are the only fields of the ten that have significant current production and installed infrastructure.

Informal news about production at both Rumaila and Zubair was quite a bit more positive than the implied 10% increases. At Rumaila, production increased nearly 20%, or 200 tbd (thousands of barrels/day) and at Zubair production was up by 80 instead of the 20 tbd that was needed to achieve the 10% target. This led an oil ministry spokesman to state the Iraq’s production was at 2.7 mm b/d and would rise to 3 mm bd in 2011.

How are the companies doing so well? Our conversations with oil company executives who have spent time in Iraq testify to the prolific nature of Iraq’s oil. Re-working old wells has the potential to dramatically increase production. We believe some of the initial production gains have been achieved in this way. The companies are not chasing volume by drilling as many wells as possible. We believe that their first priority is to carefully lay the groundwork needed to achieve and manage much higher production levels. They are spending time mapping each reservoir, measuring the pressures, volumes and temperatures of each well and preparing infrastructure to be capable of handling much greater volumes. Activity will accelerate as initial steps are completed.

To date the progress in the oilfields and in the infrastructure efforts by the government have moved forward well. The news this week is a good report. It supports the notion that the contracts are being carefully followed, that no major failures have interfered with achieving the 10% production increases and that further positive news from the fields should be expected.

Stan Harbison has been an oil and gas analyst since 1982. He has worked as a research investment analyst for a prominent US investment firm for BP, Louis Dreyfus Commodities Energy Trading and for the US. Department of Energy. He has met regularly with top managers in the world’s largest oil companies, key officials in more than ten of the world’s largest National Oil Companies and has attended many OPEC meetings. In the past year, he has devoted all of his time on Iraq’s oil development with EPRINC, (www.eprinc.org), an independent oil analysis firm in Washington DC, which provides analysis on critical emerging issues in the oil industry. Its work is read by the public, the US Congress and key US government officials.

By Stan Harbison, Vice President of Research and Analysis at energy consultants EPRINC.

The current efforts to dramatically increase Iraq’s oil production are huge in scale and revolutionary in forming a working partnership between Iraq’s own oil industry and the world’s largest oil companies. But more important at the present is the fact that they are working by any definition.

The genesis, the lobbying, the creative work and the current implementation of these projects is the work of often unrecognized Iraqi oil professionals who, for nearly all of their careers, have been denied the opportunity to continue their successful work from the 1970s. This is an Iraqi effort, in a constructive partnership with foreign companies.

Outside Iraq, observers remain sceptical, but on the ground, there is little time for scepticism. Events are moving quickly. The international companies leading the field developments are complying with demanding contractual requirements.  A wide array of global private support and infrastructure companies from around the world have moved aggressively to secure work. The Iraqi government and oil ministry, while young and short on experience, are moving ahead in tackling tough and hugely expensive infrastructure projects.

Of course there are problems: landmines, failing infrastructure, worries about security, and substantial training requirements for Iraqi oil personnel. Importantly oil developments have not been the subject of political interference or criticism. But a new government will need to address the completion of already written oil-related legislation. Most critical is the need to enact a transparent and credible revenue-sharing law. An assurance that the benefits of increasing oil revenue will be fairly distributed across the country would support both the oil projects and Iraq’s political evolution.

Stan Harbison has been an oil and gas analyst since 1982. He has worked as a research investment analyst for a prominent US investment firm for BP, Louis Dreyfus Commodities Energy Trading and for the US. Department of Energy. He has met regularly with top managers in the world’s largest oil companies, key officials in more than ten of the world’s largest National Oil Companies and has attended many OPEC meetings. In the past year, he has devoted all of his time on Iraq’s oil development with EPRINC, (www.eprinc.org), an independent oil analysis firm in Washington DC, which provides analysis on critical emerging issues in the oil industry. Its work is read by the public, the US Congress and key US government officials.