Key fact

Iraq’s refiners convert only 50-55 per cent of crude into refined products

Source: MEED

Iraq’s refining sector tends to be eclipsed by the country’s headline grabbing upstream developments. If the 11 deals signed with international oil companies prove successful, Iraq’s crude production could jump to more than 12 million barrels a day (b/d) within seven years, from approximately 2.7 million b/d today.

However, there are significant challenges that Baghdad will have to overcome to achieve its ambitious production targets.

Around 80 per cent of the oil produced in Iraq is exported. Baghdad has earned $55.73bn in oil receipts so far in 2011. In July, it exported 2.2 million b/d from a total production of 2.7 million b/d. The remaining 586,000 b/d was refined at a combination of new, small refineries dotted across the country, and at its older facilities at Baiji, Baghdad and Daura. 

Refined oil products

The consumption of refined products is rising in Iraq, particularly of fuel oil and gasoline, which is being driven by Iraq’s growing economy. Production is failing to keep pace with demand.

As the country headed into the hottest months of the year, the Electricity Ministry announced it planned to import 1.5 million litres of fuel a day from Iran over the coming year. The ministry has also stated it plans to use more gas turbines in the future to free up liquids for refining and export.

Although the design capacity of Iraq’s refineries is more than 900,000 b/d, production is hindered by poor maintenance and antiquated design, causing operating rates to drop by as much as 40 per cent.

While modern refineries convert 80-90 per cent of a barrel of oil into light or medium distillates, Iraq’s refineries convert only 50-55 per cent. This creates large amounts of heavy fuel oil (HFO), which does not move easily via pipelines or store readily in tanks.

To avoid contamination, a truck transporting HFO will require thorough cleaning before it can be used for lighter distillates.

Such issues strain the system and create build-ups of HFO at the refineries. Some have even been forced to shut down due to the strain of excess HFO storage and over production.

“In terms of exports, Iraq only actually reported 5,000 b/d of product exports. The balance of that residue production is presumably disposed of by back-mixing into the crude,” says Stephen George, a UK-based refining analyst with KBC Energy Economics.

“Iraqi crudes are getting heavier and I associate that with small hydroskimming refineries that are topping the crude, taking the light products and dumping the residue back into the crude.”

A leaked diplomatic cable from the US embassy in Baghdad in April 2009 released by whistleblowing website Wikileaks highlighted the difficulties facing Iraq’s refining sector.

“Lower operating rates stem primarily from the Oil Ministry’s inability to bring in spare parts for maintenance, damage caused by unreliable electricity supplies, long-term effects of the sanctions period, and a shortage of highly skilled workers,” the cable said. In 2009, Iraq lost approximately 116,000 b/d, some 17 per cent of its operational refining capacity, due to inadequate quantities of crude oil reaching the refineries. For many days, no crude was received.

The Strategic Pipeline, which runs from south to north, can no longer fuel all the users along the route. “Repairs to the pipeline’s pump stations have not progressed and the problem will remain for a number of years to come,” the cable said.

The majority of Iraq’s refineries are simple distilling units. It has only one hydrocracker at Baiji oil refinery, but that has not been operational since 2002. Hydrocrackers allow a refinery to break down complex carbon molecules and produce more light and medium distillates.

Efforts are under way to upgrade Iraq’s refining sector. State-owned South Refining Company will launch engineering, procurement and construction (EPC) tenders for a new fluid catalyst cracker (FCC) unit in early 2012 for the 150,000 b/d Basra refinery in the south of Iraq. Italy-based APS Engineering, a subsidiary of Japan’s JGC, was selected in February for the front-end engineering and design contract (feed), which should be completed by the end of 2011.

Tenders are also expected for FCC units at Baiji and Daura, but these are in early stages of design and will not be completed until 2016.

Increasing oil capacity

The Oil Ministry aims to increase Iraq’s refining capacity by more than 700,000 b/d by 2015. It will fund the installation of new units at the Daura and Basra refineries with an investment of more than $4.5bn.

The government is also hoping to attract private sector interest in a grassroots refinery programme, funding feed studies for four new refineries, costing an estimated $23bn, with a total processing capacity of 740,000 b/d.

The largest at Nassiriyah in southern Iraq will cost almost $8bn and will have a capacity to process 300,000 b/d of crude from the nearby Nassiriyah, Gharraf and Rafidain oil fields. The US’ Foster Wheeler is conducting the feasibility study and design and this is expected to be completed in the first quarter of 2012.

