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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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Why Iran And China Are Pushing Iraq To Boost Oil Production

There are four key reasons why Iraq is increasing the pace of development on a number of its major oil fields right now. First, it needs the money; second, hitting its own output targets will allow it to challenge Saudi Arabia in Eastern markets; third, it will allow Iran to increase its own oil exports; and, fourth, it is what China wants. Last week’s announcement from Iraq’s Oil Ministry that its Gharraf oilfield has started preparatory works for restarting output – so quickly after the announcement that a major drilling progamme will soon begin on the Nasiriyah site – fits into all of these categories.  Just like those of its neighbour, Iran – which continues to wield decisive power over it through its military and political proxies – Iraq’s finances are in a very poor state indeed. Only a month or so ago, Iraq’s economic parliamentary committee suggested that international oil companies be paid with crude oil rather than cash or cash-equivalents as a means to reduce near-term state expenditure. It also proposed delaying payments of foreign debt, introducing salary cuts of 60 per cent for various state sector employees, and reducing all non-essential spending. The negative effects on oil pricing that resulted from Saudi Arabia’s latest oil price war and outbreak of the COVID-19 pandemic have been compounded by the never-ending squabbling over the ‘oil-for-budget payments’ arrangement with the semi-autonomous region of Kurdistan in northern Iraq. 

The previous OPEC+ production deal has made the situation worse for the country, which still has around 90 per cent of its government revenues come from oil sales. Overall in June, Iraq’s oil production (including output from the Kurdish region) fell by 9 per cent, averaging 3.698 million bpd against 4.068 million bpd in May. Although this is more than Iraq’s quota under the OPEC+ deal (3.592 million bpd), it is still the lowest level for five years. Worse still, Iraq has pledged to make up this production overshoot by cutting back output even more this month, and in August and September, which will translate into even less oil revenues. 

The timing for this could not be worse as, in the next few weeks, Iraq’s new Prime Minister, Mustafa al-Kadhimi, will need to come up with at least IQD12 trillion (US$10 billion) just to pay the next two months salaries of more than four million employees, retirees, state beneficiaries, and the food relief for low-income families, which together constitute the majority of households in Iraq. It is believed in Iraqi government circles that any failure to pay any of these obligations could result in the sort of widespread protests that occurred at the end of last year. 

Related: Could Rising US-China Tensions Change Global Energy Markets?
The intention, then, is to restart production at Gharraf as soon as the preparatory works have been completed. This is currently being worked on by the principal field developer, Malaysia’s Petronas (45 per cent stake), following a suspension in production on 16 March due to the COVID-19 outbreak. Despite this, Japex (30 per cent stake), took one million barrels of Basrah Light at the end of March, albeit a substantial reduction from the two million barrels it loaded in December. The remaining 25 per cent stake in Gharraf is held by Iraq’s own North Oil Company. 

One of two major oil fields in southern Iraq’s ThiQar Province (the other being Nasiriyah), Gharraf’s progress had not been hampered by the usual shenanigans (endemic corruption, sectarianist conflict, lack of real governance) that have held back the development of Iraq’s oil industry for years. Instead, under the singular drive of its two main foreign developers (Petronas and Japex), it was developed after the second round of oil field licensing in December 2009 with a degree of urgency in line with the two firms’ respective governments’ energy security needs. With the deal offering a remuneration fee to the firms of US$1.49 per barrel, after an initial output target of 35,000 barrels per day (bpd) was achieved, the two firms’ determination to press forward on the 1 billion barrel of oil reserves field was in evidence from day one. 

Having placated the local tribesmen who refused to cede their ancestral lands peacefully, preparatory work was able to start on the field. The first phase saw the swift construction of 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. The construction of pumping stations, access roads and spillways, fencing, high-density polyethylene piping, a 15 megawatt captive power plant, and the installation of approximately 1,533 helical piling to support the above-ground pipeline were also completed very soon after the dispute had been settled. This allowed for drilling to begin in September 2011, initially using two rigs, with the objective being to drill 150 wells in the first phase of development. 

Related: Oil Rallies On Biggest Crude Inventory Draw Since 2019

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 US$8 billion for the field to reach its plateau production target of 230,000 bpd by 2017 – sent a call for tender to engineering companies to bid for a US$100 million engineering, procurement and construction contract to build the Gharraf ‘Light Oil Transport System’ (LOTS). This would allow 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 management 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 Nasiriyah, 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 has dipped (to an average of around 93,000 bpd in January) due to delays in drilling work, but Petronas and Japex have stated their intentions to raise output to the original 230,000 bpd target, albeit now by the end of 2020.

The more oil produced from Gharraf, the better for Iraq’s finances, and also for Iran’s. As highlighted by OilPrice.com, by far the most undetectable method of allowing Iranian oil to make its way to any destination in the world, regardless of U.S. sanctions, is to either blend it in with Iraqi oil or simply just to label it as Iraqi oil. Not only does Iraq share an extremely long and extremely porous border with Iran but the two countries actually share many oilfields, with the oil on the Iraqi side of the border being drilled from exactly the same reservoirs as the oil being drilled on the Iranian side. “Even if the Americans actually stationed people at every single drilling rig in every single shared field in Iraq they wouldn’t be able to tell if the oil coming out it was from the Iraq side or the Iranian side,” a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week.  

This means that the more these shared fields are developed by Iraq, the better for Iran, and also means that Iran’s ongoing efforts to drive a wedge between Saudi Arabia and the U.S. can advance at a greater pace. “It is absolutely a core strategy of China, Russia, and Iran, to end the longstanding relationship between the U.S. and Saudi [analysed in my latest book on the global oil market] because, without U.S. support, Saudi will be the second power in the Middle East, after Iran,” said the Iran source. “After the Saudis’ latest oil war, its relationship with the U.S. has never been so in danger of collapsing, so in addition to keeping the military pressure on Saudi via the Houthi threat Iran is looking to replace Saudi oil sales in the East, especially China, with its own,” he added. “And, as we have seen in recent days, China’s 25-year deal with Iran stacks the odds in Iran’s favour in enabling Tehran to achieve this,” he concluded.

By Simon Watkins for Oilprice.com

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Leave a comment
  • Nader Habibi on July 31 2020 said:
    Thank you for this well informed article. I wish you had offered more details about exactly how Iran would benefit from Iraq extracting more crude from their joint oil field. Generally, when two countries share a common oil or natural gas field they are competing against each other and each side tries to extract as much as possible at the expense of the other. Then, it is hard to imagine that Iraq and Iran can agree on sharing the revenue of Iraq's oil exports from a common field. Furthermore, it is next to impossible for Iraq to maintain a secret agreement of such a magnitude.
    Furthermore, China is only mentioned in the last paragraph without a clear explanation or solid evidence of how China is encouraging Iraq to boost its oil production. The speculations about China's desire to see Iran replace Saudi Arabia as the leading supplier of crude oil to Asia also needs to be substantiated. I regularly study China's relations with Iran and Saudi Arabia. In my opinion China is still interested in a balanced relationship rather than taking side with Iran. China's behavior might change in the future if it is dragged into an unwanted cold-war with the US.
  • CharlesBelcher on August 02 2020 said:
    So, Qatar is working to cut Iraq production and also greatly expand its gas fields with the intent of flooding the globe with cheap gas.... does any of this makes sense?

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