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Washington, 19 March 2010 (Oil & Gas Journal )

Iraq’s December 2009 auction of rights to develop 60 billion bbl of crude oil reserves in 10 fields will lift the country’s production to 9.6 million b/d by 2017 if several major obstacles can be overcome, a new Energy Policy Research Foundation Inc. (EPRINC) report concluded.

“By any standard, the Iraqi auction represents a major event in the history of the world oil market: It is the largest single transfer of reserves into the production stream since the beginning of the petroleum era,” the report maintained, saying the supply effect might lower oil prices enough to strain alternative fuels.

The report suggested that, although a wide range of external and internal threats and more traditional obstacles could derail Iraq’s prospects for a massive crude oil production increase, the prospect that it could send a supply shock into world markets can no longer be dismissed.

Expanded Iraqi production also could prevent a price spike if production outside the Organization of Petroleum Exporting Countries drops over an extended period, according to the report.

“In this scenario, the role of Iraqi supplies may be more of a brake on rising prices than a catalyst to a lower price path,” it explained. “In any case, the Iraqi auction clearly opens the door for a careful review of the conventional wisdom on the outlook for oil prices over the next 20 years.”

Under the new contracts, companies have committed to bring 9.6 million b/d online by 2017, which with production expected from fields not covered by the auction would meet the Iraqi government’s expectations for 12 million b/d. The EPRINC report assumed companies will be able to achieve only 50-75% of the targeted levels by 2017 but included scenarios under which total Iraqi production would approach or exceed the 12-million b/d benchmark by 2020.

The scenarios, it said, “clearly raise the potential for downward price adjustments in crude oil against a range of business-as-usual cases.” Several likely price outcomes, it added, “may also place alternative transportation fuels into severe financial distress.” Biofuels with economics marginal while crude oil prices are $80/bbl would require additional subsidies, “which may not be easily obtained in an era of ‘fiscal fatigue.’”

The US Energy Information Administration estimates Iraq’s reserves at 115 billion bbl, third behind Saudi Arabia and Iran. “However, credible estimates . . . suggest Iraq contains over 200 billion bbl of recoverable reserves and potential reserves of over 400 billion bbl,” EPRINC’s report indicated. It is available online at www.eprinc.org/pdf/EPRINC-Iraq-FirstLook.pdf.

Moving quickly

The unprecedented scale of the Iraqi government’s commitment and the project-management experience of many of the companies winning technical service contracts provide potential for field development to progress quickly, the report said. “Some of the difficult political issues have been met in the auction decision and process; others are being met, if grudgingly, by the very large and unexpected revenues which will be distributed to all Iraqi provinces on an equal per capita basis,” it said.

“The pitched rhetoric between the Kurdish government and the central government has softened, but substantial areas of disagreement remain,” it continued. “In line with their historical pursuit of autonomy, the Kurds have initiated and want to pursue a separate energy enclave. Under the proposed revenue distribution structure from the central government, the Kurdish government would receive 17%. It would be a great deal of money, much greater than the Kurds are likely to achieve from their regional oil development program.”

Other risks include the absence of a comprehensive law justifying the legal framework for the auctions, resolution of the Kurdish-Arab struggle for Kirkuk and oil and gas resources in Kurdistan, and Iraq’s outstanding debt with Kuwait, Saudi Arabia, and the United Nations.

“Several major oil companies, who chose not to bid, could not get comfortable with the lack of clarity on performance conditions of the contracts, stability of the tax regime, and the large carried interest of the Iraqi national oil company (approximately 25%) in the fields won by the bidders,” the report added.

Other problems include security, delivery of rigs, the handling of water for secondary recovery, and completion of government projects to upgrade pipelines and ports.

“None of these uncertainties are insurmountable, but resolving all these issues is critical if the Iraqis are to move forward on the ambitious production program,” the report said.

