Crude Awakening

By Julian Rogers, Deputy Editor

After decades of sanctions, sabotage and chronic mismanagement, Iraq – with perhaps the largest unexploited oil reserves in the world beneath its desert sands – could finally be waking from its slumber as investment and technical expertise comes flooding in from the international energy giants. Could this be the dawn of a new era of production?

“We have inherited a situation that was subject to 10 years of international embargo and gross internal mismanagement, not to mention several wars”
-Dr Hussain al-Shahristani

It's been 36 years since their unceremonious expulsion, but finally, international oil companies are back in Iraq. Through three wars, more than a decade of isolation and a five-year, US-led invasion, the IOCs have had their noses pressed against the glass looking in like a bunch of kids salivating over a shop full of sugary sweets. They could look but they couldn't touch - until now.

The security situation, although still a major worry, has improved in recent months and there seems to be no shortage of companies looking for a piece of the action. With rock-bottom extraction costs and billions of barrels of proven reserves beneath Iraq's dusty surface, you can just imagine the dollar signs flashing before the eyes of Big Oil bosses. Even the official 115 billion barrel figure looks wildly short of Iraq's true potential; it hasn't been updated since 2001, and is largely based on 2D seismic surveys from almost three decades ago.

And with huge chunks of the country still unexplored, opinions remain divided on how many barrels of proven black gold exist. Indeed, vast swathes of the western desert region have never even seen a drill bit. To add to the conjecture, Iraq's deputy prime minister, Barham Salih, was quoted in April as claiming that reserves could be as high as 350 billion barrels, tripling previous estimates and putting the country way ahead of Saudi Arabia. Salih said the optimistic forecast came from "reputable sources" after seismic surveying and exploration drilling.

Unsurprisingly, Dr Hussain al-Shahristani, Iraq's oil minister, has since tried to distance himself from these remarks. It was the same during O&G's recent unscheduled meeting with the softy-spoken al-Shahristani inside Baghdad's imposing Ministry of Oil building. "The statement is not accurate," he responds firmly in perfect English but with a hint of frustration in his voice. You get the impression that he has been fielded this question more than once in the past few months. "It is not industry practice to add probable to proven reserves, which is perhaps the source for the figure you mention." However, the 68-year-old former nuclear scientist does concede that through recent studies and the application of new technologies, many of the discovered producing and non-producing fields had seen reserves "upgraded measurably." He adds: "We are conducting an integration study to come up with the new proven reserves figure within the next few months consistent with this exercise of re-evaluation."

Output projections

Iraq's oil industry, which has been nationalized since 1972, currently pumps 2.5 million barrels of oil a day (bpd) - two million of which are exported. This is the highest level since the Saddam-era prior to March 2003. Nevertheless, the immediate goal is to raise this to 2.8 million barrels by the end of the year, al-Shahristani explains confidently. "Our plan to increase levels is going to include tying new wells to production facilities and optimizing completions of others, as well as bringing some incremental initial production from some discovered but not yet fully producing fields. However, the main thrust would be to arrest the decline and get the increments from our producing giant and super giant fields in the south and north." He states that any surplus production will be sent for export. 

But output won't plateau out at 2.8 million bpd; the Ministry of Oil plans to ramp up production to 4.5 million bpd by 2013. In 10 years time, levels could top six million bpd. "In the short-term up to 2010, we envisage taking production to 3-3.5 million bpd through national effort and technical service contracts (TSCs) with the IOCs," states al-Shahristani. "Some 500,000 barrels will come from this source."

The oil minister is all too aware that a crippled country like Iraq cannot achieve these targets without the technical expertise and knowledge of the IOCs. One energy expert described Iraq to O&G as being "light years behind on a technological level." The country also has to fill the gap in the 'brain drain' as blue and white-collar oil workers have either fled abroad or been killed since 2003. On top of this, many oil facilities are either dilapidated, looted or war-damaged; a great deal of what is operational dates back to the sixties and seventies. "It seems that Iraq has hit a ceiling as to what it can do with the in-house resources," says Samuel Ciszuk, Chief Middle East Analyst for Global Insights. "It needs help from technicians and foreign companies, as we as an inflow of foreign cash."

