Wed, Mar 03, 2010, 00:01 GMT
Iraq’s Regions Look To Reap Rich Oil Dividend
Baghdad is launching a series of initiatives which would see Iraq’s regions get greater control of and benefit from its planned oil capacity surge. Proposals for more regional oil companies and local control of a portion of revenues have been around for a while, but the imperative to secure votes ahead of Iraqi elections scheduled for next month appears to have given them a fresh urgency. Politics has also given impetus to efforts to resolve the longstanding deadlock between Baghdad and the Kurdistan Regional Government (KRG) over the latter’s oil contracts.
Iraq expects to resume oil exports from KRG within “the coming days,” federal Minister of Oil Husain al-Shahristani told reporters on 10 February. Dr Shahristani’s comments follow a 17 January announcement by KRG Minister of Natural Resources Ashti Hawrami, offering talks and potential compromise on the contract dispute, which led to KRG exports being suspended on 21 September 2009, only a few months after they started up. Reuters reported KRG Deputy Prime Minister Azad Barwari as saying that Baghdad and Irbil had reached “an understanding” that KRG investors would get paid. But consensus is that any deal is just not possible before the elections. The lack of any official KRG response or any substantive details to Dr Shahristani’s comments, and the track record of unsuccessful efforts to reach a Baghdad/Irbil oil deal would call for a healthy measure of skepticism.
Iraqi Prime Minister Nuri al-Maliki and his allies, including Dr Shahristani, are eager to trumpet the potential benefits of last year’s upstream awards and the subsequent planned capacity expansion. After years of hardship, expectations are enormous. Foreign oil companies in Basra will “participate in building our area by taking part in the building of hospitals, schools, parks, cultural centers,” explained Sheltagh 'Abbud, Basra governor and ally of Mr Maliki, to Iraq Oil Forum . “These are all great services to the community which will create a bonding between those people and the Iraqi people.” Iraq’s 2010 budget will now allow for local councils to get $1 for every barrel of oil produced or refined and $1 for every 150 cu ms of gas produced in their region. Local governorates have been broadcasting refinery plans in the local press. “This started in May in Basra. Maliki wanted it for political purposes. He did well in Basra in the local elections last year and he is eager to maintain his position,” notes Iraq expert Riedar Visser. The amount is a substantial improvement on the $0.50/B first proposed, reflecting changing political priorities (MEES , 6 July 2009). Basra will need huge infrustructure investment, including 700 new schools, and provision of social services. “The new allocations linked to oil produced and refined in the province will definitely multiply our resources,” Mr 'Abbud said.
Partners in Basra province’s 2mn b/d+ West Qurna 2 project, Lukoil and Statoil, have already met Mr 'Abbud. “I advised those who will work in the West Qurna fields to start hiring from the areas and towns close to the fields before they expand their searches to the center of Basra,” he said. Other winners in Iraq’s two bidding rounds tell MEES they also intend to meet the heads of the local governments in the areas they will be operating in. The budget oil articles are part of a set of proposals for enhanced local revenue gathering. Non-oil producing regions will also benefit – Shi'ite pilgrimage center Karbala, for instance, will be allowed to keep a percentage of pilgrims’ dues and border areas will keep a percentage of transit revenues. Iraq’s oil expansion, if contracts are fully implemented, will see capacity balloon by five times to 12mn b/d, said Dr Shahristani to news agency Aswat al-Iraq . But capacity expansion will not be allowed to happen at the expense of hurting prices by flooding the world oil markets with crude, he pledged. Iraq’s oil policy would aim to “put in place a production ceiling aimed at maximizing revenues.”