New ground

Besides scale, the auction broke new ground in two crucial ways, the report said. It would be the first time so many development projects of this size are started simultaneously with identical target completion dates. And the auction represents the first major break from the prevailing oil industry structure in almost 40 years.

EPRINC observed that since many producing countries began to nationalize their oil resources in the 1970s, multinational oil companies have had limited ability to explore for or develop reserves in those countries, particularly around the Persian Gulf. “The Iraqi auction will stand as an action that marries the interests of oil companies and of a government which controls a very large reserve base,” the report said.

“With its action Iraq has established a format for reserves development which leapfrogs the models of the other major Gulf oil producers—a transparent contractual arrangement that offers international companies an acceptable return on investment.”

Iraq’s oil sector is changing, and so could the identity of the man in charge.

Asked if he hoped to keep his post as the minister of oil in the next Iraqi government, Dr Hussain al Shahristani said he would be happy to step aside.

“I wouldn’t try to stay unless I was forced to stay. It wouldn’t be my wish,” Dr al Shahristani said before yesterday’s OPEC meeting.

Another imminent change will be Iraq’s tally of its oil reserves, which for years have been estimated as the world’s third largest, at about 115 billion barrels.

The estimate of proved reserves “is going to go higher”, Dr al Shahristani said. “We’re revising it now.”

In the past two years, foreign oil companies drilling in Iraqi Kurdistan have reported at least three world-class discoveries.

Canada’s Heritage Oil has struck an oil deposit that may contain as much as 3 billion barrels of recoverable crude.

Gulf Keystone, a Bermuda-registered company, estimates it has found at least another 1.5 billion barrels.

The Hungarian oil group MOL last week reported a significant oil find that analysts said might contain 1 billion barrels of crude.

In addition, a number of the world’s biggest oil companies have recently pored over data on Iraq’s main oil reservoirs as they prepared to bid for long-term service contracts to raise production.

Dr al Shahristani said Iraq was producing 2.5 million barrels per day (bpd) of oil and exporting more than 2 million bpd, making it the third largest OPEC oil exporter after Saudi Arabia and Iran.

In the next few months, Iraq could boost exports by as much as 100,000 bpd by restarting Kurdish crude exports that were halted last September in a long-running dispute over oil jurisdiction between the semi-autonomous regional government and Baghdad.

“We expect to resume exports from the Tawke field [in Kurdistan] shortly, within a month,” Dr al Shahristani said.

“The issue of exporting oil from those fields is a completely separate issue from the contracts that were signed.”

Within seven years, Iraq would increase its production capacity, although not necessarily its output, to 11 million bpd, the oil minister predicted. That could mean export capacity of up to 10 million bpd,www.ekurd.netrivalling that of the world’s top oil exporters, Russia and Saudi Arabia.

Iraq would not consider rejoining OPEC’s quota system until its output capacity had risen to 4 million bpd, possibly as soon as two years from now, Dr al Shahristani said.

Iraq is the only OPEC member without a production quota. It was granted an exemption to refurbish an oil sector ravaged by decades of war and mismanagement.

“Iraq is a founder member [of OPEC]. They have a right to develop their reserves,” said Abdulla el Badri, the OPEC secretary general.

“At the end of the day, we will accommodate Iraq for the sake of the Iraqi people. I am sure this will not be a problem for OPEC.”

With the Iraq election completed, the oil and gas marketplace in Iraq is set to see explosive growth.  The plan is to raise production from c.2 million bbd to approaching 12 million bbd.  Infrastructure is in a parlous state with limited investment over 30 years. The current state owned infrastructure and the services sectors are unable to respond to existing demand and the previous regime’s systematic dismantling of the private sector leaves Iraq with no prospect of increasing capacity quickly. In this situation Iraq needs international private sector partners urgently. 

