The idea of developing the 4.36 billion-barrel Nasiriyah oilfield in southern Iraq’s Dhi Qar province has been seriously mooted by the each of the rapid succession of governments in Iraq since it was discovered by the Iraq National Oil Company in 1975. These plans have variously been for the standalone development of the oil field or its development within the broader scope of the ‘Nasiriyah Integrated Project’ (NIP) that also includes the corollary construction of a 300,000 barrels per day (bpd) refinery. All major plans stalled in one way or another but last week’s signing of an 18-month contract to international oil and gas well drilling company Weatherford International with the Iraqi Drilling Company (IDC) to provide services and project management for the drilling and completion of 20 wells in the Nasiriyah field signals that a sustained and substantial development of Iraq’s hidden hydrocarbons gem may finally be underway.
The original plans to develop Nassiriya 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 eventually came properly on-stream in 2009 and was listed in the 2009-2010 fast-track development plan, which aimed to raise the field’s output to at least 50,000 bpd in the first phase. At that point – in H109 – Italy’s ENI, Japan’s Nippon Oil, the U.S.’s Chevron, and Spain’s Repsol submitted bids to develop the field on an engineering procurement construction (EPC) contract basis. At that point, the Japanese consortium led by Nippon Oil, and also comprising Inpex, and JGC Corporation, looked set to win the contract before negotiations broke down again.
In 2014, a serious push was made to resuscitate the development of the Nasiriyah field within the broader scope of the NIP. 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, which, although he was also Shia, 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 last 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.”
In terms of the bidding itself, changes to the original widely unpopular technical service contract were made that were aimed at addressing many of the concerns of international investors about the previous drafts, which many saw as falling short of the type of production sharing contracts (PSC) that they preferred. Unlike the previous contract model, the new one offered investors a share in project revenues. However, this share would only be paid under the new contract model when production began, and the Oil Ministry would pay recovery costs from the date of commencement of work, which differed to the previous contract model in which the costs were only paid when the contractor raised production by 10 percent. Related: Is Nuclear Energy Making A Pandemic Comeback?
Nonetheless, investors would still have to pay 35 percent taxes on the profit they made from the Nassiriya project, the same amount as in previous deals. At that stage 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 from the previous bidding 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 also been augmented by India’s Oil and Natural Gas Corp and its 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 political corruption and deeply ingrained sectarianism, this optimism proved ill-founded. As summarised by the independent international non-governmental organization, Transparency International (TI), in its ‘Corruption Perceptions Index’, Iraq demonstrates: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery.” Although acknowledging that the country’s anti-corruption initiatives and framework have expanded since 2005, TI added that these initiatives still fail to provide a strong and comprehensive integrity system. “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption,” it concluded.
In 2017, though – again, predictably enough, given what the country is doing across all Middle Eastern countries (and elsewhere) that are essential in its ‘One Belt, One Road’ mega-project – China stepped forward with a handy solution to Iraq’s problems. At that point, China’s need to safeguard its energy security had become all the more acute, with domestic oil production for mature Chinese fields falling eight percent year-on-year in the previous year. This prompted Beijing in 2017 to relax its directive to all state-owned hydrocarbons companies of the last two years to cut budgets. From the Iraqi side, there was a new-found 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. Additionally, achieving the 5.4-6.0 million bpd output target by the end of 2018 that was still in play – although it had been recently revised down from 8.4-9.0 million bpd - and to at least 9 million bpd by the end of 2020, remained a core component of Iraq’s overall economic recovery strategy.
At the beginning of August of that year, then, China’s Sinopec and PetroChina proposed a deal that would see the NIP being rolled out as part of the broader ‘Integrated South Project’ (ISP). The ISP (later rebranded as the ‘South Iraq Integrated Project’) 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), that was to have been led by ExxonMobil. “The Chinese said that they would spend US$9 billion on the refinery and the first phase of their developing Nasiriyah but as, 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, so the initial reaction from the Oil Ministry was to decline the offer, and say that the development should only cost around US$4 billion, which the Chinese in turn flatly turned down,” a source who works closely with Iraq’s Oil Ministry told OilPrice.com last week. Related: Is This The World’s Riskiest Oil Frontier?
The Chinese had other demands that grated on Iraq at that time as well. “In line with the US$9 billion figure, the Chinese said that it wanted its firms to receive their costs back in a much shorter timeframe than most other similar projects, which meant that they were effectively asking for a per barrel remuneration fee at a 15 percent premium to the highest maximum fee being paid to any company in Iraq for a regular crude oil producing field, which was US$6 per barrel to PetroChina for al-Ahdab,” said the source. “This would mean that the Chinese would get around US$6.90 per barrel, more than [Angola’s] Sonangol for its heavy oil extraction at Najmah [US$6 per barrel] and Qairayah [US$5 per barrel] and would dwarf the US$1.49 per barrel that [Malaysia’s] Petronas was getting for the same type of field of Gharraf,” he added. “Additionally, the Chinese were demanding that it was given [Iraqi] dinar-denominated government-backed bonds for the entire amount [US$9 billion] that could be cashed in if the development did not start to generate large amounts of oil quickly,” the source told OilPrice.com.
Given the new contract for Weatherford International, working alongside the IDC, it may be that new Iraq Prime Minister, Mustafa al-Kadhimi, is continuing to try to walk a tightrope between appeasing the U.S. and Iran. “The U.S. has been a major financial backer for Iraq since the removal of Saddam Hussein from power in 2003 and some of its companies are the most able to complete certain key projects properly, particularly ExxonMobil with the CSSP,” the source said. “On the other side, though, [al-] Kadhimi needed the support of the Fateh Coalition to be made prime minister, and Fateh has very close links to [Iran’s] IRGC [Islamic Revolutionary Guard Corps], and Iran wields huge power in southern Iraq through its political and military proxies.” With this new contract, then, he concluded, Iraq appears to be signaling to the U.S. that Nasiriya is up for grabs again – along with the other stalled oil projects – and that, if necessary, China is already lined up to step in, adding another Middle Eastern country to the power bloc that it is gradually accumulating together with firm ally Russia.
By Simon Watkins for Oilprice.com
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