A New Structure
Baghdad has also announced it intends to create a fourth regional oil company alongside the three existing ones – South Oil Company (SOC), North Oil Company (NOC), and Misan Oil Company (MOC). Midlands Oil Company will cover central areas. “Historically, in the 1980s, there was a Midlands Oil Company before it was disbanded,” 'Abd al-Karim al-Laibi, Deputy Oil Minister for the Upstream, tells MEES . “We have proposed to the cabinet to revive the company. There are a lot of things to organize, but in a few months, maybe six, it will be established.” As well as Baghdad, Midlands Oil Company will, like its predecessor, oversee upstream operations in Diyala, Wasit, Babel, Karbala and Qadisiya provinces. The old Midlands Oil Company also oversaw oil operations in the western province of Anbar, but it is only “probable” the new one will too, one source says. Anbar, a stronghold of Sunni leader Ahmad Abu Risha, an ally of Mr Maliki, has in the past leant towards greater regional control of his province’s hydrocarbon wealth. Anbar is home to the yet-to-be-developed 4.5 trillion cu ft 'Akkaz gas field. The UAE-based Crescent Petroleum, which is blacklisted by Baghdad for its KRG investments, has plans for an Anbar gas city based around the development of 'Akkaz. Iraq’s long-stalled proposed hydrocarbon law allows for provinces with production of over 100,000 b/d to form their own regional oil company. There have been proposals for Dhi Qar to have its own regional firm. The province is home to the Gharaf field, from which Petronas and Japex plan to produce 230,000 b/d. And a Dhi Qar Oil Company should be formed once Gharaf output reaches 100,000 b/d.
Much could change if a new government comes in March, but developing Iraq’s regions is likely to remain a priority. Similarly, any new government will find it very difficult to undo what are widely regarded as good contracts for Iraq as far as the oil upstream deals signed recently (MEES , 8 February). But Shell’s Heads of Agreement (HOA) for gas utilization in Basra governorate appears to be running into difficulty. The HOA, which expired in September, has been given a six month extension (MEES , 21 September, 2009). One source flatly denies that any talks are being held over bringing a third foreign partner into the project – Mitsubishi also has a minority stake (MEES , 24 August). “We are finalizing the details. But we don’t have a legal framework and we are facing all sorts of difficulties,” notes another senior Iraqi official. “We will try and take it to cabinet shortly,” he adds, conceding that ratification might have to wait until after the elections. “But you know with all this new oil, there is going to be more gas. And everyone is talking about the urgency of getting gas, so we need the project,” he argues.
Downstream Disruption
Saboteurs blew up a pipeline from the Kirkuk fields to Daura refinery Ahmad al-Sham'a, Deputy Minister of Oil for the Downstream, told MEES on 10 February. “There is some disruption, but we have crude from Basra and there are trucks. This pipeline only started up two days ago.” Volumes supplying Daura from the south were running at 55,000-60,000 b/d, with trucked volumes from Kirkuk at 20,000-25,000 b/d. Work on a second 70,000 b/d central distillation unit at Daura should be complete by July, Mr Shama' said (MEES , 6 July 2009). At the Baiji refinery, the focus is on improving product quality and gasoline output, rather than distillation capacity. There have been some delays. It had been hoped to boost gasoline output from 6,000 cmd (37,740 b/d) to 10,000 cmd (63,000 b/d) by mid-2010, but now this will only happen in 2011, Mr Sham'a said. “When this is completed, this will enable us to stop importing gasoline,” he added.
Kurdish Investors Plough On
While there is little doubt the dispute with central government has cast a pall over investment, foreign oil companies in the KRG are continuing to drill. There have been notable successes, with Gulf Keystone the latest firm to boast discovering substantial reserves (MEES , 1 February). But many have also found geological conditions hard going. MOL’s first well has so far encountered heavy bituminous non-commercial oil, MEES understands. Meanwhile on 8 February, Western Zagros announced that high pressures had forced it to abandon drilling at its Kurdamir-1 well. This is the second time high pressure has forced the firm to halt drilling operations. But as MEES went to press, initial results at OMV’s first well – which reached target depth on its Shorish block – are very positive, with oil shows in at least three formations. The well, drilled by Weatherford, has been the first in the KRG to use air drilling, which avoids fluid loss – a common problem in the KRG’s highly-fractured subsurface.
The KRG oil industry is gaining traction despite the absence of a deal with Baghdad. Discussions on new deals and acreage continue. And the last few months have seen the entrance of a number of new engineering and service firms to the region, which is bringing more competition and should give operators more choice. Entrants include Italy’s Ava Drilling Fluids and Services and Austria’s CAT Oil. And the region is also catalyzing the emergence of local firms and joint ventures, such as Daro Oil Services. Momentum Logistics is a new joint venture bringing together UAE port operator Gulftainer and Kurdish firm Federal Petroleum. Federal Petroleum is also a partner, together with Chinese drilling firm Honghua and Jordanian engineering firm Edgo, in a new KRG joint venture drilling company, Hi-Tech Drilling. The latter is selling itself on its experience – largely through Honghua – of the air and foam drilling techniques, which have been successful for OMV.