To bring costs of looking into this massive market into an acceptable range, Upper Quartile will run the second Oil and Gas Trade Mission to Basra and Baghdad between the 2nd and 7th May - " ....... this will reduce costs for individual companies yet allow for maximum exposure to decision makers within government ministries and the private sector, in a safe & secure environment" said Adrian Green today.

If Iraq signs all contracts now on offer, output may approach 12 million barrels per day and lift Iraq to second or third place among global oil producers.   

• Shell and BP have tenders out and further tenders on the way
• BP Rumaila site plan drawn up and about to be contracted
• Schlumberger are negotiating a significant sub contract
• Baker Hughes are having a site built in Rumaila
• Shell have tendered for a number of services in Majnoon
• ENI, Shell, BP, and other IOC planning team members are making weekly visits in and around Basra
• One IOC has office and accommodation base partly located in downtown Basra

Contracts on offer will push Iraq's oil services market to $8 billion by 2014.   Capital spending on oilfield services in 2011 alone is estimated to be five times that of Saudi Arabia, Bahrain, United Arab Emirates, Oman, Qatar and Kuwait combined. 

Contact Adrian Green on [email protected]

Bloomberg - 12 March

Ayman Asfari, the chief executive officer whose oil and gas engineering skills guided a fourfold increase in the value of Petrofac Plc within five years, is now preparing to tap Iraq’s energy boom.

Iraq, with estimated reserves of 115 billion barrels of oil, the world’s third-largest, is set to ramp up production as companies including BP Plc, Royal Dutch Shell Plc and Exxon Mobil Corp. spend as much as $100 billion to develop fields awarded in contracts last year. A good chunk of that will go to contractors including Petrofac and larger U.S. rivals Baker Hughes Inc. and Halliburton Co.

“He’s passionate about his business model, which is about being a low-cost provider of quality engineering;” said Barclays Capital analyst Mick Pickup, who worked with Asfari on Petrofac’s initial public offering as a consultant at Lehman Brothers Holdings Inc. “Iraq is the billion dollar question. Ultimately, there will be the whole infrastructure to build there. It will be big.”

“We see Iraq as a growth market,” Asfari, 51, said in an interview from the company’s London headquarters. “This is a natural place for our expansion. We’re working in Kuwait, Saudi Arabia and Syria, and it’s very easy for us to step out across the border.”

The largest U.K. oil and gas services company reached a record in London this week after it announced the spinoff of North Sea fields it owns into a new company. The shares may outperform peers because the company has kept costs under control and is positioned to win work in Iraq, investors and analysts said.

Reuters - 12 March

The storm brewing on OPEC's horizon over future Iraqi oil output could engulf the producer group sooner than it would like, say analysts.

OPEC is unlikely to discuss Iraq at its meeting on March 17 but it may need to do so within a couple of years, they say.

'There's only one issue, but it's a big one. It's a tsunami. Iraq,' said Leo Drollas at the Centre for Global Energy Studies.

After years of sanctions and war, Iraq is exempt from the output targets OPEC uses to set supply levels.  But as Baghdad embarks on an unprecedented oil industry development, OPEC will at some point need to bring Iraq back into the fold to prevent millions of barrels of new oil supply undoing its work to balance markets.

OPEC officials and analysts have said the issue is not urgent, as it could be years before Iraq makes significant increases to current output of around 2.5 million barrels per day (bpd). Baghdad's failure to reach past ambitious targets has fed the skepticism.

The consensus among analysts is that it would take around five years for Iraq to boost output by between 1 million bpd and 1.5 million bpd. But output gains could surprise OPEC in their speed.

'You could be looking at 1.5 million barrels in two years,' said a senior executive at one of the oil firms involved in Iraq. 'That could make a huge difference to the supply and demand balance. Is there going to be that kind of demand pick up in that timeframe?'

Iraq's deals call for foreign firms to boost output potential to 12 million bpd in seven years, which would leave it snapping at the heels of Saudi Arabia's capacity of 12.5 million bpd.

