Baghdad’s golden oil opportunity

05 January 2010

The winners in Iraq’s oil licensing rounds face stiff challenges in developing the country’s oil fields

As one of the architects of Iraq’s ambitious plans to lure energy majors to the country, Sabah Shibeeb al-Saidi could afford to breath a sigh of relief as 2009 drew to a close. He could point to an impressive return since announcing plans for two oil licensing rounds, 12 months earlier.

While just one field from the first licensing round in June 2009 was awarded, a further seven fields were awarded in the second auction, held on 11-12 December (see table).

With preliminary deals now in place for some of the country’s largest oil fields, Baghdad predicts it can boost its crude capacity to as much as 12 million barrels a day (b/d) in just seven years, from 2.5 million b/d currently.

“There will be billions of dollars of work available in the next 20-25 years and we expect a wide range of companies to come here”

Sabah Shibeeb al-Saidi, Iraq Oil Ministry

The second licensing round alone should increase the country’s oil output by 4.8 million b/d by 2016 and provide an extra $100bn a year in revenue. “We talked about numbers like these 12 months ago but to have so many deals signed by this point on such favourable terms is very good for Iraq,” says Al-Saidi, commercial and legal head at the Petroleum Contracts & Licensing Directorate in the Oil Ministry.

Wider investmentWith oil majors now signed up to revive the country’s oil industry, attention is now turning to the next area of opportunity. The international oil companies are set to invest tens of billions of dollars in developing the infrastructure to support their plans, meaning there will be significant opportunities for contractors.

US-based consultant firm Ergo estimates that, if all of the deals from the two licensing rounds proceed as planned, the value of the oil services sector in Iraq will increase to $8bn by 2014, from just $1.3bn this year.

Some of the world’s largest contractors, such as France’s Technip, are already drawing up plans to open offices in Iraq and bid for the engineering, procurement and construction (EPC) work that is expected to emerge.

“We believe we will be one of the first international EPC players in Iraq,” Arturo Grimaldi, Technip’s senior vice-president for the Middle East, told MEED in October. “We will open our own office there soon and hope to be the first to be there and be awarded projects.”

Technip, along with rival US firms Foster Wheeler and Stone & Webster, has already won some contracts in the country after securing engineering deals in February 2009 with the Oil Ministry to rehabilitate four refineries, at Karbala, Nasiriyah, Kirkuk and Missan.

While most of the engineering and design work needed to revive these refineries was carried out in the firms’ US and European offices, industry executives expect far more work to be carried out in Iraq in the future.

“Carrying out some basic revamp design on a refinery is one thing, but the sort of large-scale work that will be needed on these oil fields requires people on the ground as well,” says a Dubai-based business development executive at an international contracting company.

But the competition to win any contracts in the future is likely to become tougher for the US and European contractors that won a glut of security and infrastructure work following the US-led invasion in 2003.

With so many fields being developed by national oil companies from Asia and Africa, Western firms may find it difficult to compete against state-run oil contractors from those countries. Malaysia’s Petronas, Angola’s Sonangol and Russia’s Gazprom are all expected to use their own cut-price contractors to help develop their projects. China National Petroleum Corporation (CNPC) has also indicated it will use its state-run affiliate, Sinopec.

“CNPC is clearly bearing the Chinese flag in securing access to reserves and has proved before that it can use its access to cheap labour and equipment to bear much lower rates of return in the Middle East and Africa,” says Samuel Ciszuk, Middle East energy analyst with IHS Global Insight, a US-based energy consultant.

Al-Saidi says the Oil Ministry will not place any restrictions on which contractors or oil services firms can operate in Iraq. “There will be billions of dollars of work available over the next 20-25 years and we expect a wide range of companies to come here to work,” he says. “There will be requirements in terms of hiring local workers and local laws, but we will not put limits on which companies can come here.”

Some international contractors warn that firms may not have the expertise required to work on the most technically challenging fields.“Some of the geologically challenging fields, such as Najmah and Qaiyarah, require a level of experience to reach their [production] targets, which I am not sure all of these state-run companies and their contractors necessarily have,” says the Dubai-based executive.

Such comments could simply be fear-mongering, but a more serious issue is the potential for a shortage of equipment, materials and labour given the volume of work. This could lead to costs rising and deadlines being missed, as happened during the project boom in energy projects in the rest of  the Gulf in 2007 and 2008.

“Iraq will require a huge number of oil rigs to drill all of the wells under these work programmes,” says the Dubai-based executive. “You also have pipelines, floating oil terminals and the processing plants themselves. Exactly where these will be sourced from and who will operate them has yet to be answered.”

The nature of the initial work required to develop the fields will partly depend on location. Fields in the south of the country, which have historically provided up to 80 per cent of Iraq’s oil output, generally offer oil firms much better infrastructure facilities, with good links to Kuwait and to Iraq’s export hub at Basra.

Established oil majors have largely opted to develop fields in more stable areas of the country, which require relatively little new infrastructure to be developed.

For example, the UK/Dutch Shell Group and Malaysia’s Petronas have won a development contract for the 12.5 billion barrel Majnoon field in the south. IHS Global Insight argues that Shell and Petronas are already at a distinct advantage over other oil majors, due to the location of the field.

“It is possible for [these] companies to use Kuwaiti ports and roads for much of their early access,” says Ciszuk.

Emerging challenges

But all the oil majors now preparing to start work in Iraq will have to meet a raft of technical and logistical challenges. The quality of the seismic data available is often poor, and oil companies will also need vast amounts of water for injection into the oil fields in order to maintain their pressure.

“Constructing joint desalination facilities has been broached in inter-company discussions,” says Ciszuk. “But constructing a large facility would itself take several years.”

In any case, oil majors are expected to have to take on some additional responsibilities in developing the necessary infrastructure.  “The ministry promised things like water supply for injection and a host of transport infrastructure initiatives,” says an executive from Shell. “These [facilities and services] are not in place and we are now expecting we will be asked to carry out these tasks before we can start work on the actual field development.”

There are also political risks. The security situation is often still volatile at best and parliamentary elections due to take place in March could lead to a new government with a different attitude to developing the country’s oil resources.

With no national oil law in place, despite years of political negotiations in Baghdad, there is still some uncertainty about the legality of the deals which Baghdad has signed.

As a result, no significant work is likely to start on the development of Iraq’s oil fields until after the elections.

Al-Saidi says he does not expect any issues in terms of cabinet ratification or electoral disruption. “This set of contracts has the potential to transform the oil industry here and I think Iraqis recognise the huge value this could bring to our country.”

Oil majors are hoping that the deals, which will significantly boost the state’s coffers, will be lucrative enough to convince any new government to safeguard the terms of the contracts. Contractors will be hoping for the same, so they can take advantage of what should be one of the most lucrative markets in the region.

CAPTION Contract: Mounir Bouaziz, vice-president of Shell Upstream International (left) and  Abdul Mahdy al-Ameedi of Iraq’s Oil Ministry (right) sign an initial deal for the Majnoon field

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