The design capacity of the Iraq’s refineries is more than 900,000 b/d, but it is hindered by poor maintenance

According to another leaked cable, the proposed scheme will be built on a plot of land 10 kilometres south of the existing refinery, although it may not necessarily be connected to it. The two facilities might report separately to South Refinery Company, or the smaller existing refinery operation might be subordinate to the new refinery.

The Nassiriyah refinery will include a FCC unit and a hydrocracking unit, along with an isomerisation unit to produce additives to turn naphtha into high-octane gasoline.

Several firms are competing for a contract to develop the Nassiriyah oil field. The 23 April 2009 cable said that Itay’s Eni was confident it would win the deal to develop the field and as a consolation, a Japanese consortium led by Nippon Oil would be awarded the refinery contract.

Progress delayed for oil fields and refineries

More than two years on, senior oil officials say Iraq could hold a mini-auction for the undeveloped field and refinery, following unsuccessful attempts to reach agreement.

Abdul-Mahdy al-Ameedi, head of the oil ministry’s contracts and licensing directorate, said Nippon, Eni, the US’ Chevron and Spain’s Repsol had submitted proposals. Repsol was not qualified and only the other three would be invited to bid.

Two further refineries each with a capacity of 150,000 b/d, costing $5bn a piece are planned for the Missan province in the south and at Kirkuk in the north. The US’ Shaw Group will complete the feasibility study and design for both by the end of 2011. A 140,000 b/d refinery is also being designed by France’s Technip in Karbala.

In late April, the Oil Ministry announced plans for another three 50,000 b/d refineries at Dhi-Qar, Kirkuk and Missan.

Ahmed al-Shammaa, the ministry’s undersecretary for refinery affairs said paper work for the development of refineries will be drawn up after completion of a feasibility study. “The three projects will be completed according to the refineries investment law, which would provide legal and economic protection for international investors,” said Al-Shammaa.

Iraq could certainly use the refining capacity. It is short of all products except fuel oil and reliant on imports

Stephen George, KBC Energy Economics

In 2007, the Iraqi parliament approved a law allowing for private investment in refining and for foreign or local firms to build and operate domestic refineries. Baghdad previously offered a 1 per cent discount on the supplied crude, but as an incentive to investors on 28 April, parliament approved a set of legal amendments raising the discount to 5 per cent.

 “Iraq could certainly use the refining capacity. It is short of all products except fuel oil and reliant on imports from its neighbours, especially Kuwait, to meet its transportation fuel requirements,” says George. “The intention to build up to 700,000 b/d of new capacity is clear, but signs of real progress on the ground are hard to see.”

At the end of July, the Oil Ministry signed an agreement for the construction of a 200,000 b/d refinery with the Refinery of Karbala Corporation (RKC), a joint venture of UAE-based Atconz Group and Italy’s Invest International. RKC has been given six months to finalise plans for the $6.5bn refinery at Karbala, 100km south of Baghdad.

According to Sam Michael, RKC’s executive manager, Italy’s Saipem will provide engineering, procurement and construction (EPC) services for the processing plant, as well as training and assistance with the refinery operations.

The technical configuration for the refinery will be agreed between the Oil Ministry and RKC, with construction expected to start in early 2012, says Michael.

The planned refinery is some 60,000 b/d larger than the proposed 140,000 b/d refinery at Karbala, for which France’s Technip won a $25.2m feed contract in 2009, so it remains unclear where it will fit in Iraq’s plans. Technip completed a feasibility study at the end of 2010 and sources close to the firm told MEED in May that the government was considering the project, but no decision had been made.

If it goes ahead, the RKC will be the first foreign-owned refinery in Iraq, a landmark for the nascent downstream sector.

“While this is a milestone of sorts, we think this is a lot easier than starting construction on the ground,” says George.

Private support

Interest from the private sector appears to be increasing. The Oil Ministry signed a memorandum of understanding in August with Egyptian private equity firm Citadel Capital for a refinery at Mosul in the north of Iraq.

Citadel Capital has been given a three-year period to prepare studies and designs for a 150,000 b/d refinery, which will be supplied with crude from the Najma and Qayara oil fields.

Plans to modernise and expand Iraq’s refineries are moving ahead slowly. The biggest difficulties stem from Iraq’s tough contracting procedures and shortage of skilled staff to manage large projects.

It is also exacerbated by the lack of reliable electric power to safely operate high tech process equipment. The Oil Ministry faces an uphill task to meet its goals of self-sufficiency and higher exports.