Iraq faces huge political, security and logistical challenges in reaching that target. The first test will be how the new government that emerges from Sunday's elections will handle contracts signed by oil firms.

But assuming the deals survive intact and work can go ahead, Iraq's huge oilfields present little technical challenge to oil majors that have had to push into regions such as deep water and the Arctic to access oil reserves. There is nowhere else on earth where international oil firms have access to such cheap to produce, abundant reserves.

Reaching 12 million bpd in seven years appears improbable, but oil firms believe early gains will be easy.

The terms of the contracts Iraq has signed encourage firms to boost output quickly to recover costs. Once firms boost output from producing fields by 10 percent, they start getting paid.

'The way the contract is structured is to incentivize swift progress,' said Bill Farren-Price of consultancy Petroleum Policy Intelligence. 'I'm fairly optimistic that we'll see Iraqi oil output rising over the next 12 months as Rumaila and other projects get underway.'

Iraq has said it expects another 200,000 bpd of oil from fields leased under the new contracts this year. Its biggest producing field, Rumaila, should rise 100,000 bpd by July. BP and CNPC won the contract to boost output at Rumaila, the workhorse of Iraq's oil industry to 2.85 million bpd from 1.07 million bpd.

What can OPEC tolerate?

OPEC, which has weathered many difficulties in its 50-year history including a bitter war between members Iran and Iraq, will likely put off thorny negotiations on how to accommodate a resurgent Iraq as long as possible.

'It's the last thing they want to do (tackle this issue), the want to sweep it under the carpet,' said Drollas of the CGES.

When the group calls on Iraq to rejoin the how quickly oil demand rebounds after two years of contraction due to the global economic downturn.

'If the market is very tight, with demand rising and non-OPEC supply continuing to disappoint, then Iraq could be accommodated quite well ... But if demand falls then it would be a very big challenge for OPEC,' said Bassam Fattouh at Oxford Energy.

Even if the market could absorb the extra production, other OPEC producers would have to maintain curbs on supply in place since late 2008, while Iraq pumped more.

This would create tensions within the group as other members effectively give up market share and billions of dollars of potential revenues to Iraq.

Baghdad has said that it believes OPEC should allow it to pump more without imposing a quota as it has lost market share and revenues to other members of the group as years of sanctions and war prevented Iraq from achieving its production potential.

OPEC officials have said they would need to think about quotas once Iraq showed it can consistently pump 3 million to 3.5 million bpd.

Some say the group would have to address the issue if Iraq's output approached 5 million bpd -- putting it ahead of Iran and making Baghdad the second largest OPEC producer after Riyadh.

That could challenge Saudi Arabia's position as dominant producer with the flexibility to influence output significantly.

'As Iraq substantially exceeds Iran's production level it will raise significant political problems for OPEC as a whole and for Saudi Arabia in particular,' said Edward Morse, head of global commodities research at Credit Suisse.

Iraq has strengthened its hand for future negotiations with the oil deals. Previous production targets have been based on reserves. Iraq's reserves are a little smaller than Iran's, so a renewed quota might be similar to that of its neighbor. Iran's target is around 3.34 million bpd, although Tehran disputes that and is pumping around 3.75 million bpd.

But Iraq would likely refuse to be saddled with that comparison, as the deals it has signed would put it on a par with Saudi capacity, regardless of its reserves. It would likely use that as a starting point for negotiations, analysts say.

Newsweek, Inc - 11 March

Yes, on Sunday the Iraqis once again proved bravely, stubbornly, even astoundingly that they won't be kept away from the polls by mere car bombs and mortar shells. But by and large they were voting for the same coterie of politicians who've made Iraq among the five most corrupt nations in the world. The country's near-term future is just about waiting, after the election, for a new government to take shape over the next many weeks. But its long-term future could be haunted by what Stanford professor Larry Diamond calls "the oil curse."

