Iraq’s Endemic Corruption Costs It Another Massive Oil and Gas Opportunity

• British supermajor Shell last week exited Iraq’s potentially game-changing US$11-billion Nebras Petrochemical Project.
• Shell signed the NPP deal, having agreed to the original memorandum of understanding back in 2012.
• The key problem stopping Iraq from fulfilling its potential in oil, gas, and petrochemicals, remains the widespread corruption in its oil and gas sector, among others,

There is no practical impediment to Iraq becoming a world-leading exporter of petrochemicals, given its huge oil and gas resources. It holds an estimated 145 billion barrels of proven crude oil reserves - around 9 percent of world’s total – although this is a very conservative estimate. The International Energy Agency’s 2012 analysis highlighted potentially around 232 billion barrels of recoverable crude and natural gas liquids, as analysed in depth in my new book on the new global oil market order. Similarly, Iraq’s proven natural gas reserves total around 131 trillion cubic feet - the 12th largest in the world - but there may be a lot more. The rate of exploration for non-associated (with oil drilling) gas reserves has not matched that for oil and the associated gas resources it might have may also be massive but also remain largely untapped. However, the key problem stopping Iraq from fulfilling its potential in oil, gas, and petrochemicals, remains the widespread corruption in its oil and gas sector, among others. The exit of British supermajor Shell last week from Iraq’s potentially game-changing US$11-billion Nebras Petrochemical Project (NPP) looks to be case in point.

Back in January 2015 when Shell signed the NPP deal, having agreed the original memorandum of understanding back in 2012, hopes were high on both sides for the future of the Project. For Shell, it would offer the opportunity to build out its then-upstream operations in Majnoon and West Qurna 1 into a flagship downstream capability. These offered oil and associated gas stocks to add to the potential feedstock that would come from Shell’s 44 percent stake in the US$17 billion 25-year Basra Gas Company (BGC) project. The BGC was designed to aggregate gas from fields in the south including West Qurna 1, Zubair, and Rumaila. Shell’s design plans for Nebras were for a project that could produce at least 1.8 million metric tonnes per year (mtpa) of various petrochemicals. This would make it Iraq's first major petrochemicals project since the early 1990s and one of only four major petrochemicals complexes across the entire country at that point. The others - Khor al-Zubair in the south, Musayeb near Baghdad, and the Baiji refinery complex in the north – were all operated by Iraq’s State Company for Petrochemical Industries. Related: India Raises Its Long-Term Power Demand Forecast

For the Iraq government at that time, finances looked even more perilous than usual, following the Saudi Arabia-led 2014-2016 Oil Price War aimed at destroying, or at least severely disabling, the then-nascent U.S. shale oil sector, as also analysed in depth in my new book. This War had pushed oil down below the US$50 per barrel (pb) level and had left Iraq facing a government budget deficit of over 12 percent of its gross domestic product (GDP), an annual rate of GDP growth near to zero, and dangerously rising inflation. Worse still, the government estimated that dues of US$18 billion would accrue to international oil companies (IOCs) over the course of the year, adding to the US$9 billion in outstanding arrears from 2014. Consequently, a new – and crucially, value-added - stream of income to be made not from basic oil exports but from the value-added petrochemicals sector looked extremely appealing to the government in Baghdad. “Also, the location in the southern oil hub of Basra was superb, Shell had all of the technology, equipment and people needed to do it, and in one leap it would push Iraq into the major league of petrochemicals producers in the Middle East,” a senior source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com at the time. Indeed, the then-Industry Minister, Nasser al-Esawi, told a news conference that the Shell-run Nebras petrochemical complex would come online within five to six years and would make his country the largest petrochemical producer in the Middle East.

The trouble for Shell on the Nebras project began almost as soon as it tried to get construction moving, according to the Iraq source. “Commission payments are very common in the Middle East, but they can be seen as bribery in the West, particularly when they relate to matters like getting work permits granted, visa applications approved, or equipment deliveries made, and there were also commission payments being asked for by senior government officials, which might look even more like plain bribery,” said the source. “For example, on its oil field developments Shell was being paid US$1.39 per barrel extracted for Majnoon and US$1.90 for West Qurna 1 but was being asked for commission payments from government officials that would have left it with payments of just US$1.25 per barrel for Majnoon and US$1.70 per barrel for West Qurna 1,” he added. “When you’re working on such thin margins anyway, even a few cents make a big difference,” he underlined. “For the Nebras [petrochemical project], Shell would have to pay out around US$4 billion in these commission payments and even then it wouldn’t know whether it was dealing with the people who could actually allow the project to progress at all,” he told OilPrice.com. “Exactly the same sort of thing happened to ExxonMobil at the time on its Common Seawater Supply Project, which is why it was reluctant to move ahead with that project either,” he concluded.

The independent non-governmental organisation, Transparency International, in its ‘Corruption Perceptions Index’ of that period ranked Iraq joint 168th out of 180 countries for being the most corrupt (with 180 being the worst). It was described as: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” It added: “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.” It concluded: “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.”

This said, as also analysed in depth in my new book on the new global oil market order, there is a massive business opportunity in developing Iraq’s petrochemicals sector. As highlighted exclusively to OilPrice.com back in 2018 by a senior figure in one of the Russian companies that was looking to take over the Nebras project: “Shell has done a really good job so far with Basra Gas Company project, but the country needs to put into action its plans to develop a second gas hub away from Basra.” He added: “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 and that would give sufficient volume for a major petrochemicals plant to be viable.” By 2019/2020, the BGC had reached a peak production rate of over this required level (1.035 billion standard cubic feet per day to be exact) - the highest in Iraq’s history.

Ethane should be the initial feedstock for Iraq’s new petrochemicals plants, including Nebras, the Russian source added at the time - not naphtha, as Iraq’s Oil Ministry has often suggested. “Ethane should be used as 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 percent and slightly over] 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 petrochemicals industry,” he underlined. “Later, 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 petrochemicals products in the world - is in the range of 1.0 to 1.5 million tons of ethylene production, the source added, and a 1.0 million ton per year ethylene facility would require a supply of roughly 1.3 million tons per year of ethane. “This would need to be a sustainable and reliable supply for at least 20 to 25 years and, overall, to build out all of the necessary parts for a functioning world-class petrochemicals sector in Iraq would require around US$40-50 billion,” he concluded.

By Simon Watkins for Oilprice.com

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