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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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Can Iraq Become A World Class Petrochemicals Player?

Theoretically, there is no reason why Iraq cannot become one of the leading producers of petrochemicals in the world, given its tremendous reserves of oil and gas. Finally, with a relatively low oil price complex and its crude exports falling in October, Iraq appears to be making some advances on moving its long-stalled push into the petchems sector forward. Earlier this week, Iraq’s Ministry of Oil (MoO) made public that Baghdad is to go ahead with a range of projects that will add around 790,000 barrels per day (bpd) of refining capacity to the current nameplate capacity of around 1 million bpd, although its effective capacity is around 650,000 bpd. This particular expansion would come from both adding a new refining unit at the Karbala facility and new facilities at Kirkuk (capacity 70,000 bpd), Wasit (140,000 bpd), Nasiriyah (140,000 bpd), Basra (140,000 bpd), and Al Fao (300,000 bpd). However, there are still some major stumbling blocks in the road to Iraq’s becoming a top-tier power in the global petchems sector, according to various sources spoken to by OilPrice.com last week.

Such advances belie the major problems that Iraq has yet to address in building out its petchems infrastructure so that it can effect any meaningful foray into the global petchems market, though. These are one of the reasons why oil and petchems supermajor, Royal Dutch Shell (Shell), has not yet made any substantive progress on what was to have been Iraq’s flagship petchems project, the US$11 billion Nebras petrochemicals plant in the southern oil hub of Basra. The deal to build this was signed way back in January 2015, with the original memorandum of understanding pre-dating that by another three years. Back then, hopes were high on both sides for the future of Nebras, with Shell releasing a statement that Iraq’s cabinet had authorised the Nebras project and that the company would work ‘jointly with the ministries of oil and transport to develop a joint investment model for a world-scale petrochemical cracker and derivative complex in the south of Iraq.” Related: Tech Breakthrough Could Spark A Geothermal Energy Boom

For Shell, the Nebras project offers the opportunity to build out its existing upstream operations in Majnoon and West Qurna 1 into a landmark downstream capability. The fields offer oil and associated gas stocks to add to the potential feedstock that come from Shell’s 44% stake in the US$17 billion 25-year Basra Gas Company (BGC) project. The BGC is designed to aggregate gas from fields in the south, including West Qurna 1, Zubair, and Rumaila. The design plans for Nebras were for a project that could produce at least 1.8 million metric tonnes per year (mtpa) of various petrochemicals, making it Iraq’s first major petrochemicals project since the early 1990s and one of only four major petchems complexes across the entire country. The others - Khor al-Zubair in the south, Musayeb near Baghdad, and the Baiji refinery complex in the north – are all basically operated by Iraq’s State Company for Petrochemical Industries.

“Shell was and remains a perfect partner for Iraq to move its hydrocarbons business chain beyond just the upstream, mainly low-value-added crude oil, where it is now largely stalled, into the next stage that’s critical for both the added-value petrochemical and refining sectors,” the head of petrochemicals projects for a major international oil company told OilPrice.com. “In particular, there needs to be a focus on the midstream to attract sufficient capital with the strategic objective of developing an integrated master gas system,” he said. “Shell has done a really good job so far with the BGC but the country needs to put into action its plans to develop a second gas hub away from Basra that would get the gas volumes up to an average of one billion standard cubic feet per day so that the ethane can be extracted on a sustainable and reliable basis that would give sufficient volume for a major petchems plant to be viable,” he added.  Related: This Texas Oil Town Sees Strongest Salary Growth In US

Ethane should be the initial feedstock for Iraq’s first few plants in the same way that it was in the development of Saudi Arabia’s master gas system that captured associated gas, which was then fractionated and supplied as primary feedstock to the flagship Jubail Industrial City, he underlined. “The highest concentration of ethane [up to 10% plus] is usually found in associated gas streams, which Iraq has a lot of, and processing ethane produces ethylene with few by-products [mainly fuel gas] to process and manage,” he told OilPrice.com. “This reduces the capital required for construction and minimises the complexity of the logistics and distribution requirements, which will be important factors in Iraq’s early stage build-out of a viable petchems industry, but as the industry and corresponding infrastructure grows, heavier feed streams can be utilised, as happened with the use of propane, butane and naphtha in Jubail,” he said. “A world-scale facility for ethylene – one of the most in-demand petchems products in the world, especially from China - is in the range of 1.0 to 1.5 million tons of ethylene production and a 1.0 million ton per year ethylene facility would require a supply of roughly 1.3 million tons per year of ethane, and this would need to be a sustainable and reliable supply for at least 20 to 25 years,” he added. “To build out all of the necessary parts for a functioning world-class petchems sector in Iraq would require around US$40-50 billion but, given the commitment of major global players in Iraq, this is not a problem,” he underlined.

The problem in this equation – and the real reason for Shell’s reluctance to go ahead with the Nebras project, according to a senior source who works closely with Iraq’s MoO – is corruption. Corruption in Iraq is so broad- and deep-reaching that it has now become almost passé to mention it, however for Shell (and all Western international oil companies) it was and remains the principal reason why Shell is still - according to the MoO – ‘in the process of evaluating the viability of the Nebras petrochemicals complex’, rather than having already made progress. It is also the key reason why U.S. supergiant ExxonMobil has so long delayed its engagement in the Common Seawater Supply Project.

“Shell would be looking at paying out bribes of around 30% of the total cost for Nebras on top of the US$11 billion headline figure, which is a major consideration both from an economic and reputational perspective,” said the Iraq source. “Even if it decided that it was okay to do that there would be the massive risk to its reputation if such an arrangement was discovered by the media or leaked to the media by one or other of Iraq’s political groupings looking to discredit whatever government was in control at the time,” he concluded.

By Simon Watkins

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