How much oil are we talking about? Even after years of embargo, occupation, and civil war that weakened its production capacity, Iraq was the third-biggest producer in OPEC in January, according to the trade journal Petroleum Economist. The 2.45 million barrels it pumped every day, on average, would have brought in roughly $172 million—every day. In another three or four years, now that development contracts have been agreed with several major Western oil companies, that production could double, racking up income on the order of $125 billion a year. And that doesn't even begin to calculate the billions in revenue from largely untapped natural gas deposits.

"Not a single one of the 23 countries that derive most of their export earnings from oil and gas is a democracy today," Diamond noted in an essay earlier this year. Especially in Arab countries, the fabulous riches that come from under the ground tend to create overbearing governments with apathetic citizens. "In these systems, the state is large, centralized, and repressive," Diamond wrote. Societies are usually "intensely policed" because "there is plenty of money to lavish on a huge and active state-security apparatus," and bureaucracies are "profoundly corrupt." They tend to see the money that pours into state coffers as everybody's and nobody's, and therefore more or less free for the taking. The public pays no taxes in the richer states, and in the view of the entrenched potentates no taxation means any need for representation.

Precisely because the Iraqi government is not entrenched, however, there's some hope. "My view is a bit paradoxical," Diamond wrote me in an e-mail. Corruption is indeed "rampant," he said, and the institutions the Americans tried to create in Iraq to deliver better government accountability "have been overwhelmed by the common desire to loot the golden pot." But "there is so much oil wealth—particularly with what's likely to come on stream … that there will be plenty to steal and still some for development."

"I'm not cavalier about this," said Diamond, who served in the early U.S. administration in Baghdad and whose book Squandered Victory chronicled the way good intentions went horribly awry. But if all the major factions and provinces of the country feel they're getting their cut, and then Iraq might "keep its political head just above water, though not without recurrent crises and uncertainty," Diamond told me. Not a comforting scenario, he said, but not a return to civil war, either.

In that same vein, oil analyst Ruba Husari in Baghdad tells me Iraqis often talk more about the need for federalism and decentralization than they do about the relative abstraction of "democracy." If they are going to get the basic public services and the jobs they desperately need—the issues that dominated Sunday's elections—the oil money has to be spread around. And Husari says there are positive signs that may be happening. Iraq's 2010 budget law has provisions for a portion of the income from each barrel produced in a given province or "governorate" to be paid back to it. There may be no comprehensive "hydrocarbon law" yet, but the article in the budget "is going to happen," says Husari. "The governorates are going to come at the end of the year and say, 'Where is our money?' "

Even if Iraq's rising oil and gas production does help to buy internal peace, however, it will pose an economic—indeed, a strategic—challenge to its most troubled and troublesome neighbor: Iran.

The government in Tehran already is having serious economic problems, and because embargos and boycotts have cut it off from a lot of Western oil technology, it has a very hard time raising its production of about 3.7 million barrels a day to compensate when prices fall. It wants to make sure that Iraq, which has been exempted from all OPEC quotas, will not start out producing it, driving down prices and further crippling the Iranian economy. Already, skirmishing has begun behind the scenes at the oil cartel as Tehran tries to make sure quotas are imposed on Iraq before it can surpass Iran and perhaps even start to rival Saudi Arabia (which produces a whopping 8.2 million barrels daily and could go higher).

The more the mullahs feel competitive pressure from Iraq, the more likely they are to meddle in its internal affairs, whether with violence or, more subtly, through a democratic process where they try to control key players from behind the scenes. Getting to Iran's level of oil production in the next three years "will not be a big issue for Iraq," says Husari. "Whether Iran will accept it—that's the big question."

The first flight carrying pilgrims has taken off from Ninewa Airport to Jeddah International Airport, a civilian source said on Saturday.

“The plane, carrying 223 pilgrims from local residents aboard, took off this afternoon,” the source, who requested anonymity, told Aswat al-Iraq news agency.