Copyright MEES 2010.
Iraq’s Regions Look To Reap Rich Oil Dividend
Baghdad is launching a series of initiatives which would see Iraq’s regions get greater control of and benefit from its planned oil capacity surge. Proposals for more regional oil companies and local control of a portion of revenues have been around for a while, but the imperative to secure votes ahead of Iraqi elections scheduled for next month appears to have given them a fresh urgency. Politics has also given impetus to efforts to resolve the longstanding deadlock between Baghdad and the Kurdistan Regional Government (KRG) over the latter’s oil contracts.
Iraq expects to resume oil exports from KRG within “the coming days,” federal Minister of Oil Husain al-Shahristani told reporters on 10 February. Dr Shahristani’s comments follow a 17 January announcement by KRG Minister of Natural Resources Ashti Hawrami, offering talks and potential compromise on the contract dispute, which led to KRG exports being suspended on 21 September 2009, only a few months after they started up. Reuters reported KRG Deputy Prime Minister Azad Barwari as saying that Baghdad and Irbil had reached “an understanding” that KRG investors would get paid. But consensus is that any deal is just not possible before the elections. The lack of any official KRG response or any substantive details to Dr Shahristani’s comments, and the track record of unsuccessful efforts to reach a Baghdad/Irbil oil deal would call for a healthy measure of skepticism.
Iraqi Prime Minister Nuri al-Maliki and his allies, including Dr Shahristani, are eager to trumpet the potential benefits of last year’s upstream awards and the subsequent planned capacity expansion. After years of hardship, expectations are enormous. Foreign oil companies in Basra will “participate in building our area by taking part in the building of hospitals, schools, parks, cultural centers,” explained Sheltagh 'Abbud, Basra governor and ally of Mr Maliki, to Iraq Oil Forum . “These are all great services to the community which will create a bonding between those people and the Iraqi people.” Iraq’s 2010 budget will now allow for local councils to get $1 for every barrel of oil produced or refined and $1 for every 150 cu ms of gas produced in their region. Local governorates have been broadcasting refinery plans in the local press. “This started in May in Basra. Maliki wanted it for political purposes. He did well in Basra in the local elections last year and he is eager to maintain his position,” notes Iraq expert Riedar Visser. The amount is a substantial improvement on the $0.50/B first proposed, reflecting changing political priorities (MEES , 6 July 2009). Basra will need huge infrustructure investment, including 700 new schools, and provision of social services. “The new allocations linked to oil produced and refined in the province will definitely multiply our resources,” Mr 'Abbud said.
Partners in Basra province’s 2mn b/d+ West Qurna 2 project, Lukoil and Statoil, have already met Mr 'Abbud. “I advised those who will work in the West Qurna fields to start hiring from the areas and towns close to the fields before they expand their searches to the center of Basra,” he said. Other winners in Iraq’s two bidding rounds tell MEES they also intend to meet the heads of the local governments in the areas they will be operating in. The budget oil articles are part of a set of proposals for enhanced local revenue gathering. Non-oil producing regions will also benefit – Shi'ite pilgrimage center Karbala, for instance, will be allowed to keep a percentage of pilgrims’ dues and border areas will keep a percentage of transit revenues. Iraq’s oil expansion, if contracts are fully implemented, will see capacity balloon by five times to 12mn b/d, said Dr Shahristani to news agency Aswat al-Iraq . But capacity expansion will not be allowed to happen at the expense of hurting prices by flooding the world oil markets with crude, he pledged. Iraq’s oil policy would aim to “put in place a production ceiling aimed at maximizing revenues.”