Although the IOCs are clambering to get in, they are naturally panicky about committing investment and manpower to a country that still doesn't have a concrete hydrocarbon law in place that will govern the industry. The draft law was agreed by the cabinet in February last year but parliament has failed to rubber stamp the legislation because the government and Kurdish Regional Government (KRG) in the semi-autonomous north have been at loggerheads over who will control reserves and contracts. Even after two-and-a-half years of political squabbling, there is still no date as to when this piece of landmark legislation will finally be ratified.

"The oil minister has been promising that it will happen before the end of the month for about 18 months," argues Ciszuk. "Without it, getting anything underway will be very hard." Iraq's old oil law still bans private participation in the country's oil business. The new one would authorize production-sharing agreements (PSAs) that would guarantee a profit for the IOCs. It would also allow provinces freedom from central government to award contracts. Since 2004, around 40 foreign firms have been assisting the Ministry of Oil free-of-charge through memorandums of understanding.

So how much longer do we have to wait for the new law? Al-Shahristani smiles before divulging his carefully composed response. "We have always advocated the importance and necessity to enact the new oil and gas law as quickly as possible because we are confident that it would properly organize and facilitate the work in the oil sector. However, the delay in promulgation is a political matter to be finally resolved by parliament and the composing political spectrum. If this delay were to last longer, things could still be processed under the prevailing oil and gas law in the short-term." So is there a date? The question falls on deaf ears.

The lack of a new law hasn't stopped around 20 foreign energy firms from Canada, Norway, US, Turkey and a handful from Asia from setting up operations in the northern Kurdish region, thought to hold as much as 40% of the country's reserves. In fact, Iraqi Kurdistan could have more hydrocarbons than Nigeria. The Kurdish Regional Government in Irbil say the PSAs the companies have signed are legal but the Iraqi government states that the contracts are invalid and the IOCs should leave. Those companies that have shied away from entering have done so out of fear that Baghdad could later annul contracts. The Kurds have accused the Iraqi government of "former regime tactics" but an unrepentant al-Shahristani says the oil is the property of the Iraqi people and should be left alone. There have also been threats to blacklist any companies agreeing to oil concessions with the Kurds.

Bringing in the money

In an attempt to kick start the process of reintroducing much-needed overseas expertise to the ailing sector, October saw the Iraqi Oil Ministry open the first round of oil and gas licensing since the 2003 invasion. At the Sheraton Park Lane hotel in London, Dr al-Shahristani met executives from 35 pre-approved foreign companies, including Chevron, ExxonMobil, Shell, BP and Total, to discuss deals to develop the country's six largest oil fields - Kirkuk, Bai Hassan, West Qurna, Zubair, the Maysan fields (Bazargan, Abu Gharab and Fakka) and South Rumaila. Two gas fields - Akkas and Mansuriyah - are also included.

Under the terms of the proposed 20-year contracts, state-owned companies will have a 51% stake in the entities operating the fields and foreign companies would hold 49%. In return for committing to spend money on rehabilitating infrastructure, drilling wells and reassessing recoverable reserves in each field - something that is long overdue - foreign firms would recover their costs and earn additional revenue from any oil produced above current output levels at the fields - and could choose whether to be paid in oil or in cash.

Oil companies have traditionally steered clear of such service contracts, preferring deals that give them equity in the oil in the ground as this allows them to book reserves. But the majors have been squeezed out of so many oil-producing regions - such as Venezuela, Russia and the Middle East - that they can't afford to turn up their noses at the conditions al-Shahristani is offering; the overseas firms need Iraq's oil.

