Iraqi Exports Rise, Production Rates Set as Foreign Oil Firms Mobilise

Mobilisations

IOCs are stepping up early planning and preparation work at their mega-projects in the south of Iraq, preparing the ground for worker camps, tendering early work contracts, and consolidating liaison contacts with Iraqi state-owned oil company personnel, now also at mid-management levels. Recruitment has also been getting under way, with IOCs offering Iraqi oil and construction engineers and geologists significantly raised salaries compared to the state-industry standard, severely undermining the strong resistance to foreign companies heard in the Basra region just a few months ago.

BP and CNPC have already started setting up camp at the Rumaila field in the south, and a few weeks ago tendered a contract, for which 10 companies have pre-qualified, for the drilling of 56 wells. Of the three consortia that emerged successful from the first licensing round, this was the first to sign, so such progress is part of its obligation to show initial on-the-ground progress within three months of contract signing—although the exact definition of this obligation is open to interpretation. With the ExxonMobil/Shell consortium securing the West Qurna-1 project and the Eni/Occidental/KOGAS consortium taking on Zubair not long after, they too are under pressure to demonstrate progress relatively soon. These consortia, as well some of those securing access to Iraqi oilfields in the second licensing round in December last year, have already made headway in establishing their joint management committees. These are a contract requirement for leading the individual oilfield projects under the technical service contracts (TSCs) and have to include staff from their state-owned Iraqi partnering companies.

Downward Pressure

News yesterday, however, has revealed that the ExxonMobil/Shell consortium at West Qurna-1 and the Eni-led group at Zubair had already come to an agreement with the Iraqi Oil Ministry about a downward revision in their respective fields' baseline production rate. This is the level at which the field is producing without the development help of the IOCs. The companies developing the fields will receive their per-barrel remuneration fee for all production above this level. A decline model is also tied to this rate to assess how much the fields' output would have declined without IOC development and at what rate, in order for the companies’ remuneration to compensate for their full improvement of the fields' output also over time. ExxonMobil and Shell managed to secure a lowering of the West Qurna-1 baseline from about 270,000 b/d to 244,000 b/d, while the Eni-led consortium secured a baseline production rate of 183,000 b/d, down from about 195,000 b/d.

While the initial numbers were calculated according to Iraqi assessments, the revisions have been based on initial surveys conducted by the IOCs of the reservoirs and existing production facilities and infrastructure. The revised numbers show that the production infrastructure and facilities are in a worse shape than Iraq had estimated, and also that the Iraqi monitoring and metring equipment—measuring the output—leaves a lot to be desired. This is no surprise: the metring and monitoring of Iraqi production, midstream transport, delivery to refineries, and loading at export facilities are error-prone and have consistently shown large discrepancies throughout the production chain. In fact, this is one of the reasons why oil industry corruption and industrial-scale theft of oil and refined products was able to reach such rampant levels in the aftermath of the 2003 U.S.-led invasion and during the following insurgency. The situation has since improved dramatically, but is still far short of internationally acceptable levels and remains unresolved.

More worrying perhaps are the issues about potential reservoir damage being behind the downward revisions, although the IOCs have not yet had sufficient time to conduct extensive reservoir surveys. Mismanagement over recent decades is believed to have resulted in potentially quite significant and irreversible damage at Iraq’s main producing oil reservoirs, affecting their peak output plateaux and ultimate recovery rates. Studies made by independent consultants and many of the oil companies themselves, however—often as part of their pro bono technical assistance programmes to Iraq to build goodwill and relationships—should have meant that most of the reserve and production plateau targets presented during the first and second licensing rounds were based on newer and more accurate statistics.

The lower baseline production rates should mean that IOCs will be paid a little more than previously thought, although in the greater scheme of things the change is not that large. If reservoir damage is involved, it might of course also affect peak performance—and this would have a negative impact on the companies’ remuneration.

Greater Pragmatism?

The lower numbers do suggest a bit more common sense on the Iraqi side and willingness to back down from otherwise quite harsh terms and conditions. This could well be a specific strategy, however, as current negotiations are in a purely technical phase and the political or popular interest in them has been lost—especially as Iraq gears up for general elections. Indeed, the Iraqi opposition and population have already got the impression that the government has been harsh in its negotiations with the foreign upstream investors and has secured deals favourable to the Iraqi state; the remaining adjustments fall below the political radar of most onlookers because of their technical nature.

Hence, Iraq’s Oil Ministry might now have more reason for pragmatism, partly to ensure a smooth start to investments and development at the fields by avoiding complications in the run-up to the elections—and beyond, during what threatens to be a rather complicated and protracted process of government coalition negotiations, should the results go as currently expected. This means that the hand of the IOCs will be strengthened as time goes by—any delays will immediately hit a cash-strapped government’s revenue projections, and it could be very costly for Iraq to risk project standstills by not accommodating companies, at least to a degree. The IOCs can be expected to take advantage of such a scenario and seek improvement in their contract terms, or at least raise the chance of doing so in next-phase projects.

Outlook and Implications

Rising Production—Now

Meanwhile, statistics from Iraq’s State Oil Marketing Organisation (SOMO) show that February oil exports rose to 2.083 million b/d, up from 1.926 million b/d during January. The return to levels above 2 million b/d is very welcome, as Iraq has had significant problems exporting more than that for any sustained period in recent years. At the same time, rising exports might now make it more difficult for Iraq to deal with the output increases towards the second half of 2010 from the IOC-led Rumaila, West Qurna-1, Zubair, and Majnoon projects, where easy repairs and expansions are hoped to add 250,000 b/d of production capacity before the end of the year. Iraq’s midstream installations and export facilities today have a very limited spare capacity and their expansion and renovation is the sole responsibility of the Oil Ministry’s different companies, with their already over-stretched capabilities. As IHS Global Insight has repeatedly warned, it might be hard for them to manage the tendering and project management of the infrastructure bottlenecks in a sufficiently timely manner that shut-ins at the large-scale Basra-region projects can be avoided.