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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 Iraq Isn’t Producing 10 Million Barrels Per Day Yet

Despite its huge oil resources, Iraq’s practical readiness to hit its 7 million barrels per day (bpf) oil production target (by 2025) came into question again last week, with statements from the developers of two of its major fields – BP in Rumaila, and Japan Petroleum Exploration (Japex) in Gharraf – that achieving higher output from their respective developments is not as straightforward as it might appear. Although Iraq could be producing at least 9 million bpd with ease by now – even 12 million bpd – if it were not for the investment and corollary infrastructure constraints that have resulted from the endemic corruption across the country, its ability to attain the 7 million bpd target looks also looks far from certain in the current circumstances.  In the case of Rumaila - which lies around 30 kilometres north of Iraq’s southern border with Kuwait and which, together with Kirkuk, has produced around 80 per cent of Iraq’s cumulative oil production to date - BP is currently in talks with Iraq’s oil ministry over plans to push production up to 2.1 million bpd from the current 1.4 million bpd. With an estimated 17 billion barrels in proven reserves, the current output of 1.4 million bpd is nowhere near its optimum production level, and Rumaila is a prime example of a field for which even a relatively small investment could yield significant increases in crude oil output. However, according to a comment last week from BP’s country head, Zaid Elyaseri: “There is an ongoing discussion with the ministry of oil and the Basra Oil Co. on how to proceed [it has asked all international oil companies (IOCs) to cut their capex by 30 per cent this year], given the low oil price environment and the reduction in the activity set that the ministry has requested all IOCs to do this year as a result of low oil prices,…There is a discussion on the timing and all other details….[and] We are working to increase production gradually.” 

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The original plan was for BP to add 100,000 bpd every year up to a total of 2.3-2.4 million bpd of production by the original target date of 2020, a figure which remains entirely achievable within a relatively short space of time in oil development terms. “The main reason that it hasn’t gone according to the original plan was that Rumaila has been one of the fields that the government has looked to when it needs to reduce overall country production,” Richard Bronze, cross-energy analyst for Energy Aspects, in London, told OilPrice.com. “This has happened with the OPEC/NOPEC deal and before that with the difficulties in paying IOCs under the technical service contract [TSC] payment structure,” he added. “As a result, BP has been unwilling to make the extra investments needed in order to meet these incremental output increases, as it did not know whether it would be allowed to pump at these levels on a sustained basis,” he underlined.  

In addition to these constraints, BP’s Elyaseri highlighted that other field-related activities have had to be postponed, notably the water-injection projection project that was to have been part of the Common Seawater Supply Project (CSSP), which involves taking seawater from the Persian Gulf and transporting it to oil production facilities to boost pressure at key oil reservoirs. It was absolutely critical for Iraq’s ambitions to reach its previous oil output target of 6.2 million bpd by the end of this year, and 9 million bpd by end-2023, and remains absolutely vital to the new target of hitting 7 million bpd oil production by 2025. It also hints at why Iraq was so in debt for so long to various international oil companies (IOCs). As exclusively reported by OilPrice.com at the time, U.S. oil supermajor ExxonMobil was long in prime position to finally expedite the development and completion of the CSSP, as part of the broader US$53 billion Southern Iraq Integrated Project (SIIP) – either alongside the China National Petroleum Corporation (CNPC) or alone – until further consideration of all of the unsavoury details attached to the project stopped ExxonMobil in its tracks. 

Related: OPEC+ Expects Oil Market Deficit Next Year

For Gharraf, Japex stated last week that its relatively modest output target of 230,000 bpd will be hit later than the original schedule of the end of 2020. This outlook revision comes on the back of the release of Japex’s April-September results, which showed a 70 per cent year-on-year (y-o-y) decline in its overseas crude sales to 1.18 million barrels, due  in large part to a decrease in sales from the Gharraf field. Part of this again was due to Iraq’s reduced OPEC+ output, with Iraq producing 3.79 million bpd in October, according to industry data, just under its 3.80 million bpd quota in the agreement. This figure, though, was not as low as it should have been, as Iraq was supposedly to have made up for overproduction earlier this year with subsequent larger-than-quota cuts. According to Japex, it will now lift 1 million barrels of crude cargo in December and March 2021 from the Gharraf oil field, and another 1 million barrels in June.

