New Iraq government faces oil infrastructure challenge

07 October 2018
Security remains the most obvious challenge for whoever heads the ministry in the future

A new government is in the process of being formed in Iraq under newly appointed prime minister Adel Abd al-Mahdi, who previously served as both finance and oil minister.

He has until 2 November to form a new cabinet, although it is unlikely to include current oil minister Jabbar al-Luaibi, according to Iraq observers.

Whoever takes the oil ministry role will have his work cut out dealing with challenges on a number of fronts. Security remains the most obvious challenge – the oil ministry announced on Sunday that a bus transporting Chinese workers was attacked in the northern Salah al-Din province, with one killed and 14 injured.

One of the biggest challenges for Iraq's next oil minister will be to address the bottleneck to its crude oil exports out of the south, with aged infrastructure and a lack of storage capacity limiting capacity. However, sources in Iraq say work to address the issue is slowly gathering pace.

Iraq’s crude oil export capacity from the south of the country, where the federal government's shipments load onto vessels in the Northern Gulf, stands at around 3.7 million barrels a day (b/d).

Preliminary export statistics released last week by the Iraq oil ministry show it shipped an average of 3.56 million b/d from the Basra Oil Terminal and single-point moorings in the Gulf. This was Iraq’s second-highest recorded export level ever, after August’s mark of 3.58 million b/d.

The September exports brought in revenues of more than $7.912 billion. The oil ministry data shows that Iraq’s export revenues are at their highest levels since late 2012, buoyed by recent oil prices in excess of $80 a barrel and record levels of shipments.

However, with capacity just 140,000 b/d above this level, there is little room for further increases to shipments.

Upgrading the infrastructure at Basra is essential to allow Iraq to keep raising production and exports. The oil ministry has long outlined plans to build its crude oil storage capacity on the Al-Fao peninsula. This is the key staging post where crude oil is segregated into its current export streams — Basrah Heavy and the higher-quality Basrah Light — before being pumped to the offshore terminals for loading onto vessels.

Al-Fao can currently store around 10 million barrels of crude, but Iraq eventually plans to more than double this with a total of 22 tanks. The facility will be even more important in the coming years, as Iraq adds a third crude oil grade, Basrah Medium, in order to meet the changing needs of its customers. This will require additional onshore storage tanks and pumping systems.

The export capacity will limit Iraq’s ability to further increase upstream production, just as many of its partners are starting to enjoy major increases. PetroChina, the operator of the Halfaya oil field in the southern Missan province near Iraq's border with Iran, doubled its production capacity last month to 400,000 b/d.

The boost to output is well ahead of the planned 2019 start-up date for the new units and makes PetroChina the first of Iraq’s international oil company partners to hit its full target; however, it must now maintain this level for the next 16 years.

The Halfaya expansion is part of Iraq's wider ambition to lift total crude oil production capacity to 6.5 million b/d by 2022, up from about 5 million b/d currently. This includes production from the semi-autonomous Kurdistan Region of northern Iraq.

While the southern Basra province remains Iraq’s key oil hub, accounting for the majority of the country's nearly 5 million b/d capacity, the Halfaya expansion has turned the Missan province into a relatively big producer approaching nearly 700,000 b/d.

Further capacity increases from the province are planned, but it is unclear how many more barrels can be produced before hitting the export ceiling. Iraq’s domestic consumption has been limited by damage to its 330,000 Baiji oil refinery caused by Islamic State militants.

Increases at Missan could mean cutting back output elsewhere.

Abd al-Mahdi’s relationship with the semi-autonomous Kurdistan Regional Government (KRG) could help ease the burden on Iraq’s southern exports by reopening a route for crude from the north of Iraq.

During his tenure as oil minister from the middle of 2014 to mid-2016, al-Mahdi negotiated a deal with Ashti Hawrami, the KRG’s Minister of Natural Resources, that allowed federally produced crude oil to flow through the KRG pipeline to Turkey for the first time.

However, the deal fell apart as the two sides argued over how to split the revenues. Crude produced by the federally owned North Oil Company has been locked in with no route out for exports. A new deal with the Kurds over exports could unlock significant volumes of exports and valuable revenues.

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