Iraq’s plans to radically overhaul and expand its downstream oil sector took a significant step forward at the beginning of 2014. Barely a week into the year, the government approved its first major engineering, procurement and construction (EPC) contract for a South Korean group led by Hyundai Engineering & Construction.

The $6.04bn deal was approved on 7 January in the cabinet’s first regular meeting of 2014, although an official contract signing has yet to take place. The contract will see the construction of Iraq’s first new refinery in three decades at Karbala in the south of the country.

The 140,000 barrel-a-day (b/d) facility will be a new milestone in the downstream sector, and is just one of several new refineries planned by the Oil Ministry, along with projects to revamp its existing facilities. Front-end engineering and design (feed) studies have already been completed for five refineries. By the end of the decade, Baghdad hopes to have raised refining capacity to 1.45 million b/d, from about 860,000 b/d today. Its ambitious downstream plans, however, are starting to slip.

Foreign investment

While the Karbala project is to be funded by the government, attracting foreign investment to carry out the other projects has proved more difficult. Nasiriyah, in southern Iraq, is the site of the largest of the new refineries proposed by Baghdad in 2010, processing 300,000 b/d of crude and costing an estimated $8bn.

Previous efforts to attract investors to develop the refinery and the nearby 4-billion-barrel Nasiriyah oil field separately proved unsuccessful. Since October 2012, the refinery’s construction has been tied to the upstream development of the oil field, known as the Nasiriyah Integrated Project. The refinery will be built in parallel to the upstream field work, but split into two phases of 150,000 b/d.

Early estimates put the cost of the entire scheme at more than $15bn. To attract foreign investors, the Oil Ministry will pay a fixed fee for each barrel of oil processed, calculated on the basis of international prices. At least a dozen oil firms and refinery operators have been prequalified to bid, and the developer of the project will be selected in Iraq’s next auction. Originally scheduled for the end of 2013, the bid round is now set for June. But with parliamentary elections due in April, another postponement is likely.

A new refinery was also planned for Qayyarah in the north of Iraq, with the first 20,000 b/d train due to be completed in 2014. However, the project is still nowhere near an agreement, let alone moving into construction. This was to be followed by the start-up of the Karbala refinery in 2016 and 150,000 b/d facilities at Missan and Kirkuk in 2017. The Nasiriyah refinery was also due to start operations by 2018, along with another 75,000 b/d train at Qayyarah.

At Karbala, France’s Technip began the feed work back in 2010, and the Oil Ministry originally planned to get the refinery up and running in 2016. However, the construction period is expected to last 54 months, ending in the middle of 2017, assuming work starts soon.

“The expansion programme has been [going] for a long time without much progress. Even some of the 2016 projects may be delayed,” says Saadallah al-Fathi, an independent consultant based in Dubai and former head of energy studies at Opec in Vienna.

Downstream plan

An alternative downstream plan has also been proposed by the government. The Integrated National Energy Strategy (Ines), prepared by US consultants Booze & Co proposed the construction of only three refineries, built over phases by 2025.

Published in June last year, the study proposed a 210,000 b/d refinery at Qayyarah, a 450,000 b/d refinery at Missan and a 300,000 b/d export-oriented facility in Basra, along with upgrades to the current facilities. The Nasiriyah development was not included, nor were the refineries at Karbala or Kirkuk.

According to the Ines study, the current Oil Ministry plan does not fully take into account efficiencies of scale and the competitiveness of the new refineries since four of the five proposed plants will process less than 150,000 b/d. The planned configurations are also unsuitable for Iraq’s forecast domestic consumption, with fuel oil still in surplus and gasoline supplies persistently short. Implementing the Ines proposals for the downstream sector, which covers refineries, pipelines, storage depots and export infrastructure, will come at a cost of $75bn up to 2030.

Missan controversy

Given the progress already made on the Nasiryah Integrated Project and the award of the Karbala refinery, it is still unclear how many of the Ines recommendations the Oil Ministry will adopt. For now, it seems the ministry is ploughing ahead with its own schemes. One has proved particularly controversial.