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 control of Japex and Malaysia’s Petronas, it has been developed with a degree of urgency in line with the two firms’ respective governments’ needs to secure their energy security requirements following the second round of oil field licensing in December 2009. With the deal offering a remuneration fee to the firms of US$1.49 per barrel, after an initial output target of 35,000 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. 

First, they had to placate the local tribesmen who refused to cede their ancestral lands peacefully, whatever the Iraqi government in Baghdad had promised Japex (and fellow developer, Malaysia’s Petronas) in the run-up to the bid being accepted, after which 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. 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 a minimum of US$8 billion for getting the field to its plateau production target of 230,000 bpd – sent a call for tender to engineering companies and contractors to bid for an estimated US$100 million engineering, procurement and construction contract to build the Gharraf ‘Light Oil Transport System’. 

This allowed 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 jurisdiction 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 rose again and then dipped, due to delays in drilling work.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on November 18 2020 said:
    The short answer is rampant corruption, lack of oil infrastructure, lack of investment and geopolitics.

    With tremendous crude oil reserves rivalling, if not exceeding, those of Venezuela, lowest production costs in the world and the biggest potential for capacity expansion of anywhere else, Iraq may be destined (at least in theory) to dominate the world oil market from the third decade of the 21st century but only if geopolitics and infrastructure permit.

    Although the BP Statistical Review of World Energy reports Iraq’s proven crude oil reserves at 147.2 bn, many experts think the country’s true potential is still underestimated, partly because the current assessment is based on a recovery rate probably lower than 15% of its oil-in-place (OIP). Iraq’s proven and probable reserves are estimated at 315 bb with some experts believing that Iraq actually holds more than 400 bb of reserves. Moreover, only 70% of Iraq’s territory has so far been explored for oil. Furthermore, there are also more than 60 discovered but undeveloped oilfields in Iraq containing at least 75 bb of reserves.

    Iraq’s oil fields are the most prolific in the world. Before Iraq’s oilfields were devastated by three wars between 1979 and 2003, its wells produced an average of 13,700 b/d each. By contrast, Saudi wells averaged 10,200 b/d each. US conventional wells averaged 17 b/d each. It would take more than 800 US wells to pump as much oil as a typical Iraqi well. The average cost of bringing a barrel of oil in Iraq is estimated at $1-$2 compared with $5-$6 in Saudi Arabia and $10 in the United States (but only for conventional oil not shale oil).

    Based on this great oil wealth and the development plans signed between Iraq and major oil majors, Iraq was projected to be producing 12.72 million barrels a day (mbd) by 2020. So why isn’t? The maximum it has managed to achieve was 5 mbd before the 2014 oil price collapse. The answer lies in rampant corruption, lack of oil infrastructure, lack of investment and geopolitics.

    During the reign of Iraq’s historic leader the late Saddam Hussein, the price for corruption was execution. Unfortunately, America’s greed for oil and its attempts to steal Iraq’s oil as it is trying now to steal Venezuela’s and also protect Israel led to the 2003 invasion of Iraq and the killing of Iraq’s leader.

    A combination of corruption and geopolitics continue to undermine prospects of foreign investments. This stopped ExxonMobil going ahead with the construction of the Common Seawater Supply Project (CSSP), which involves taking seawater from the Persian Gulf and transporting it to oil production facilities to boost pressure at key oil reservoirs. It was absolutely critical for Iraq’s ambitions to hike its oil production significantly.

    Moreover, for many years the government has done nothing significant to address the enduring problems of oil export-bottlenecks or the lack of adequate facilities and infrastructure essential to support the growth of oil production. To exacerbate the uncertainty, the security situation continues to fluctuate.

    The only available oil-export pipeline is the Iraq-Turkish pipeline (ITP) from Kirkuk to Ceyhan on the Turkish Mediterranean coast with capacity of 1.6 mbd . However, the ITP passes through Iraqi Kurdistan and could thus be vulnerable to sabotage and attacks by Kurdish insurgents unless some form of a political settlement is reached between the central government in Baghdad and the Kurdistan Regional Government (K)RG.

    Moreover, given the vulnerability of the ITP, Iraq has no alternative pipelines to bypass the Strait of Hormuz in case it is blocked or mined by Iran in any future conflict over its nuclear programme. Therefore, Iraq should have long time ago extended the Iraq strategic oil pipeline to the Jordanian port of Aqaba on the Red Sea, possibly with similar capacity to the ITP.

    Iraq’s export capacity through the ITP (when it is operational) and terminals on the Gulf is currently estimated at 4.0 mbd.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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