Southern Iraq holds potential

27 April 2015

The signing of an agreement with Shell to develop a $11bn petrochemicals complex in Basra illustrates the region’s potential, as the most secure area in Iraq

Iraq’s petrochemicals sector post-2003 has been characterised by a lack of project activity, with ambitious plans announced over the past decade largely failing to materialise.

Baghdad has mainly focused on the resurgence of its upstream oil industry - with several major field developments being carried out - as well as on improving export infrastructure in the southern oil hub of Basra.

Although several chemicals projects have been announced in the past 10 years, the country is seen as a risky place to invest in capital-intensive, long-term developments, especially given the rise of sectarian violence throughout much of the country.

Nibras complex

However, prospects for a growing petrochemicals sector improved in January, when Iraq’s Industry Minister Nasser al-Esawi revealed the government had signed a deal with UK/Dutch oil major Shell to develop an $11bn complex in Basra.

Al-Esawi told reporters in Baghdad the Nibras complex would come online in the next five to six years and would have the capacity to produce 1.8 million tonnes a year (t/y) of petrochemicals products.

“The Nibras complex will be one of the largest [foreign] investments [in Iraq] and the most important in the petrochemicals sector in the Middle East,” Al-Esawi was quoted as saying.

Shell said Iraq’s cabinet authorised the project in January, but the company has been unavailable to provide further details on the scope or timeline of the scheme.

Agreement inked

In May 2012, Shell signed a memorandum of understanding with the government on a petrochemicals complex to use ethane from associated gas captured in southern oil fields by Basrah Gas Company (BGS).

Shell holds a 44 per cent stake in BGS, with Japan’s Mitsubishi Corporation owning 5 per cent and the majority 51 per cent held by state-owned South Gas Company.

“It is the most promising project that has been made public,” says Andrew Spiers, senior vice-president, Middle East at US-based consultancy Nexant. “The agreement shows you have an international, world-class partner that knows how to undertake projects in developing countries, and a government that is willing to support development in the industry.

“[In signing the agreement], the government should have an understanding of what needs to be done in terms of feedstock pricing and what needs to happen for the project to go ahead. These two factors together provide a good environment to develop an export-driven industry.”

Foreign investment

Another company looking into developing a petrochemicals complex in Iraq is Russia’s Lukoil, which started crude production from its West Qurna-2 field development last year. In March 2014, the company reached a preliminary agreement with Iraq’s Oil Ministry to study a scheme to use associated gas from the field to produce methanol.

A Lukoil spokesman tells MEED a feasibility study on a petrochemicals project at West Qurna-2 is still taking place.

In numbers

1.8 million t/y
Capacity of proposed Nibras petrochemicals complex

70 per cent
Proportion of methane in unprocessed associated gas in southern Iraq

t/y=Tonnes a year. Sources: Industry Ministry; International Energy Agency

Unprocessed associated gas in the south of Iraq consists of about 70 per cent methane and 30 per cent natural gas liquids (NGLs), including 15 per cent ethane and 8 per cent propane, according to the Paris-based International Energy Agency.

In 2012, Iraq’s Deputy Industry and Minerals Minister Mohammed Abdullah said the country was wooing foreign firms to invest $35bn-$50bn in its gas industry to provide feedstock for petrochemicals schemes during the 2017-23 period. “This is our current view, and that could be revised upwards in the future,” Abdullah said at the time.

A third petrochemicals project, also in the south of Iraq, has been studied by French oil major Total. It signed a preliminary agreement with the Industry & Minerals Ministry in late 2013 to carry out a feasibility study for a complex in Basra. However, it has not announced any updates on the project since revealing the initial study.

The French group is a partner at the 4.1-billion-barrel Halfaya oil field in the east of Iraq, along with operator China National Petroleum Corporation (CNPC) and Malaysia’s Petronas.

Chemicals pioneer

Iraq was a pioneer of petrochemicals development in the Middle East, building the region’s first integrated project in 1976. But decades of war, sanctions and lack of investment have seen the country fall behind in the industry as Saudi Arabia and the other GCC countries rapidly began building up capacity in the 1990s.

The gas in southern Iraq is especially rich in ethane, which has been used as the main feedstock for petrochemicals projects in the US, the GCC and elsewhere. Given the size of the associated gas reserves in southern Iraq, the country is thought to have significant untapped potential for ethane-based petrochemicals developments.

