Iraqi gas: Addressing the hurdles to progress

11 September 2009

While Iraq rebuilds itself in the post Saddam era, political infighting continues to hamper its gas sector and undermine hopes of developing a rich stream of export revenues

After a poor response to Iraq’s first post-war oil field licensing round in June, Baghdad is attempting to put the development of the country’s oil and gas industry back on track.

According to the annual Statistical Review of World Energy produced by UK energy giant BP, at the end of 2008 Iraq’s proven gas reserves stood at 111.9 trillion cubic feet (tcf), the tenth largest reserves in the world. The US Energy Information Administration (EIA) says probable Iraqi reserves could be 275-300 tcf. However, as with many countries in the region, the development of the gas sector has trailed behind that of crude oil.

Iraqi gas reserves (%)
Free gas20
Captive gas9
Associated gas71
Source: Source: Fertile Crescent Oil

Two-thirds of Iraq’s gas reserves are associated with oil fields and an estimated 70 per cent lie in the Basra region in the south of the country. The majority of non-associated reserves are concentrated in several fields in the north of Iraq.

Although gas production has been on the rise since the 2003 US-led invasion of Iraq, in 2006 it produced less than 100 billion cubic feet (bcf) a year, under half of the 215 bcf reached in 1989 under Saddam Hussein.

Key Fact

More than two thirds of Iraq’s gas reserves lie in the Basra region

Source: MEED

Regional influence

Exactly how Iraq will drive the development of its gas sector to return to the production levels recorded in the 1980s remains a politically thorny issue. As well as security, there are two issues at play. The first is the role of international oil companies (IOCs) in the development of the sector, given the trend towards a resurgence in resource nationalism in the region.

The second is the nature of government in Iraq. In a country dominated from Baghdad for decades, how much say will the provincial and regional governments have?

“How much authority does anyone have in the country?” asks Jonathan Stern, director of gas research at the UK-based Oxford Institute for Energy Studies. “You have the centre versus the regions, such as Baghdad versus Kurdistan. Who actually has the authority to negotiate or agree anything?”

The Kurdistan Regional Government (KRG), the official ruling body of the federal region in predominantly Kurdish northern Iraq, passed its own hydrocarbons law in 2007. The KRG has also signed oil production sharing, development and exploration contracts with more than 35 energy companies over the past two years, worth nearly $5bn.

The contracts sit at the heart of the ongoing dispute between the KRG and Baghdad, which has declared the production-sharing agreements unlawful. The KRG says the federal constitution gives it the right to strike its own exploration contracts.

The state-run Korea National Oil Corporation of South Korea won the largest overall deal in Kurdistan in June 2008. In return for its exploration licence, the firm will spend $2.1bn on developing infrastructure in the KRG-controlled areas of Iraq.

Baghdad is still considering drafting an oil law covering the entire country, a crucial step for the oil and gas sectors’ rehabilitation but also a politically divisive one given the tensions between Baghdad and the KRG.

Iraqi Oil Minister Hussein al-Shahristani has repeatedly said China’s Sinopec will be blacklisted from bid rounds and dealings with the ministry if it does business with the KRG.

“There are different messages coming from the government, and as long as this goes on we will be at a standstill”

Samuel Ciszuk, analyst, IHS Global Insight

“Sinopec believed it had clearance to engage with the KRG,” says Samuel Ciszuk, Middle East and Africa analyst at US-based IHS Global Insight. “Clearly, there are different messages coming from within the government, and as long as this goes on we will be at a standstill.”

Considering the political stalemate over regional authority, it is hard to imagine any progress can be made in Iraq’s gas sector development. However, some projects have begun to move. In September 2008, the Iraqi cabinet approved a heads of agreement for a preliminary gas deal between UK/Dutch Shell Group and Iraq’s state-owned South Gas Company.

Natural gas fields for bid in Iraq
First bid roundReserves (trillion cubic feet)
Al Mansuriyah3.3
First round total*22
Second bid round 
Khashem al Ahmar0.1
Second round total*26
* Includes associated natural gas from oil fields in bidding rounds
Source: Energy Information Agency (EIA) 

Almost a year later, Japan’s Mitsubishi Corporation joined the joint venture with a 5 per cent stake. South Gas Company remains the majority stakeholder with a 51 per cent stake. The agreement creates the framework for the South Gas Utilisation project, a midstream scheme involving the gathering, treatment and processing of raw gas produced within Basra province and the sale of the processed natural gas, along with its associated products, such as condensate and liquefied petroleum gas (LPG) for use in the domestic and export markets.

Flaring halt

The project will be a vital step in bringing the practice of flaring – or burning off gas from associated oil fields – to a halt. The Oil Ministry reports that approximately 60 per cent of associated natural gas production is flared due to a lack of sufficient infrastructure to use it.

“If you have ever flown over Basra at night, you will see the whole sky literally lit up with flares,” says Gasser Hanter, Dubai-based Iraq country chairman at Shell.

Gas lost to flaring, according to Hanter, amounts to 700 million cubic feet a day (cf/d) based on current crude oil production levels. This is equivalent to about 300,000 bottles of LPG gas a day and 20 million tonnes of carbon dioxide a year, says Hanter, providing a further environmental element to the problem. At the same time, the country faces LPG shortages requiring imports of 1,200 tonnes a day.

