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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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$100 Oil Encourages Iraq To Fast-Track Production At Two Major Oil Fields

  • Iraq is encouraging the development of several oil fields in its ThiQar province.
  • The  Iraqi Drilling Company started work on the first of its 20 oil wells at the Nasiriya oil field, in conjunction with the U.S.’s Weatherford.
  • $100 oil has prompted the Iraqi government to fast-track development of more technically challenging oil fields.

With Brent crude oil still holding above the key US$100.00 per barrel support level, Iraq is looking to optimise its oil output, including from those fields that are regarded as slightly more difficult to exploit than others in the country. Encouraging the development of these fields – including several in the ThiQar province, most notably Nasiriya and Gharraf – also allows Iraq to judge which of the potential foreign suitors for these more difficult oil and gas projects might make suitable partners in other areas of its hydrocarbons sectors. For obvious reasons right now, companies from the U.S. and China are at the centre of the field development plans on ThiQar, with Russia taking more of a backseat. In Nasiriya’s case, the original plans to develop the potentially 4.36 billion-barrel oilfield on a standalone basis were shelved in the lead-up to the Iran-Iraq war that began in 1980 and lasted until 1988. The field, discovered in 1975 by the then-Iraq National Oil Company (INOC), eventually came on-stream in 2009 and was listed on the 2009-2010 fast-track development plan that aimed to raise its output to at least 50,000 bpd in the first phase. At that point, Italy’s ENI, Japan’s Nippon Oil, the U.S.’s Chevron, and Spain’s Repsol were invited to submit bids to develop the field on an engineering procurement construction (EPC) contract basis. The Japanese consortium led by Nippon Oil – also comprising Inpex, and JGC Corporation - looked set to win the contract before negotiations broke down again. 

In 2014, another serious push was made to resuscitate the development of the Nasiriya field within the broader scope of the ‘Nasiriya Integrated Project’ (NIP), which also included the corollary construction of a 300,000 barrels per day (bpd) refinery. This followed the departure in September of that year of the divisive figure of Shia Islamist Nouri al-Maliki as prime minister, and his replacement by Haider al-Abadi. Although al-Abadi was also Shia, his arrival prompted optimism in the international investor community that a more inclusive government – with a more secure mandate – might emerge. This optimism was bolstered by al-Abadi’s announcement of his three deputies - Hoshyar Zebari, the Kurdish outgoing foreign minister, Saleh al-Mutlak, a secular Sunni who held the same post in the previous government, and Baha Arraji, a Shia and former MP – which prompted then-U.S. Secretary of State John Kerry to say that the new cabinet “has the potential to unite all of Iraq’s diverse communities.” 

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In terms of the bidding itself, changes to the original technical service contract (TSC) were made that were aimed at addressing the concern of international investors that the TSC model fell well short of the type of production sharing contracts (PSC) that they preferred. Unlike the previous contracts, the new contract offered investors a share in project revenues, but only when production began, and the Oil Ministry would pay recovery costs from the date of commencement of work. This differed from the previous contract in which the costs were only paid when the contractor raised production by 10 percent. This said, investors would still have to pay 35 percent taxes on the profit they made from the Nasiriya project, the same amount as in previous deals.

At that point in 2014, the international engineering and construction firm Foster Wheeler had already completed a front-end engineering and design study for the refinery, and seven of the original potential bidders remained on the list (India’s Reliance Industries, France’s Total, Russia’s Lukoil, and Zarubezhneft, China’s CNPC, the U.S.’s Brown Energy, and a Japanese joint bidding team from JGC and Tonen General). These had been augmented by India’s Oil and Natural Gas Corp, and Essar Oil, Russia’s Rosneft, France’s Maurel & Prom, and South Korea’s GS Engineering & Construction. Predictably enough, however, given Iraq’s history of endemic corruption, sectarianist conflict, lack of real governance, as analysed in depth in my new book on the global oil markets, these potential deals came to nothing. 

