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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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Iraq Moves To Exploit Its Massive Natural Gas Reserves

Official estimates are that Iraq’s proven reserves of conventional natural gas amount to at least 3.5 trillion cubic meters (tcm), or about 1.5 percent of the world’s total, placing Iraq 13th among global reserve-holders, with around three-quarters of this figure comprising associated gas that is found in the same reservoirs as oil. The International Energy Agency, though, estimates that ultimately recoverable resources will be considerably larger, at 8.0 tcm, of which around 30 percent is thought to be in the form of non-associated gas. Despite these huge potential gas resources, Iraq has made little substantial progress over the years on developing this potential either for associated or non-associated gas, mainly flaring the former and overlooking the latter. Last week, though, a heads-of-agreement deal was announced with French oil and gas giant, Total, to jointly work on four major projects that include developing the associated gas sector. 

Part of the multi-billion dollar deal, according to Iraq’s Oil Minister, Ihsan Abul Jabbar, will involve the building of a facility to produce natural gas at the five southern Iraq oilfields of West Qurna 2, Majnoon, Ratawi, Tuba, and Luhais, and this is expected to produce at least 300 million standard cubic feet of gas per day (mscf/d) and double that after the second phase of development. The agreement between Iraq and Total follows the signing of a memorandum of understanding on 27 January to develop various large-scale projects, including associated gas developments in Ratawi in the south, Diyala in the east, and Anbar in the northeast. Total already has ongoing experience of working across Iraq, holding a 22.5 percent stake in the Halfaya oil field in Missan province in the south and an 18 percent stake in the Sarsang exploration block in the semi-autonomous region of Kurdistan in the north. 

Related Video: Saudi Arabia Goes All-In on Hydrogen

The other key elements in this heads-of-agreement deal will be Total’s involvement in the construction and operation of a 1,000-megawatt solar energy plant and a project that will utilize redirected and reprocessed seawater to boost the pressure at oil fields to counter declining output yields. In this latter regard, according to Iraq’s Oil Ministry, Total will focus on treating around 2.5 million barrels of seawater per day and focusing these efforts on boosting output from Ratawi, and the Zubair, West Qurna 2, Majnoon, and Rumaila. This would appear to be an attempt by Total to gauge whether or not to take over the entire Common Seawater Supply Project (CSSP). 

The CSSP – which involves exactly the same methodology as the project for which Total has tentatively signed up – has long been regarded as unwieldy, expensive, and prone to extreme reputational risk for any company taking it over due to the endemic corruption in the country. In its entirety, the CSSP is intended to take and treat seawater from the Persian Gulf and then transport it via pipelines to oil production facilities for the purposes of maintaining pressure in oil reservoirs to optimize the longevity and output of fields. The CSSP was intended to be rolled out initially to supply around six million bpd of water – not just the 2.5 million bpd in Total’s deal - to at least five southern Basra fields and one in Maysan Province, and then built out for use in further fields. Whilst the CSSP has been delayed for many years – in turns involving the participation of the U.S.’s ExxonMobil or the China National Petroleum Corporation (or related China entity) - Saudi Aramco’s 2 million bpd expansion of the existing Qurayyah Seawater Plant facility took just four years from the awarding of the front-end engineering, procurement, and design contract – in May 2005 – to the time that water first began to flow in early 2009. 

The prospects for Total’s intended associated gas project appear to be better than for its involvement in any stage of the CSSP, though. To begin with, there is a clear economic imperative for Iraq in that currently this vast resource of associated gas is simply burnt off, akin to burning cash. It could be monetized instead into gas exports or used to generate power in Iraq’s chronically underpowered grid, which would also mean that precious crude oil would not have to be used to generate power and instead could be exported. This would go some way to alleviating the severity of the cash crunches that relatively new Prime Minister, Mustafa al-Kadhimi, has faced since taking office. 

The most notable recent example of this was during the summer when he required IQD12 trillion (US$10 billion) just to pay the next two months salaries of more than four million employees, state beneficiaries, and the food relief for low-income families, which forced him to go to Washington to plead for assistance. These groups constitute the majority of households in Iraq and it is believed in Iraqi government circles that any failure to pay any of these obligations could result in the sort of widespread protests, bloodshed, and deaths that occur periodically in the country.

Related: Goldman Sachs Sees Large Oil Demand Rebound This Summer

This ties into the second imperative for Iraq to push ahead with the development of its associated gas sector, which is that its failure to do so thus far – and the power shortfalls that this threatens – has left it reliant on neighboring Iran to send it electricity and gas for its power grid. This, in turn, has been the source of continued concern from the U.S., which grants Iraq waivers to continue to export these two products from the sanctioned Iran but which shows its displeasure with Iraq over the enduring closeness of its relationship with Iran by providing very short waiver periods from time to time. It also shows its displeasure by suspending planned major investments by U.S. companies into Iraq, depending on how much assistance Iraq gives to Iran’s anti-U.S. activities across the region in any period leading up to the granting of a new waiver. 

As it stands, Iraq still ranks as one of the worst offenders for flaring associated gas in the world, after Russia, burning off around 16 billion cubic meters last year, despite it joining in 2017 the United Nations and World Bank ‘Zero Routine Flaring’ initiative aimed at ending this type of routine gas flaring by 2030. That said, it has made some progress in developing gas resources, most notably in 2019/2020 when the US$17 billion 25-year Basra Gas Company (BGC) project with Royal Dutch Shell reached a peak production rate of 1035 mscf/d, the highest in Iraq’s history and sufficient gas to generate approximately 3.5 gigawatts of electricity - enough to power three million homes. The BGC - initially focussed on capturing gas from the fields of Rumaila, West Qurna 1, and Zubair, in the first instance - is also responsible for currently supplying around 70 percent of Iraq’s liquefied petroleum gas (LPG) and for enhancing Iraq’s export capabilities, which helped the country to become a net exporter of LPG from 2017.

Successfully capturing associated gas rather than flaring it will also allow Iraq to revive the also long-stalled US$11-billion Nebras petrochemicals project with Shell, which if it went ahead in a correct linear fashion could be completed within five years and would generate estimated profits of up to US$100 billion for Iraq within its 35-year initial contract period. The original design plans for Nebras – formulated between Shell and the Iraq Oil Ministry and Ministry of Industry and Minerals - were for a project that could produce at least 1.8 million metric tonnes per year (mtpy) of various petrochemicals. This would make it Iraq’s first major petrochemicals project since the early 1990s and one of only four major petchem 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 operated by Iraq’s State Company for Petrochemical Industries. From 2012, though, the development of Iraq’s hydrocarbons chain stalled in the upstream sector, with little impetus on the next stage that is critical for both the petrochemical and refining sectors - a focus on the midstream to attract sufficient capital with the strategic objective of developing an integrated master gas system. Further delays arose from disagreements between the Oil Ministry and Shell over whether or not to calculate feedstock prices for the plant on a different basis to vanilla market pricing, according to Iraq’s Jabbar.

By Simon Watkins for Oilprice.com

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