On 25 February, Iraq’s cabinet approved a set of upstream engineering, procurement and construction contracts worth $1.7bn with two South Korean firms – Samsung Engineering and Hyundai Engineering & Construction – to build new degassing stations at the Zubair oil field.

Along with the award of the $6.04bn Karbala refinery project in January, the deals mark almost $8bn-worth of contracts signed so far this year, more than double the value of projects signed in the whole of 2013.

But the awards also mask Iraq’s ongoing problems. The cabinet approved the awards after months of delays, and only after threats from Eni CEO Paolo Scaroni, who warned that the Italian major, which is developing the Zubair field, would quit Iraq over excessive contracting delays.

And while the early part of the year has proved successful in terms of awards, the rest of 2014 could be much more difficult. Elections are looming in April. Last time around, the delay in government formation took 10 months. So project decisions are likely to face delays again.

Production targets

Following the recommendations of the Integrated National Energy Strategy (INES), published in the middle of 2013, Iraq is now aiming to hit a production target of 9 million barrels a day (b/d) by 2020. This is instead of the previously heralded 12 million b/d target by 2017, which had been widely criticised by oil analysts, both domestic and foreign, for being too ambitious and likely to harm Iraq’s interests.

Iraq has been making progress, albeit stuttering, on its upstream oil production since it awarded a raft of technical service agreements with international oil companies.

Crude oil production has hit 3.5 million b/d and exports rose to record average highs of 2.8 million b/d in February, after the completion of expansion work at the Basra Oil Terminal on the Gulf. Exports had been just 2.2 million b/d in January.

About 2.5 million b/d of Iraq’s total exports are shipped from Basra. A new central metering and manifold system has now been installed in the Gulf by Italy’s Saipem, allowing Iraq to load cargoes simultaneously from its 900,000 b/d offshore single-point-moorings (SPMs). Previously ships had to alternate on the SPMs.

Thamir Ghadban, a former oil minister and current chairman of the prime minister’s advisers committee, set out the Oil Ministry’s plan for production, speaking at MEED’s Iraq Energy Projects event in Dubai on 26 February. The ministry hopes to reach an export target of 3.4 million b/d by the end of the year, and as much as 3.7 million b/d if a deal on exports from the semi-autonomous Kurdistan region of northern Iraq can be reached.

Each project… must be completed in line with upstream developments, or Iraq’s newly installed capacity will be shut in

In 2013, Iraq lifted average production to 2.99 million b/d, and exports to 2.34 million b/d, compared with 2.3 million b/d production and exports of 1.8 million b/d in 2010. The 2.34 million b/d of exports brought in about $242bn in revenues from 2010-13, 90 per cent of which went to the Iraqi treasury.

Majnoon and Rumaila

The biggest future increases will come from two fields. The Majnoon field, operated by the UK/Dutch Shell Group, is expected to increase to 200,000 b/d from just 37,000 b/d. Shell finally produced its first oil at the field at the end of September 2013, after criticism from the Oil Ministry that it was running more than nine months behind schedule. The company is in talks with the ministry to reduce its overall Majnoon target to 1 million b/d by 2020, instead of 1.8 million b/d by 2017.

Iraq oil, 2010-13
Total production (million barrels) 2,336,929
Production increment (b/d) 735,000
Total expenditure ($bn) 21
Paid expenditure ($bn) 19
Remuneration cost ($bn) 2
Total revenues ($bn) 243
Incremental revenue ($bn) 93
b/d=Barrels a day. Source: Thamir Ghadban

At the same time, the Oil Ministry hopes output from the Rumaila field, operated by the UK’s BP, will rise to 1.39 million b/d, from 1.23 million b/d. BP has proposed three new plateaus and extended production periods: a high scenario of 2.4 million b/d, a medium scenario of 2.2 million b/d and a low case of 2 million b/d. No agreement has been reached so far.

Planning and implementation are enormous burdens on the country, which lacks the institutional capacity to handle such a huge number of critical projects running almost concurrently.

A quick scan of the major projects planned alongside the upstream developments illustrates the scale of the task at hand. Among the projects are: the estimated $10bn Common Seawater Supply Facility (CSSF); the expansion of the southern export evacuation system, also worth more than $10bn; the Iraq-Jordan crude oil export pipeline; the construction of adequate gas gathering and processing facilities; and the construction of five new grassroot refineries across Iraq. The list could go on.

Shut-in capacity

Each of the projects is interlinked and must be completed in line with upstream developments, or Iraq’s newly installed capacity will be shut in. “We can’t just focus on production and leave other areas to become bottlenecks,” said Ghadban.

Ines production scenarios
Case Oil production (b/d) Target year
High case 13 million 2,017
Medium case 9 million 2,020
Low case 6 million 2,025
INES=Integrated National Energy Strategy; b/d=Barrels a day. Source: Thamir Ghadban

Any delay in the CSSF project, in particular, will have a major impact on plans for upstream production. The project covers the construction of a giant seawater treatment facility and pipelines. Worth an estimated total of $10bn, the scheme will supply treated seawater for injection into the fields, allowing production from the deeper, more difficult Mishrif and Yamama reservoirs, which will make up a greater proportion of Iraq’s future production. 

The CSSF will be built in phases, with the first providing 6.7 million b/d of water for five fields: Zubair; Rumaila; West Qurna-1; West Qurna-2; and Majnoon. Further phases will increase supplies to these fields as well as to the Gharraf, Halfaya and Missan oil fields. Total demand for water could reach 12.5 million b/d.

However, three years after it was first conceived, the front-end engineering and design contracts for the facility and pipeline to the oil fields have only just been awarded. Designs are expected to be completed by September 2014, before tendering can start.

Raising the financing for these megaprojects in another challenge, and for most of the schemes it will be borne entirely by the government. Iraq spent more than $18.9bn between 2010 and 2013 on increasing its oil production, including more than $7bn paid to international oil companies in remuneration fees.

“Financing is a challenge as it is an expensive plan. We paid $7bn in 2013 to international oil companies. In 2014, we will pay them $12.5bn,” says Ghadban. “The Oil Ministry’s capital expenditure stands at $17.5bn including payments to the IOCs.”

Increased production has not come without problems. Angola’s Sonangol became the first international oil company to announce plans to withdraw from its oil fields, citing the ongoing security problems in the country.

The state-owned firm was awarded two technical service contracts in 2009 for the development of the Najma and Qayyarah heavy oil fields in the northwest of Iraq. It has been unable to push ahead with these, however, due to security risks in the Ninevah province.

Sonangol declared force majeure at the Najma oil field, following the first major attack on upstream activities in January 2012, which forced the developer to suspend its operations.

Security costs

Kuwait Energy has also cited security as a major issue at its developments in Iraq. The privately owned firm is developing the Siba gas field in the southern Basra province and the Mansuriya gas field in the eastern Diyala province.

Company officials at the MEED conference complained that projects at the Mansuriya field were costing three times as much as equivalent projects at Siba due to security. The Mansuriya projects were also delayed due to the paucity of bids received as contractors were reluctant to work in the more restive areas of northern Iraq, compared with the relative security of Basra.

“Would it not be better to put these projects on hold until security improves?” one audience member asked. Ghadban responded that the Oil Ministry’s approach was to be patient with firms facing these problems.

“Sonangol had issues and [the Oil Ministry] has given them more time,” he said. “We should not opt to suspend projects; hopefully things will improve.”

Key fact

Crude oil production hit 3.5 million b/d and exports rose to record average highs of 2.8 million b/d in February

Source: MEED