Reuters reported today (8 May 2012) that it has seen ministry of oil documents indicating that Royal Dutch Shell is ready to cut the production plateau target of the Majnoon oilfield to 1 million bpd from 1.8 million bpd.
In my humble view, if this is true, it should be a welcoming development. As many, including myself, have repeatedly argued that the contracted plateau targets for bid rounds one and two, which could bring the total production capacity of the country to more than 12.5 mdb are unattainable, and if attainable the are unsustainable and if they are maintained they could be very damaging both to the fields themselves and to the national economy in the long run.
Since the conclusions of the three bid rounds an increasing recognition of this fact began to emerge and even accepted formally by the oil-related decision makers at the ministry and cabinet levels. All international “serious” studies that I came across doubted very much the viability of reaching and delivering these contracted plateau targets. The in depth energy study done by Booz & Co, which was partially financed by the World Bank, did not lend support to that aggregated plateau level. Also information I heard during my participation in the IEA workshop on Iraq Energy Outlook held in Istanbul on 4 May echo what have circulating within international oil professionals and business community.
The move by Shell could generate positive domino-effects by prompting other IOCs to follow suit. However, there are serious contractual matters that need addressing.
Shell has 60% participating interest and Petronas has the remaining 40% of the 75% share of the consortium. The remaining 25 % is for the Iraqi state partner-MOC. At the time of concluding the service contract Majnoon producing was ca. 50,000 bd, and the contract supposed to increase it to 1.8 million bd during seven years of development phase. Originally the plateau target was set to remain for 10 years. The remuneration fee was $1.39/barrel. The consortium is entitled to begin recovering their remuneration fees and capital expenses once they reach 175,000bd. Their minimum expenditure obligation was set at $300 million. Proven reserve at the time of the biding was 12.58 billion barrels.
Now, reducing the plateau target from 1.8 mbd to 1.00 mbd and prolonging the plateau period from 10 to more than 20 years, as reported by Reuters are bound to have many implications that could require serious revision of the contract. Will the initial and final development plans be revised and the related periods reduced? Will the new plateau target be attained earlier than the previous one, and when? Does the threshold for early recovery of capital expenditures and remuneration fees to be reduced, and if yes by how much? Will the remuneration fees remain the same or be adjusted upwards or downwards? Will the provisions of the “Performance Factor” remain or be revised as well? These are few of the issues that have to be discussed, resolved and agreed-upon, and the contract has to be amended accordingly.
The ministry of oil was highly praised and commended for holding the three bid rounds in an open, transparent and competitive fashion. It is equally expected that ministry to keep the process of revising the related contract open and transparent. Iraqi oil professionals could extend support and advice to the Ministry in the tasks ahead.
Ahmed Mousa Jiyad,
Iraq/ Development Consultancy and Research
8 May 2012