Likewise, Iraq needs the overseas firms. "We see their [the IOCs] complementary role as important for the future," al-Shahristani explains in between a quick sip of still water. "The participation of the international oil industry will complement our national effort to reaching our new production objectives through providing new investment and new technology. Starting in 2010, we foresee the implementation of Investment Service Contracts through licensing rounds with the IOCs to redevelop, improve and enhance oil recovery mainly from the same giant and super giant fields (those fields with over five billion barrels of reserves), and perhaps the development of a limited number of discovered but not yet developed fields."

Those companies in the running for contracts will be mindful of the fact that Russian oil giant LUKOIL signed a deal with Saddam Hussein back in the nineties that went sour. The contract, to develop the super giant field West Qurna, was subsequently cancelled and left in legal limbo before finally being torn up last year. Cuszak says the IOCs will need confidence in the contracts that they sign - not easy, given the continued procrastination over the passing of the hydrocarbon law, which still has the potential to derail any existing agreements if ratified. "There needs to be some kind of political stability so that companies can trust that the law that is there will remain for the foreseeable future. If it remains a politicised environment like Iran where parliament can go in and pick a single contract to pieces then it will be extremely difficult."

Petroleum consultant Tariq Shafiq was co-author of the draft petroleum law two years ago along with two other 'technocrats'. Together, the trio have 120 years' experience in the energy industry of Iraq and the Middle East. During a recent meeting with O&G over lunch in London, Shafiq expressed his disappointment at the current situation. "It is a stalemate," he claims. "Without improvement, there is little hope of a solution in the future."

Shafiq, who is a former executive director of the Iraqi National Oil Company, says his first draft put an emphasis on revitalizing the ageing and damaged infrastructure in order to boost production levels, not new E&P efforts. "The proven reserves can raise today's production of 2.5 million bpd to 10 million bpd and maintain it for decades at high levels without the need for one barrel of new oil. Investment and discovery by the regions or provinces, besides being unjustified investment, would lead to unhealthy consequences among the haves and have nots and on account of lack of infrastructures."

The security situation

As well as the wrangling over the legislative framework, the government is all too aware of the need to continue to focus on security in order to protect oil workers, plants and pipelines. For the past five years, Iraq has been synonymous with sectarian violence and killings and although the situation is improving, it's still an extremely dangerous place to do business. The government has been protecting oil workers and energy facilities with gun-toting guards and lofty walls, while the coalition forces have played their part too. It is expected that those after contracts will be required to have a manned office in the Iraqi capital during the bidding process and negotiations, which will present a scary prospect for some. 

Iraqi oil officials say the security situation is being kept under control. "With improved security conditions in Iraq, the Ministry of Oil has already been able to protect installations and pipelines, which has allowed increased production and export," al-Shahristani asserts. "Therefore, the IOCs can evaluate the matter more objectively now and start getting involved, on the ground, with us. We are co-operating extensively with the army and police forces to provide the secure conditions needed for their work in the field under acceptable conditions." The minister also reports that none of the bidding foreign firms see the security or the stalled oil law as serious deterrent to going into Iraq.

Another major headache that the authorities have to address is smuggling, with a conservative estimate of 105,000 barrels worth of oil stolen from pipelines every day and sold on the black market. Politicians may not be able to agree on the petroleum law, but they have given the green light to an oil anti-smuggling bill. The crackdown will mean those caught facing punishments ranging from fines to imprisonment.

So is security and smuggling the key issues that the Ministy of Oil faces today? Al-Shahristani leans forward in his chair to emphasize his point. "The main challenges for the Ministry of Oil now are the security threats, which have been reduced measurably in recent weeks, as well as the need to optimize reservoir management, surface installations and de-bottlenecking." The oil chief is also quick to point out that repairing an industry brought to its knees by the old regime will take time. "We have inherited a situation that was subject to 10 years of international embargo and gross internal mismanagement, not to mention several wars that affected the oil centers directly. Since April 2003, we have relied almost entirely on our own efforts to bring back production now to 2.5 million bpd and exports to two million."