In 2017, though, China relaxed its directive of the previous two years to all state-owned hydrocarbons companies to cut budgets. From the Iraqi side, this coincided with a fresh impetus for expediting as much production from the south of the country ahead of the chaos in oil supplies from the north that was likely to result (and did) from Kurdistan’s independence referendum to be held in September, as also analysed in depth in my new book on the global oil markets. These factors led to China’s Sinopec and PetroChina proposing a deal that would see the NIP being rolled out as part of the broader ‘Integrated South Project’ (ISP). The ISP aimed to boost output across Iraq’s southern oilfields, and also to build out related infrastructure, including pipelines, transport routes, and the construction of the Common Seawater Supply Project (CSSP). 

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“The Chinese said that they would spend US$9 billion on the [NIP-related] refinery and the first phase of developing Nasiriya but under the terms of Iraqi oil contracts the Iraqis would have to pay back this cost to the Chinese from the value of oil recovered,” a source who works closely with Iraq’s Oil Ministry told OilPrice.com. “The initial reaction from the Oil Ministry was to decline the offer, and to say that the development should only cost around US$4 billion, which the Chinese in turn flatly turned down.” 

All of this has put the U.S. in a prime position to use the development of Nasiriya and then potentially the NIP as a springboard to other development projects in Iraq’s oil and gas sector in line with its new softer power policy in the country. According to comments last week from the director of the Iraqi Drilling Company, Basem Abdul Karim, the company has started work on the first of its 20 oil wells at the Nasiriya oil field, in conjunction with the U.S.’s Weatherford.  He added that the project is to be completed within 18 months. This all feeds in to recent news that the newly resuscitated Iraq National Oil Company has been authorised by the government in Baghdad to directly negotiate with U.S. oil giant, Chevron, for it to more broadly develop the Nasiriya site. 

Relatively close by, the Gharraf oil field has seen its crude oil output rise by 20,000 bpd in the past month alone, according to the Oil Ministry, with more production increases to come.  With Japex and Malaysia’s Petronas in lead roles in the site’s development, there has been a greater sense of urgency to press ahead on the 1 billion barrel of oil reserves field than has been evident on Nasiriya, despite the relatively small remuneration fee to the firms of US$1.49 per barrel, after the initial output target of 35,000 bpd was achieved. 

Initially, they had to placate the local tribesmen who refused to cede their ancestral lands peacefully, whatever the Iraqi government in Baghdad had promised Japex (and Petronas) in the run-up to the bid being accepted. Then they had to construct the initial surface facilities for production, including a degassing facility with two trains of 50,000 bpd each, eight storage tanks, piping, atmosphere flares and other ancillary infrastructure. In just over two years, output from the field hit 60,000 bpd. At that point, in order to expedite further production increases, the development partners – which had budgeted a minimum of US$8 billion for getting the field to its plateau production target of 230,000 bpd – sent a call for tender to engineering companies and contractors to bid for an estimated US$100 million engineering, procurement and construction contract to build the Gharraf ‘Light Oil Transport System’. 

This allowed for around 300,000 bpd of output to be carried from the two fields of Gharraf and Badra. Phase one of the project – under the jurisdiction of Petronas and Japex – consisted of the construction of a 92 kilometre pipeline moving oil from the central processing facility of the Badra field (managed by Russia’s Gazprom Neft) - the Gharraf-Badra tie-in area (GBTA) - to a storage depot at Nasiriya, which would then be forwarded to the Al Fao export terminal in Basra. The Russians completed their part of this in March 2014, enabling the second phase pipeline – catering for oil from the Yamama reservoir of the Gharraf field - to come on-stream at the end of 2016/beginning of 2017. By this time, Gharraf was producing around 150,000 bpd, having seen output rise from 60,000 bpd at the end of 2013 to 100,000 bpd in 2014. Subsequently, production at Gharraf rose again and then dipped, due to delays in drilling work.

By Simon Watkins for Oilprice.com

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