Last year, a little-known Swiss-firm, Satarem agreed an estimated $6bn deal with the Oil Ministry for the construction and operation of a 150,000 b/d refinery at Missan in the east of the country. After years of struggling to attract foreign investment, the memorandum of understanding (MoU) was signed on 10 October, covering a 50-year build-own-operate contract with a firm that has no known experience in either the construction or operation of refineries. Iraqi oil analysts and former oil executives quickly raised objections.

“The Oil Ministry has to come out with an official statement on this matter and a decision on the fate of the signed memorandum of understanding,”Ahmed Mousa Jiyad, a consultant based in Norway, told MEED at the time. “Offering such a modern refinery at such cost should be thought [through] seriously, carefully and with credible due diligence.”

The Oil Ministry was forced into the unusual position of having to release a statement saying the company had shown it had the backing of “well-known partners and financiers”. Whether the Oil Ministry decides to pursue this particular firm will become clearer on 10 February, when the MoU expires.

Production challenges

Nevertheless, the Satarem deal follows a worrying but familiar pattern for Iraqi projects. In 2011, another deal was signed for the development of the Karbala refinery, this time with a UAE/Italian consortium, known as the Refinery of Karbala Corporation. The deal collapsed in early 2012, leaving the Oil Ministry to fund the project itself.

From Iraq’s total oil production of just over 3 million b/d at the end of 2013, 2.3 million b/d was exported and 602,000 b/d was refined at a combination of newer, small refineries dotted across the country, and Iraq’s three ageing workhorses: Baiji; Baghdad; and Daura.

Although the total installed capacity is more than enough to meet demand, Iraq’s refineries are plagued by poor maintenance and antiquated design. Not only does this mean operating rates are low, but the product specification is also low. As a result, Iraq is forced to import more than 100,000 b/d of light refined products such as gasoline, which accounts for a third of consumption.

[Baghdad’s refinery] expansion programme has been [going] for a long time without much progress

Saadallah al-Fathi, Dubai-based consultant

At the end of January, Oil Minister Abdulkarim al-Luaibi announced the imminent start-up of a third refining unit at the Basra refinery, capable of processing 70,000 b/d and taking total capacity to 210,000 b/d when commissioning is completed. South Refineries Company (SRC) hopes to increase gasoline production at the Basra refinery by installing new units, including a 30,000 b/d fluid catalytic cracking (FCC) unit at a new complex just outside the existing one.

SRC is currently preparing to issue a tender for the construction of the FCC unit. If tendered and awarded before the end of the year, the unit could be operational in early 2019. The project, however, provides yet another illustration of the frustrating delays to Iraq’s downstream projects. EPC contractors have waited for the tender since June 2012, when the feed was completed.

It is not only the Oil Ministry that has plans to develop refineries. Some of the provincial governments also see opportunities in the hope of resolving persistent fuel shortages and creating employment opportunities.

The governor of Ninevah in the north of Iraq, for example, invited international and local firms in October to bid for the construction of a 100,000 b/d refinery at Qayyarah.

The refinery fits with the Oil Ministry’s own plan, but given the slow pace of its projects, the province hopes to take over the responsibility of decision-making from the federal government. There is currently a 20,000 b/d refinery in the Qayyarah area, which was built in 1955 and is operated by state-owned North Refineries Company. Most of its units have been out of operation since the mid-1980s.

Provincial clash

“We are not ready to wait for decades until crude runs out from the south to start energy investments in Ninevah province,” the governor of Ninevah, Atheel al-Nujaifi, told reporters in October.

Al-Nujaifi has opened talks with two firms – Turkey’s Calik and the local KAR Group – to build and operate the facility for 20 years. However, the Oil Ministry responded in October saying the governor has no right to sign contracts without its consent.

It is not the first time the governor has acted alone. In August 2011, he signed an initial agreement with Egypt’s Citadel Capital to build a 150,000 b/d refinery at Mosul. No progress has been made on this project, however.

The disagreement between the Oil Ministry and the provinces goes to the heart of a wider issue in Iraq’s oil sector: the lack of an oil and gas law setting the spheres of influence and responsibilities of the parties.

A law has been stuck in parliament in draft form since 2007, held up by disagreements between the Oil Ministry and the Kurdistan Regional Government. Six years on, there is little sign of a compromise which could result in it being passed.