The Iraqi cabinet has given the green light to a fourth state-run oil business 200 miles south east of Baghdad in the province of Maysan. The new company will be created by reorganizing the Maysan Oil and Gas Commission after splitting it from the Basra-based Southern Oil Company. Al-Shahristani has also pledged that each Iraqi province producing at least 100,000 bpd would get its own state-run oil company to focus on developing oilfields there. Increased capacity and rebuilt infrastructure cannot come soon enough for the minister. "We recognize the need to reconstruct and renovate all aspects of our industry to ramp up production and rehabilitate and renew plants, installations and management practice, as well as make a quantum leap forward in the training and development of Iraqi oil personnel. These we are hoping to achieve in co-operation with in the international oil industry in a measured and balanced manner to avoid implosion and chaotic expansion."

Bright outlook

Once the foreign firms finally arrive, full-scale production won't begin overnight as extensive seismic surveying and analysis will have to take place. For instance, even though the country has 80 discovered oilfields, there are around 400 structural anomalies waiting to be explored. As for natural gas, no one seems to have a clue how much exists, although conservative estimates put the total at 112 trillion cubic feet of reserves (cue those dollar signs in the eyes again). Industry experts are predicting that if the country fulfils its true potential, earnings could swell to somewhere between $200 and $300 billion a year.

When you consider that hydrocarbon revenues account for 90% of the government's budget, it is easy to see why the hopes for regeneration are being pinned on black gold. For consumers, increasing Iraq's oil would ease global supply fears and would probably bring crude prices down. For the time being, the country is an uncut diamond - enormous potential but much work needs lies ahead. "Iraq has a huge potential but it cannot be seen as anything but the region's wildcard right now," suggests Cuszak. "When looking at future production there are so many question marks over the political situation and the levels of violence. Iraq should be able to double its production in the long run if everything goes well."

He continues: "The country could overtake Iran as the world's second largest producer but it will take a time because of the sheer size of the projects and the time it will take for the country to heal properly." That healing process is slowly underway - which cannot come soon enough for Iraq's citizens. "The Iraqi nation's deep-routed culture remains the only safeguard for the country's return to normality," Shafiq concludes.

Critics tell Big Oil to stay away

Unsurprisingly, there are those vehemently against the oil giants plundering Iraq's resources, accusing the IOCs as being nothing more than a pack of vultures circling a stricken animal. The American majors being involved in the no-bid TSCs has only added fuel to fire with anti-war critics arguing that oil was the main reason the US invaded Iraq. Last year, Alan Greenspan, the former chairman of the Federal Reserve, said the war was "largely about oil." Back in 2003, Defence Secretary Donald Rumsfeld famously dismissed similar accusations as "utter nonsense" but this did little to dispel concerns. Oil workers' unions and nationalist parliamentarians feel that Iraq should pay for the re-development of the industry, not the IOCs through PSAs. They want the foreigners to be employed as contractors and paid a fee for their services and expertise. Hassan Juma'a, President of the Iraqi Federation of Oil Unions, has stated that if contracts last 30 or 40 years IOCs could be make more money than the government. Al-Shahristani rebuffs these fears and says the deals will be on terms beneficial to Iraq. For ordinary Iraqis the main priority is getting essential services back up and running, not lining the pockets of the energy giants. You only have to look around Baghdad on any given day to see queues of vehicles snaking around the streets from the gas stations. For all its tremendous oil wealth, the country still can't supply enough to its people. With this situation it is little wonder that hostility exists over the involvement of the IOCs.

Did you know?

The world's oil majors first started drilling in Iraq back in 1925 when they held a stake in Iraq Petroleum Company, which had a stranglehold on the country's reserves until 1961. In 1972 Saddam Hussein oversaw the seizure of international interests and the foreign players were thrown out.

Licensing round schedule

October 2008 Technical and legal specifics presented by Oil Ministry
March/April 2009 Deadline for pre-qualified companies to bid, followed by detailed negotiations
June 2009 Final awards