Umra is a pilgrimage to Mecca, Saudi Arabia, performed by Muslims that can be undertaken at any time of the year. It is sometimes called the ‘minor pilgrimage’ or ‘lesser pilgrimage’, the Hajj being the ‘major’ pilgrimage and which is compulsory for every able-bodied Muslim who can afford it.

(Aswat Al Iraq)

The Organization of Petroleum Exporting Countries will uphold its target of 24.845 million barrels a day when it meets in Vienna on March 17, according to 42 of 44 analysts surveyed this week. Shokri Ghanem, chairman of Libya’s National Oil Corp. said on March 9 that “no new decision is expected,” while Saudi Arabian Oil Minister Ali Al-Naimi said in January that oil between $70 and $80 is “almost perfect.”

The producer group is unlikely to reduce quotas that it set at the end of 2008 as long as members are pumping more than the agreed limits, nor raise them without stronger signs that demand will keep improving, the analysts said. Oil inventories have risen again this year, after being whittled down in 2009 by OPEC’s record production cuts.

“OPEC is pretty satisfied with how stable the price is,” said Amy Myers Jaffe, an energy analyst at the Baker Institute and associate director of the Rice Energy Program in Houston. “They’re where they want to be. Compliance with quotas is not as good as it could be so I’d expect some jaw-boning about that.”

The group announced the biggest production cuts in its 50- year history at the end of 2008 as demand crumbled because of the global recession. Those cutbacks, led by Saudi Arabia, made oil prices rose to 78 percent last year. Oil futures made further gains this year, exceeding $80 a barrel in New York, driven by a recovery in the broader economy, even as OPEC’s oil output rose for a sixth consecutive month in February.

(Business Week)

08 March 2010 (Reuters)

Iraq has signed an initial deal with China's CNOOC and Sinochem to develop the 2.5-billion-barrel Maysan oilfield complex, Oil Minister Hussain al-Shahristani told Reuters on Sunday.

A final deal with both companies will be signed in the coming days, after they accepted the government's proposed remuneration fee of $2.30 for every additional barrel of oil produced, Shahristani said.

"The Chinese companies have accepted all our conditions for this field," he said. "We have an authorization from the cabinet to sign the final deal."

CNOOC, together with Sinochem, made an unsuccessful bid for the three Maysan fields in Iraq's first auction of oilfield contracts last year. But since then they had decided to accept the government's proposed remuneration fee of $2.30.

CNOOC and Sinochem had projected plateau output of 450,000 barrels per day (bpd) when they first made the bid last year.

The deal is one in a series of contracts with international oil companies that could boost Iraq's output capacity to 12 million barrels per day, rivaling top producer Saudi Arabia, from around 2.5 million bpd now.

The government is hoping that the deals will generate cash needed to rebuild Iraq's shattered economy after years of war, sanctions and economic decline.

The Organization of the Petroleum Exporting Countries’ (OPEC) crude oil supply rose in February to the highest in 14 months led by Angola and Saudi Arabia, a Reuters survey showed, further reducing compliance with output targets.

Supply from the 11 members of OPEC with output targets, all except Iraq, is averaging 26.80 million barrels per day (mbpd), up from a revised 26.69 mbpd in January, according to the survey of oil firms, OPEC officials and analysts.

The survey implies OPEC has made 53 per cent of promised supply cutbacks versus 56 per cent in January. OPEC, source of more than a third of the world’s oil, meets to set policy on March 17 and the widening gap between its supply target and actual output is likely to be a main topic of debate.

Even so, analysts said the extra barrels were not unwelcome in the market given that oil prices remain within the range favored by many OPEC members and inventories, which ballooned last year due to falling demand, were coming down.

“OPEC's told us that given the current economic environment, their goal is oil at $70 to $80. As long as prices are in that range, they are happy,” said Mike Wittner, analyst at Societe Generale in London.

(OilAndGasNewsOnline.com)