“If you look around the rest of the region, there is a limit to the amount of ethane available for petrochemicals,” says Spiers. “People are struggling to get allocations in Saudi Arabia, there is a moratorium on gas projects in Qatar, while Egypt, Oman and Bahrain have limited ethane.

“When countries emerge and start to attract investment in petrochemicals, they often have to give attractive prices for the gas to encourage those first few projects - first-mover advantage. If you look around the world, there are very few opportunities like that now.”

Despite most of the violence in the current conflict taking place in the north and west, the weak security situation makes Iraq a difficult place for investors to commit to, despite its natural resources and access to export markets through the Gulf.

Slow improvement

“These are very capital-intensive, long-term investments and there is a balance of risk and reward,” says Spiers. “People would think Iraq is a very risky place to invest in now.” He forecasts that investment will continue to move slowly in the medium term.

Baghdad’s plans to develop its petrochemicals sector, along with its oil and gas industry, are enshrined in the Integrated National Energy Strategy (INES), published in June 2013.

The INES study is optimistic about the prospects for developing a petrochemicals and fertilisers industry in the country. It sets out that the priority in the short term should be the rehabilitation of Iraq’s existing plants and, in the medium term, ramping up capacity to export chemicals using methane, ethane and propane feedstocks.

Iraq petrochemicals projects
Company DetailsStatus
Shell Group (UK/Netherlands)$11bn complex with ethane cracker and downstream plastics plants; capacity of 1.8 million tonnes a yearShell signed development deal with Iraqi government in January; timeline yet to be disclosed
Lukoil (Russia)Production of methanol from gas extracted at West Qurna-2 field developmentFeasibility started in first quarter of 2014; study still under way as of mid-March 2015
Total (France)Petrochemicals complex at BasraPreliminary agreement signed in November 2013 for feasibility study; no recent update
Chevron Phillips Chemical Company (US)New facility and upgrade of existing units in Basra with investment of $6bnLetter of intent signed in June 2012 for feasibility study; no recent update
STX Heavy Industries (South Korea)$3.2bn petrochemicals complex to produce ethylene, propylene, polyethylene and polyvinyl chloride from 2014Agreement signed in late 2010; no progress
Source: MEED

In the medium term, this would mean the export of basic chemicals such as polyethylene, ethylene glycol, polypropylene, methanol and fertilisers such as ammonia and urea. In the long term, the country could diversify by expanding into higher-value chemicals, in the way Saudi Arabia’s petrochemicals industry has moved in recent years.

The INES study forecasts total capacity reaching 16.8 million t/y. At the time of the report, this compared with Saudi production capacity of 22 million t/y, and Iran’s capacity to produce 9 million t/y.

Export capacity

Domestic demand for these products is not expected to exceed 1 million t/y before 2030, which would leave Iraq with a world-scale export capacity.

INES also sets out plans for growth in urea fertiliser capacity to replace the volumes Iraq has been importing from overseas. The report proposes increasing production to meet local demand of about 2 million t/y through the rehabilitation of existing plants and new capacity of 700,000 t/y by 2017. The long-term target is 8.3 million t/y by 2028, using greater volumes of methane feedstock.

Urea fertiliser production requires large volumes of methane. The INES plan calls for methane to be first allocated to the power sector, since it provides the highest benefits in the use of gas. The use of methane in power displaces liquid fuels, freeing them up for more profitable exports.

The second priority for methane under INES is in industrial diversification - the production of fertilisers, methanol and steel. Methanol could be used as feedstock to produce polyphenyl ether, used to manufacture lubricants, and methyl tertiary butyl ether, a fuel component.

Gas processing

Production of ethane-based petrochemicals, methanol and urea will require significant expansions in gas processing capacity in Iraq. The INES programme predicts that new industries will require as much as 2 billion cubic feet a day (cf/d) of gas by 2030.

Although INES’s target year of 2030 is still a long way into the future, the lack of progress on projects in the past two years and the deteriorating security situation leave the scale of the programme looking unrealistic.

Iraq has suffered major setbacks in its efforts to diversify its hydrocarbons sector through petrochemicals and fertilisers, but there is still potential for schemes to get under way in the south of the country, which is by far the most secure area. The January announcement of an agreement with Shell is a strong sign that Iraq can be seen as an attractive place to invest for companies willing to take the risk for what could prove to be highly profitable operations years down the line.

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