Assuming a gas price of $5 a million British thermal units (BTU), lost revenues due to flaring amount to about $1.8bn a year, says Hanter. Alongside existing commercial gas production, this could meet up to 60 per cent of the country’s power generation needs. 

In the year since the heads of agreement between Shell and the South Gas Company, Shell has embarked on a survey of the region’s production facilities to understand the scope of the work required.

“This gas is being flared in more than one location, coming from more than one field. We are making progress and it should be cleared in the not too distant future,” says Hanter.

However, Iraqi deputy oil minister Ahmed al-Shamma told local press in early September that progress on the project is likely to be delayed until after the January parliamentary elections.

“[South Gas] was controversial from the start and it would appear the government is hoping to strengthen their position and ability to push it through, if they gain more seats,” says Ciscuk.

Shell has been in talks with Iraq over gas projects since 2001. Its interest was revived in 2005 when the company developed a countrywide gas masterplan along with Japan’s Mitsubishi on behalf of the Oil Ministry.

The project has been less controversial than other deals signed with international oil majors because there is no upstream involvement from Shell, and the agreement does not give Shell any ownership of the gas captured.

The gas produced will be wholly owned by Iraq, and then sold to the Basra Gas Company, the proposed joint venture of South Gas Company and Shell, at prices set by Baghdad.

All of these deals are being carried out in the shadow of a 10-year strategic plan launched in 2008. Under that plan Iraq set a goal of increasing natural gas production to 2.5 trillion cubic feet a year, and to end the flaring of natural gas. It also included three licensing rounds.

The first was announced in June 2008, and included oil and gas fields with 22 tcf of natural gas. By the end of June 2009, however, it emerged that Iraq’s Oil Ministry would develop the Akkas and Mansuriyah gas fields on its own, following the failure of the bidding round.

The 3.3 tcf Mansuriyah field in the western desert received no bids. The 2.1 tcf Akkas field close to the border with Syria received only one bid from a consortium led by Italy’s Edison, but this was declined by the Oil Ministry.

However, the ministry did award an $80.5m engineering, procurement and supply contract to India’s BGR Energy Systems for both fields. According to the BGR, both fields have a target production of 110 million cf/d.

“The government has mandated the [state-run] National Oil Company, which will be formed to develop these fields, and the Oil Ministry will work on the development of these fields until the founding of the National Oil Company,” Assem Jihad, a spokesman for the Oil Ministry told Iraqi press in August.

A second bidding round with 26 tcf of reserves is planned for December 2009, and includes the Siba field in Basra and the Khashm al-Ahmar field. The ministry insists that this licensing round, for which 41 international companies are prequalified, will prove more successful.

The bidding contest is scheduled for early December. Contracts are due to be signed two weeks after that and then ratified by the cabinet. Providing everything goes as planned, Iraq could be in line to secure several multi-billion-dollar deals ahead of parliamentary elections at the end of January 2010. 

Because of the failure of the first round, there is scepticism over the chances of the second round going ahead on time.

“There are parliamentary elections in January, so companies will be reluctant to go in ahead of this,” says Ciszuk. “I suspect the second licensing round will probably be stalled until after this.”

“We see very confident projections from the EIA and others on Iraqi exports to Europe, but there is such a long way to go before we can start to be confident about seeing Iraqi gas in Europe,” says Stern.

Before Saddam Hussain’s invasion of Kuwait in 1990, Kuwait had been a recipient of Iraqi gas via a 170-kilometre-long pipeline from the Rumaila field, taking 400 million cf/d to a processing centre in Ahmadi in Kuwait. Negotiations over a resumption of exports, of up to 200 million cf/d, have been going on since 2005. Any final deal, however, will be subject to the approval of Iraq’s Oil Law, which is still in draft form.

Kuwait connection

Kuwait has also expressed an interest in developing Iraq’s southern gas fields through the Kuwait Foreign Petroleum Exploration Company, but no deals have yet been signed.

Exports to Europe from northern Iraq through the proposed Arab Gas Pipeline are also a possibility. The pipeline would deliver gas from Iraq’s Akkas field to Syria, Lebanon and Turkey before going on to Europe.

Shell says its joint analysis with the Oil Ministry shows that the volume of associated gas will not be fully consumed by Iraq’s current or proposed domestic use.

“Our analysis shows it is unlikely that the produced gas will be totally consumed domestically,” says Hanter. He notes, however, that following the licensing rounds it is hard to project future crude production levels.

“Being associated gas, it is difficult to pin down what the gas levels will be,” he says.

Iraq currently has no capacity to store gas, so cannot adjust gas production to meet demand without reducing crude oil production simultaneously.

This leaves two options: a continuation of flaring, or exporting more by pipeline or as liquefied natural gas (LNG).

Plans to export more gas remain controversial. Given the number of power plants lying idle in the country, or forced to run on the less efficient fuel oil due to inadequate gas feedstock, this is understandable.

“You have to question whether the initiatives you see in the press have any substance,” says Stern. “I have grave doubts we shall see any significant exports within a five and even within a 10 year period. I just do not think Iraq will be in any position to prioritise exports.”

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