A New Structure
Baghdad has also announced it intends to create a fourth regional oil company alongside the three existing ones – South Oil Company (SOC), North Oil Company (NOC), and Misan Oil Company (MOC). Midlands Oil Company will cover central areas. “Historically, in the 1980s, there was a Midlands Oil Company before it was disbanded,” 'Abd al-Karim al-Laibi, Deputy Oil Minister for the Upstream, tells MEES . “We have proposed to the cabinet to revive the company. There are a lot of things to organize, but in a few months, maybe six, it will be established.” As well as Baghdad, Midlands Oil Company will, like its predecessor, oversee upstream operations in Diyala, Wasit, Babel, Karbala and Qadisiya provinces. The old Midlands Oil Company also oversaw oil operations in the western province of Anbar, but it is only “probable” the new one will too, one source says. Anbar, a stronghold of Sunni leader Ahmad Abu Risha, an ally of Mr Maliki, has in the past leant towards greater regional control of his province’s hydrocarbon wealth. Anbar is home to the yet-to-be-developed 4.5 trillion cu ft 'Akkaz gas field. The UAE-based Crescent Petroleum, which is blacklisted by Baghdad for its KRG investments, has plans for an Anbar gas city based around the development of 'Akkaz. Iraq’s long-stalled proposed hydrocarbon law allows for provinces with production of over 100,000 b/d to form their own regional oil company. There have been proposals for Dhi Qar to have its own regional firm. The province is home to the Gharaf field, from which Petronas and Japex plan to produce 230,000 b/d. And a Dhi Qar Oil Company should be formed once Gharaf output reaches 100,000 b/d.
Much could change if a new government comes in March, but developing Iraq’s regions is likely to remain a priority. Similarly, any new government will find it very difficult to undo what are widely regarded as good contracts for Iraq as far as the oil upstream deals signed recently (MEES , 8 February). But Shell’s Heads of Agreement (HOA) for gas utilization in Basra governorate appears to be running into difficulty. The HOA, which expired in September, has been given a six month extension (MEES , 21 September, 2009). One source flatly denies that any talks are being held over bringing a third foreign partner into the project – Mitsubishi also has a minority stake (MEES , 24 August). “We are finalizing the details. But we don’t have a legal framework and we are facing all sorts of difficulties,” notes another senior Iraqi official. “We will try and take it to cabinet shortly,” he adds, conceding that ratification might have to wait until after the elections. “But you know with all this new oil, there is going to be more gas. And everyone is talking about the urgency of getting gas, so we need the project,” he argues.
Downstream Disruption
Saboteurs blew up a pipeline from the Kirkuk fields to Daura refinery Ahmad al-Sham'a, Deputy Minister of Oil for the Downstream, told MEES on 10 February. “There is some disruption, but we have crude from Basra and there are trucks. This pipeline only started up two days ago.” Volumes supplying Daura from the south were running at 55,000-60,000 b/d, with trucked volumes from Kirkuk at 20,000-25,000 b/d. Work on a second 70,000 b/d central distillation unit at Daura should be complete by July, Mr Shama' said (MEES , 6 July 2009). At the Baiji refinery, the focus is on improving product quality and gasoline output, rather than distillation capacity. There have been some delays. It had been hoped to boost gasoline output from 6,000 cmd (37,740 b/d) to 10,000 cmd (63,000 b/d) by mid-2010, but now this will only happen in 2011, Mr Sham'a said. “When this is completed, this will enable us to stop importing gasoline,” he added.
Kurdish Investors Plough On
While there is little doubt the dispute with central government has cast a pall over investment, foreign oil companies in the KRG are continuing to drill. There have been notable successes, with Gulf Keystone the latest firm to boast discovering substantial reserves (MEES , 1 February). But many have also found geological conditions hard going. MOL’s first well has so far encountered heavy bituminous non-commercial oil, MEES understands. Meanwhile on 8 February, Western Zagros announced that high pressures had forced it to abandon drilling at its Kurdamir-1 well. This is the second time high pressure has forced the firm to halt drilling operations. But as MEES went to press, initial results at OMV’s first well – which reached target depth on its Shorish block – are very positive, with oil shows in at least three formations. The well, drilled by Weatherford, has been the first in the KRG to use air drilling, which avoids fluid loss – a common problem in the KRG’s highly-fractured subsurface.
The KRG oil industry is gaining traction despite the absence of a deal with Baghdad. Discussions on new deals and acreage continue. And the last few months have seen the entrance of a number of new engineering and service firms to the region, which is bringing more competition and should give operators more choice. Entrants include Italy’s Ava Drilling Fluids and Services and Austria’s CAT Oil. And the region is also catalyzing the emergence of local firms and joint ventures, such as Daro Oil Services. Momentum Logistics is a new joint venture bringing together UAE port operator Gulftainer and Kurdish firm Federal Petroleum. Federal Petroleum is also a partner, together with Chinese drilling firm Honghua and Jordanian engineering firm Edgo, in a new KRG joint venture drilling company, Hi-Tech Drilling. The latter is selling itself on its experience – largely through Honghua – of the air and foam drilling techniques, which have been successful for OMV.
Copyright MEES 2010.