Changing gas markets in the Middle East: Iraq

Troops at a well atop a deposit of oil & natural gas in the desert of Iraq's western Anbar Province, near Syria.

This is the second in a series of articles MJMEnergy will produce on the Middle East, this month we are looking at the markets in Iraq.

Oil and Gas Background
Iraq is a nation that has large domestic oil and gas reserves, however only a small number of Iraq's known fields are in development. Indeed, Iraq is one of a small number of nations that has vast (proven and unknown)reservoirs, which have barely been exploited.

Iraqi proven oil reserves are currently estimated at 115 billion barrels , this figure ranks Iraq as containing the 4th largest amount of oil reserves in the world . However, this figure has not been reassessed since 2001 and is based on old data, geologists and consultants have approximated that Iraq may contain an additional 45 to 100 billion barrels of recoverable oil in unexplored areas of Iraq. Iraq’s economy and domestic income is very much dependent on oil exports, these export revenues accounted for over 75 percent of GDP and 86 percent of government revenues in 2008 . Gas plays a more peripheral role in the Iraqi energy sector with an estimated 94% of Iraq’s energy needs being met with petroleum.

Proven gas reserves currently stand at 112 Trillion cubic feet (Tcf), 70% of these reserves lie in the volatile province of Basra located in southern Iraq . Similarly to Iraq’s oil status it is estimated that probable Iraqi gas reserves could in fact increase to somewhere within the region of 275-300 Tcf. Progress is underway for these figures to be confirmed and accurately updated by a number of IOCs and independent surveyors. However, as current estimates stand Iraq still ranks as containing the world’s tenth largest proven gas reserves. Two-thirds of Iraq’s gas resources are located in associated fields, which leaves just under 20 percent of known gas located in non-associated fields and around 10 percent of which is salt “dome” gas.

Production Levels
Iraq is yet to have exploited many of these resources and their production levels reflect this notion. Natural gas production has risen since 2003, and has returned to towards production levels of the mid-90s. However, Iraq’s 2006 dry natural gas production of approximately 104 Bcf was well below its peak level achieved in 1989 of 215 Bcf.

The Iraqi gas sector also suffers from large quantities of gas in associated fields being untapped and largely wasted through flaring. The Iraqi Oil Ministry reported that approximately 60 percent of associated natural gas production is flared. This is mainly due to a lack of infrastructure to utilize gas for export and domestic consumption. However, Iraq is attempting to amend this situation through a recent contract awarded to Shell in 2008 which will see Shell implement a 25 year contract to capture flared gas and utilize it for domestic use, whilst surpluses will be transported to an LNG project for export.

Similarly, production levels in the oil sector are failing to reach levels achieved during Saddam Hussain’s rule. In 2008 oil production stood at 2.4 million barrels per day (bbl/d), whilst this is an increase from 2.1 million bbl/d measured in 2007, production levels have yet to reach pre-war levels of 2.8 million bbl/d in 2003.

The Iraqi oil and gas production levels have suffered from years of sanctions and since 2003 further damage has been caused by the Coalition’s invasion and the following Insurgency. Dated and damaged infrastructure has also hindered development in the Iraqi energy sector leaving a large requirement for modernisation and investment of Iraqi infrastructure. These investment needs are starting to be realised with the US already having allocated $2.05 billion to begin modernization of Iraqi infrastructure, the Iraqi government has also recently doubled its Ministry of Oil budget allocation to $3.2 billion. However, these figures are a long way short of expected long-term investment requirements, which total to $100 billion or higher.

Iraq’s strategy going forward
In response to their development problems Iraq has developed a 10-year strategic plan from 2008-2017, which seeks to see the increase of natural gas production to 2.5 Tcf per year, and end gas wastage through flaring.

Part of this plan has seen Iraq attempt to auction off various oil and gas fields through the process of three licensing rounds. However, so far the first of these bidding rounds has been deemed unsuccessful with only one bidder to accept contract terms from the Iraqi government. The only companies to accept terms was the joint venture of BP and China’s CNPC who agreed to run the 17 billion barrel Rumaila oil field. However, with two further licensing rounds to come there seems no indication that any of the big IOC’s will accept the Iraqi’s terms.

Though some have seen the auction as a failure and with only one contract being awarded it has somewhat added weight to their argument. It is worth noting that the Rumaila oil field as described by Business Week is a ‘monster’. The Rumaila oil field is the forth largest in the world, currently producing 960,000 barrels a day, and according to BP contains an additional 65 billion untapped barrels. This fields being exploited by BP and CNPC joint venture will provide a large contribution to Iraq’s continued plans for increased production.

Why no investment: Problems facing the Iraqi Energy Industry Bitter political divisions and post-war instability may have discouraged investment from some quarters. Since 2003 when the US led the invasion of Iraq, foreigners have regularly been the target of violence, kidnapping and with these acts being particularly public through modern media this may have discouraged a number of oil companies from setting base in Iraq wanting to avoid oil workers compounds being a bull’s-eye for attacks.

However, whilst Iraq is currently a dangerous and unstable country, IOCs have long been involved in the extraction of resources from unstable volatile region's and if there are substantial profits available to be made the region’s instability shouldn’t hold the IOCs back for to long.

Among other things Mohammed Abbas and Ahmed Rasheed of Reuters (2009) note that ‘a lack of security, rigid bureaucracy and the absence of a legal framework’ is deterring investment. Furthermore, the aftermath of the Coalition’s invasion has further damaged what limited infrastructure was previously available, indeed Iraq’s energy sector is in need of large investment to get it back to full capacity again.

The crux of the problem behind the lack of investment appears to be due to the terms the Iraqi government is offering IOC’s. Indeed, there appeared to be no shortage of initial interest with 32 companies being approved as potential bidders. Currently the government’s terms stipulate that for each field the ministry of oil will specify the minimum production level (close to current production levels).

The bidders will not be paid for anything up to the minimum production level, however, they will be able to specify the amount they want to be paid for each barrel produced above the minimum, and also predict how much oil they will be able to produce. However, this is where a problem has developed for future investors as the ministry of oil has also set a maximum price they can be charged per barrel, which is significantly below the expectations of the IOCs involved.

BP and CNPC agreed a contract for the Rumaila field, to do the work for $2 dollars a barrel, this includes the ministry covering costs for any work they have to do on the production facilities. Exxon Mobil were among a number of winning bidders that declined to accept the ministry’s maximum payment terms.

The next auction takes place in December, and is set to place fields with reserves estimated at 35 billion barrels under the hammer. The Iraqi Oil ministry may well need to reconsider their pricing strategy if they want to reach they objectives and goals for their oil and gas programme to move forward.

Flaring in Iraq

Article written by Tim Madden