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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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How The U.S. Lost Control Of This Giant Iraqi Oilfield

Just ahead of the August 2020 visit to Washington of Iraq Prime Minister, Mustafa al- Kadhimi, promised then-U.S. President, Donald Trump, that he would allow a raft of in-principle agreed contracts with U.S. companies to finally go ahead, with a substantial presence of U.S. ‘security personnel’ on the ground to safeguard these interests. The express intention of this initiative by the U.S. was to draw a line in relentless advance of China and Russia into what had been its heartlands of influence in the central Middle East. For Iraq, the promise was made simply to expedite its waiver from the U.S. to continue to import gas and power from Iran and to avoid Washington cutting off financial assistance to it and introducing threatened sanctions against Baghdad. The ratification last week of a US$480 million deal for U.S. oilfield services giant, Schlumberger, to drill 96 horizontal and diagonal oil wells at the supergiant West Qurna 1 field fits precisely into this mould of perennial game-playing by Iraq with the U.S. and China, as does the news that the U.S.’s Halliburton is in talks over bidding for ExxonMobil’s long-troublesome stake in the field.

Located around 65 kilometres from southern Iraq’s principal oil and export hub of Basra, West Qurna 1 has a considerable portion of the estimated 43 billion barrels of recoverable reserves held in the entire supergiant West Qurna field. Originally West Qurna 1 was thought to have around 9 billion barrels of these reserves, but earlier this year Iraq’s Oil Ministry said it has plans to boost the field’s crude oil production capacity to more than 700,000 barrels per day (bpd) over the next five years on the basis that it has recoverable reserves of more than 20 billion barrels. Although the field is currently producing only around 380,000 bpd, the Oil Ministry says it current capacity is at least 500,000 bpd, and the new wells to be drilled by Schlumberger are intended to add around 200,000 bpd to this. This said, although West Qurna 1 – like many of Iraq’s oil fields - benefits from the lowest lifting costs in the world, around US$1-2 per barrel (pb) operating cost (excluding capital expenditure), on a par with the best fields in Saudi Arabia and Iran, it still suffers from a lack of sufficient water-injection to boost reservoir pressure. Moves to redress the falling pressure in the reservoir with the implementation of the Common Seawater Supply Project (CSSP) have so far come to naught, with arguably the only company in the world capable of properly completing it – ExxonMobil – apparently no longer interested in doing so, nor indeed continuing with its 32.7 per cent stake in West Qurna 1 either.

ExxonMobil’s unwillingness to continue on the field goes to the very heart of not just why so many major Western oil companies have done the same in recent months but also why, specifically, any idea the U.S. has about using the Schlumberger contract in West Qurna 1 to re-assert its influence across the oil fields of Iraq is ill-founded. Over and above the pervasive corruption across Iraq’s hydrocarbons carbons that has been well-documented by OilPrice.com, the fact remains that China has been expanding its influence across the very same fields ever since the U.S. signalled that it wanted to reduce its role in the Middle East (and elsewhere, such as Afghanistan) in order to avoid fighting ‘endless wars’ in the region. Whilst it was dealing with the volatile Trump, and in the midst of a highly sensitive Trade War with Washington, Beijing sought to achieve this by avoiding headline-grabbing large-scale deals for exploration and development contracts for big oil fields and instead secured multiple ‘contract-only’ awards for a series of obscure Chinese engineering and services firms, many of which no one had ever heard of before.

A case in point is on West Qurna 1 itself, with China already dominant at the site, not only through the 32.7 per cent stake held by PetroChina - the listed arm of China National Petroleum Corporation (CNPC) - but also through the gradual acquisition of a range of huge supposed ‘contract-only’ awards made to Chinese companies for work on the field. These most recently included the US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production to the China Petroleum Engineering & Construction Corp (CPECC). Not only has this put China as the key player on West Qurna 1 – so alienating ExxonMobil from both the field development and, even more importantly from going ahead with the crucial CSSP – but it has also allowed it to make other demands from Iraq.

Following ExxonMobil’s withdrawal from the CSSP, CNPC was the only player left. The Iraqi Oil Ministry knew perfectly well that it did not have the required technology, expertise, or engineering capabilities required at that time to complete the project to the top specifications. However, it was assured by Beijing that CNPC was in the process of ‘acquiring and updating’ all of the additional elements that it was lacking to complete the CSSP to the required standard ‘over time’, a senior oil and gas industry source who works closely with the Ministry told OilPrice.com. “What the Chinese wanted to do – and what they have now achieved with Exxon’s effective withdrawal from West Qurna [1] and the CSSP – was to gain first refusal on all other major oil and gas fields in Iraq, which was the agreement at the time that the CSSP contract was announced,” he said.

This is precisely what has happened, with the same sort of ‘contract-only’ award (‘drilling-only contract’ in this case) for Iraq’s supergiant Majnoon oil field to another hitherto unheard-of Chinese firm. The Hilong Oil Service & Engineering Company was engaged to drill 80 wells at a cost of US$54 million, while another contract at the same time was awarded to the Iraq Drilling Company to drill 43 wells at a cost of US$255 million. In reality, said the Iraq source, it is China that is in charge of both, having given the funds required to the Iraq Drilling Company as a ‘fee’ for its own participation. Also located very close to Basra – around 60 kilometres to the north-east - the supergiant Majnoon oilfield is one of the world’s largest, holding an estimated 38 billion barrels of oil in place. It is currently producing around 240,000 bpd. Longer term, though, the original production tar­get figures for then-Shell-led consortium still stand: the first production target of 175,000 bpd (already reached), and the plateau production for the site of 1.8 million bpd at some point in the 2030s.  

By Simon Watkins for Oilprice.com

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