Iran and Iraq lead new oil export pipelines

30 October 2013

About $40bn of recent pipeline contracts highlight the region’s push to diversify its export options and build alternative routes to transport oil and gas across the Middle East and beyond

Between 2008 and 2012, there were about $38bn-worth of pipeline construction contracts awarded in the Middle East and North Africa region. Iran led the contract awards in terms of value, at almost $10bn, followed by the UAE with almost $7bn-worth of contracts and Kuwait with $5.4bn.

The largest schemes mark a growing trend in the region to build new outlets for stranded oil and gas reserves, as well as providing new routes to diversify export options. Three projects in Iran, Iraq and the UAE illustrate these ambitions.

In Iran, the largest scheme by both value and scale of ambition is a pipeline that will connect its offshore production in the Caspian Sea to its Gulf coast. A $3.3bn deal to build the 1,500-kilometre pipeline was signed in late 2011 with the local Khatam al-Anbiya, the construction arm of the Islamic Republican Guard Corps.

International oil sanctions

Starting at the Neka port in the northern Mazandaran province, the 42-inch pipeline will pass through the Semnan, Isfahan, Yazd and Kerman provinces, before finally reaching the Jask Port on Iran’s southern coast.

Construction on the pipeline has yet to begin, due to Iran’s oil and gas sector suffering under international sanctions, making the planned commissioning date at the end of 2015 unlikely. Nonetheless, if it is ever completed, the pipeline will provide a route for Iran’s oil reserves from the Caspian Sea, which it shares with Azerbaijan, Kazakhstan, Russia and Turkmenistan. Iran’s landlocked northern neighbours have also hinted at possible participation in further expansion of the pipeline, therefore giving them an export route.

At the same time, growing domestic demand and a lack of investment have prevented Iran from becoming a major natural gas exporter.

According to the latest data from oil producers group Opec, Iran exported 9.2 billion cubic metres in 2012 through a 2,577km pipeline from Tabriz in its northwest to Ankara in Turkey. It also imported 6.7 billion cubic metres of oil from Turkmenistan.

Lacking the technology to build its own liquefied natural gas export facilities, Tehran has been forced to consider pipeline exports. These include a 22 billion cubic-metre-a-year (cm/y) pipeline to Pakistan, which would cost $1.5bn, but has faced years of delays due to US pressure on the Pakistani government.

Tensions between Iran and some Gulf countries are the main reason for new export routes from Iraq and the UAE

For some years, Tehran has also planned to build a 280km pipeline to Sharjah in the UAE, although that project broke down towards the end of the last decade, due to a reported pricing dispute. An arbitration ruling between Iran and Sharjah-based Crescent Petroleum over the deal is expected by the end of the year.

The latest scheme was announced by Oil Minister Bijan Namdar Zanganeh in late August, covering the construction of a subsea pipeline to Oman, with a preliminary agreement on gas exports already in place. It could take more than four years for the pipeline to be built.

New oil export routes

Tensions between Iran and some of its Gulf neighbours is the primary reason for the new export routes from Iraq and the UAE. The routes aim to bypass the Gulf’s Strait of Hormuz bottleneck, particularly as its closure has been threatened by the Islamic republic.

In mid-2012, construction was completed on the UAE’s Abu Dhabi Crude Oil Pipeline, which runs from onshore production facilities at Habshan in the Western Region, over the Hajjar mountains to the Port of Fujairah on the Gulf of Oman. The 370km pipeline will eventually have a capacity of 1.8 million barrels a day (b/d) of crude, more than Abu Dhabi’s current onshore oil production. The link has not come close to reaching its current capacity of 1.5 million b/d, however, since starting in July 2012.

With just over $4.2bn-worth of contracts already awarded, Iraq is fast becoming one of the most exciting potential markets for pipeline construction and maintenance contractors, as it pursues grand ambitions to rapidly expand its oil and gas production capacity.

The expansion of upstream production capacity, to as much as 9 million b/d by 2017, will require thousands of kilometres of pipelines, running from oil fields to refineries, gas processing, power plants, and storage and export terminals. With only a sliver of coast line on the Gulf for exports, Baghdad also hopes to diversify its options, and has looked to its neighbours for new transit routes.

Iraq relies on the Basra and Khor al-Amaya oil terminals and the newly installed single-point mooring stations in the south for most of its exports. It also has a twin pipeline to transport crude from its northern fields through Turkey to the Mediterranean port of Ceyhan.

