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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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Aramco Eyes Major Opportunity In Iraq

  • Saudi Aramco’s development of the Iraqi Akkas project could provide much-needed gas for Iraq’s power generation sector.
  • Saudi Aramco may not see the same difficulties in Iraq’s oil sector as Western companies have.
  • The gas supplied from the Akkas project and corollary developments would finally allow for the full-scale development of the long-mooted Nebras Petrochemicals Project.

Following the recent China-brokered resumption of relationship deal between historical enemies Saudi Arabia and Iran, a deal for the Kingdom to develop two key projects in Iran’s close ally Iraq is in the offing. The problem with this idea is that it is dependent on two highly unpredictable elements. The first is the degree to which senior Iraq Oil Ministry officials are willing to put the interests of their country ahead of their own. The second is the U.S.’s on the whole thing. The deal – which was announced as definite and then as subject to further ratification - comprises one big idea and two smaller ones that support it. The big idea is for Iraq to take the next step in genuinely building out its gas sector. The other two ideas are firstly that towards this end, Saudi Aramco develops the giant Akkas gas field, and secondly that the resultant gas goes towards the build-out of the long-delayed Nebras Petrochemical Project, all of which are analysed in my new book on the new global oil market order. To briefly recap some of the salient points here: official estimates are that Iraq’s proven reserves of conventional natural gas amount to 3.5 trillion cubic metres (tcm) or about 1.5 percent of the world total, placing Iraq 12th among global reserve-holders. However, around three-quarters of Iraq’s overall proven reserves consist of associated gas – a by-product of oilfield development. The International Energy Agency estimates that ultimately recoverable resources will be much larger than the official estimates – with its estimate being 8.0 tcm. 

Related: Dad’s Mad: Saudis Frustrated With Lack Of OPEC Compliance

Over the years, instead of capturing this hugely valuable associated gas resource to be used to generate much-needed domestic power, or to sell it off to generate much-needed income, Iraq has just burnt it off for nothing. After Russia, Iraq flares the largest quantity of gas in the world, with some 17 billion cubic metres burnt in 2022, according to a World Bank study. The squandering of this associated gas resource has meant that Iraq is still reliant on Iran for around 40 percent of all its power needs (through electricity and gas imports), which has long infuriated the Americans, who want Iraq to downscale its ties with Iran, as also analysed in my new book on the new global oil market order. It has also meant that every year Iraq runs into enormous budgetary problems (which it always expects the U.S. to bail it out of), and long periods of blackouts, particularly in the summer months.

Having signed up for the United Nations and World Bank ‘Zero Routine Flaring’ initiative aimed at ending this type of routine flaring by 2030, Iraq has announced the same plan three times, each to little effect. The most recent notable reiteration of the plan involved the U.S.’s Baker Hughes harnessing 200 million cubic feet per day (mmcf/d) from the Gharraf oil field (and neighbouring ThiQar site, Nassiriya), plus other oil fields north of Basra. According to the Oil Ministry in 2020, all this output would go to the domestic power generation sector, with Baker Hughes stating that addressing the flared gas from these two fields would allow for the provision of 400 megawatts of power to the Iraqi grid. According to an accompanying statement from then-Oil Minister, Jabbar Al-Luaibi, Iraq was also negotiating a similar gas capture deal for the state-run Nahr Bin Umar field with Houston-based Orion Gas Processors. Additionally, according to comments from Iraq’s South Oil Company, gas-processing facilities were to be constructed in the Missan and Halfaya fields that would have a combined capacity of 600 mmcf/d of gas when completed. The construction of gas-processing facilities in the West Qurna, Majnoon and Badra fields was also to have moved ahead, with respective overall capacities 1,650 mmcf/d, 725 mmcf/d and 85 mmcf/d. Early 2023 saw a restatement by France’s TotalEnergies of its commitment to move ahead with a four-pronged US$27 billion deal, one key project of which is to collect and refine associated natural gas currently burned off at the five southern Iraq oilfields of West Qurna 2, Majnoon, Tuba, Luhais, and Artawi. The development of the Akkas field by Saudi Aramco would be toward the same end of boosting Iraq’s indigenous gas supplies, and the Saudi firm has the capability to do it.

These supplies and corollary developments would finally allow for the full-scale development of the long-mooted Nebras Petrochemicals Project. In January 2015, Shell signed the deal to build the US$11 billion Nebras plant in the southern oil hub of Basra, with the project offering a natural synergy for the gas feedstock that came from its 44 percent stake in the US$17 billion 25-year Basra Gas Company (BGC) project. The BGC was designed to enable Iraq to increase its energy independence and to achieve economic diversification by capturing flared gas from the fields of Rumaila, West Qurna 1 and Zubair, in the first instance. As of 2019/2020, the BGC reached a peak production rate of 1035 mmscf/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 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. Shell’s progress on the Nebras project began to stall shortly after the 2015 deal was signed. According to a source who works closely with Iraq’s Oil Ministry, spoken to exclusively by OilPrice.com at the time, this halt in proceedings was due to 30 percent level of commission on the Nebras project being demanded by several senior Iraq oil figures. 

Having said this, the potential returns for Nebras are massive, and Saudi Aramco has the capabilities to successfully complete it. Using Nebras as the foundation project, as Saudi Arabia used its Jubail Industrial City petrochemicals project – plus a sustainable and reliable supply of ethane (usually found in associated gas streams) for at least 20 to 25 years – Iraq would have to spend around US$40-50 billion. However, after that Iraq would be one of the largest petrochemicals producers in the Middle East, and the profits for it would be exponentially higher than the seed costs. Saudi Aramco may not see the same difficulties in Iraq’s oil sector as Western companies have, given that commission payments are a standard Middle Eastern business practice, and are not subject to the same sort of scrutiny as they are in the West. The problem that it may have in developing the planned Akkas and Nebras projects is the U.S.’s view on what they add up to. 

The shift in Saudi Arabia’s longstanding geopolitical allegiance to the U.S. and towards China-Russia instead is a key feature of the new global oil market order, as analysed in full in my new book on that very subject. However, the U.S. has no intention of making it easy for Saudi Arabia, or for any of the Middle Eastern countries looking to do the same. In the case of the Akkas gas field, the U.S. has further cause for concern. Akkas has always been seen by the U.S. as one key part of a three-field development that also includes the Mansouriyah and Siba gas fields. These three sites form a skewed triangle across southern Iraq, stretching from Mansouriyah in the east (extremely close to the border with Iran), down to Siba in the south (extremely close to the key Iraqi Basra export hub), and then all the way west across to Akkas (extremely close to the border with Syria). Akkas is located in Iraq’s lawless wasteland Anbar province, a place so violent and unpredictable that it was even avoided where possible by ISIS, and close to what the U.S. military used to call ‘the spine’ of the terrorist organisation. This is whwre the Euphrates flows westwards into Syria and eastwards into the Persian Gulf, extremely close to the border with Iran. Along the spine running from east to west are the historical ultra-nationalist and ultra-anti-West cities of Falluja, Ramadi, Hit and Haditha, and then there is Syria and a short hop to the key strategic ports of Banias and Tartus. In January 2017, Russia secured control over the naval facility at Tartus, allowing it to keep both warships and nuclear vessels there. Both Banias and Tartus are also extremely close to the massive Russian Khmeimim Air Base and the S-400 Triumf missile system. Although the base only came into operation in 2015 supposedly to help in the fight against Islamic State, Russia appears to have changed its tactical plans for it, having also signed a 49-year lease on it, with the option for another 25-year extension. A short flight away is Russia’s Latakia intelligence-gathering listening station. 

By Simon Watkins for Oilprice.com

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