The Iraq-Turkey pipeline, built in the 1970s, was designed to transport 1.6 million b/d of Kirkuk crude blends to Turkey. Damage to the IT2 pumping station during the US-led invasion in 2003, however, has meant that only one line is operable, at 600,000 b/d. Actual throughput is considerably less. In September, the last month for which export data is available, only 250,000 b/d was pumped through the pipeline.

Iraq-Jordan oil link

Successive governments have attempted to diversify Iraq’s oil export options beyond this, looking to Syria and Saudi Arabia, although with only limited and often short-lived success, subject to the swings in bilateral relations with the two countries. The latest project is to build an export pipeline to Jordan, giving Iraq access to the Red Sea and on to either Asia or Europe.

In late 2012, the Oil Ministry held a road show in London, hoping to drum up investor interest in the scheme and outline its planned schedule for a 1 million-b/d pipeline. Tenders were expected in April and financial close by the end of the year. It is already falling behind schedule.

The project consultant, Canada’s SNC Lavalin, has completed the commercial and technical studies and has prepared an invitation to tender. A dozen engineering, procurement and construction (EPC) firms have now been shortlisted for the estimated $7bn scheme, but the tender is yet to be launched.

The scheme covers the construction and operation of a 42-inch, 1,000km link running from Haditha in the west of Iraq to Jordan’s Aqaba port. It also includes a second fuel gas pipeline and four pumping stations. A 7 million-barrel tank farm will also be built near Aqaba port.

Along with the Haditha-Aqaba pipeline, Iraq will also need to build a new 680km strategic oil pipeline, connecting with producing fields in the south. The Oil Ministry is in final talks with SNC Lavalin for the pipeline’s design contract and an EPC contract could be issued in the middle of 2014.

Setting the Iraq-Jordan pipeline apart from other projects is the fact that it will be tendered on a build-own-operate-transfer (BOOT) contract. It is the first of its kind in Iraq and one of only a handful of schemes to use the model in the region. Coupling a 20-year operational concession, this type of deal requires the contractor to finance, construct, own and operate the pipeline for a service fee.

The pipeline will take about two years to install and the Oil Ministry hopes to have it in place by 2017, as the country’s crude production reaches its new peak.

The Iraq-Jordan pipeline will connect with a planned new strategic oil pipeline, which will be built separately to the BOOT scheme, on an EPC basis. The existing strategic pipeline was built in 1974 to transport crude over 650km from Basra in the south to Haditha in the northwest. Due to a lack of maintenance, its design capacity of 1 million b/d has been reduced to less than 150,000 b/d.

Kuwait could benefit from Iraq’s oil expansion and its pipeline plans. Iraq exported small quantities of gas to Kuwait in the 1980s, and the two countries signed an agreement in 2004 for a new gas pipeline development, although it has not proceeded.

The Iraq National Energy Strategy study, which was published in June, estimates that Iraq could begin gas exports to Kuwait in about three years. This would include a year for commercial and technical feasibility studies, about nine months for design work and financing and a year for construction, since it would only require the rehabilitation of an existing pipeline. However, any agreement on gas exports will be politically sensitive at this time, as Iraqi citizens endure power outages due to shortages of feedstock at power plants.

Northern Iraq oil and gas exports

The semi-autonomous Kurdistan region of northern Iraq has its own ambitions to export oil and gas, much to the anger of the federal government in Baghdad, which claims the sole right to exporting Iraq’s hydrocarbons through the State Company for Marketing of Oil.

Getting oil out of the landlocked territory is a major challenge. Exports through the Iraq-Turkey pipeline have stopped since early 2012, and the region’s oil and refined products are currently transported by tanker across the border.

Now, the regional government is targeting exports of 1 million b/d by 2015 and 2 million b/d by 2019, through its own independent pipeline to Turkey. The first stage of the link is already complete, connecting the Taq Taq oil field with the Khurmala oil field near the disputed city of Kirkuk.

The really bold step will be the construction of the pipeline to the Turkish border. Initially expected to carry 300,000 b/d by 2015, the pipeline will eventually pump more than 1 million b/d and give the Kurds de facto independence from Baghdad.

In addition to the oil pipeline plans, Ankara and the Kurdistan Regional Government have agreed a framework for the export of 10 billion cm/y of natural gas to the energy-hungry Turkish market. A final gas sales agreement is expected by the end of the year, paving the way for further pipeline deals.

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