Iraq: Still hanging in there

DOUG NESTER, COO, KOGAS Akkas B.V.

Iraq has a glorious history, immense resources and rightfully proud people. Unfortunately, in 2013, Iraq continued to struggle with regional geopolitical and sectarian tensions. This deterioration of security interrupted IOC operations already struggling with an inefficient government and infrastructure. Unfortunately, such troubles come while Iraq needs national stability to attract the investments required to meet production and re-construction targets.

With so many existing problems, it is fair to question why a company or individuals would want to enter, or continue working in, Iraq. As Prime Minister Nuri al-Maliki recently proclaimed, “Iraq is the biggest investment opportunity in the region, if not the world.” He said that all facilities and infrastructure were destroyed by the former regime and wars, and then terrorism destroyed the country’s reconstruction. His statements about opportunity are justified.

Opportunity. Iraq is blessed with abundant, untapped hydrocarbons and has the world’s largest collection of underdeveloped super-giant fields. Also, a great majority of Iraq remains underexplored. The chance to use modern technologies and experience to tackle these opportunities continues to draw attention.

Nearly six years ago, Iraq announced an ambitious plan to boost production to 12 MMbopd by 2017. In June 2013, the Oil Ministry reduced this target to 4.5 MMbopd by the end of 2014, and 9 MMbopd by 2020. Officials also recognized the possibility of a low-side target of just 6 MMbopd. Given Iraq’s current situation, the International Energy Agency suggests that 6.1 MMbopd is achievable.

The government also said that investments of nearly $600 billion will be needed to reach the 9-MMbopd target. About 1,500 new wells will need to be drilled by 2016, to make this goal a reality. Now, only about 2,000 wells exist in the country. Such an effort will require mobilizing large amounts of new rigs, equipment and technologies, and experienced staff.

2014 obstacles. An obvious obstacle to this aggressive target is the number of rigs that are available and willing to enter Iraq. Certainly, the security situation in 2013 is causing some companies to pause. Iraq, however, remains the Middle Eastern leader in rig growth. There are some 93 rigs in Iraq, a 31-unit increase in the last six months. 

This increased field activity creates additional obstacles, as significant service industry investments are needed. This involves nearly everything from training of local staff, to creating supply chains and upgrading the country’s infrastructure. An overhaul of Iraq’s logistics is mandatory to support the importation of equipment and materials. This includes the need to expedite the processing of visas for individuals required to operate equipment or perform needed services.

Some of 2013’s largest project delays resulted from inefficient customs clearance associated with Iraq’s limited access to open-water ports. Only the Umm Qasr, Khor Al Zubair and Abu Floos ports are operational. The number of cranes, onshore storage and material handling equipment available makes the processing of arrivals challenging. These limitations, and unclear or changing regulations, resulted in customs delays of up to nine months, and more, for drilling-related materials in 2013.

The final obstacle that I wish to mention involves the ongoing political strife between the central government and the Kurdistan region. This conflict has resulted in a failure to pass the country’s long-awaited Oil and Gas Law, which has been debated and delayed for over two years. As a result, there are two different oil-and-gas contracts available for IOCs in Iraq. Many of the known reserves reside in fields under central governmental control. However, the central government’s contracts are much less favorable than Kurdistan’s production-sharing contracts, as they only provide for a fee in the range of approximately $1-2/bbl of oil. This caused some companies to move their operations into Kurdistan, to capture the more-lucrative contacts being offered there.

The central government forbids IOCs working in the south of Iraq to sign Kurdish contracts. Until now, independents and smaller companies had to make  choices about where to conduct Iraqi operations. Majors began to disregard this policy in 2011, when Exxon Mobil signed a Kurdish exploration agreement. Chevron and Total followed suit in 2013. These actions trouble the central government, as it views the capital and experience available in the majors as critical for re-developing Iraq’s super-giant oil fields. While Baghdad has threatened to blacklist companies, little action has occurred. Also concerning Baghdad is that other Iraqi regions have noted the challenge to the central government, and soon other governorates may offer direct contracts.

Risks. Not surprisingly, the biggest risk to IOC operations in 2014 will be security. This year started out with high expectations for stable security conditions after relatively low civilian death tolls were reported in 2011 (2,771) and again in 2012 (3,238). Civilian death tolls for first-quarter 2013 remained in line with those from 2011 and 2012. However, beginning in April, the numbers leaped from around 200 per month to nearly 600. This number increased further, with three recent months having totals of over 900. Through October 2013, the civilian death total sits at a disturbing 5,740.

Many regional geopolitical and sectarian issues are fueling this problem. There is hope that in 2014, this violent trend can be ebbed and possibly reversed. Support for this comes from Iraq’s western border along Syria, where recent diplomatic endeavors associated with the destruction of chemical weapons appear successful, and the momentum for genuine peace talks seems to be growing. To the east, a new Iranian regime is having positive dialogue with the international community that may ultimately alleviate regional tensions. And to the north, Turkey is proposing to mediate the ongoing oil revenue dispute between Baghdad and Kurdistan.

Another risk that may interrupt operations in 2014 is the planned parliamentary election for prime minister. Intra-sectarian competition could cause fragmentation of large, established voting coalitions. As a result, the period leading up to the election (if not delayed), and the period immediately after, could contain many episodes of civil demonstrations, unrest and heightened terrorist activity.

The future. I have little doubt that Iraq’s hydrocarbon potential rivals or surpasses that of Saudi Arabia. Iraq’s ability to stabilize its government, and control security, will determine whether it can also equal, or surpass, that kingdom’s production volumes. Of course, there is also the small issue of OPEC and its potential control over Iraq’s abilities to grow production volumes. As mentioned earlier, Iraq is blessed with much, from its history to its people to its enormous reserve potential. As of now, the opportunity that Iraq presents to our industry cannot be overlooked. While challenges exist and risks are real, I believe that with support from our industry, Iraq can fulfill its re-construction goals and return to being a dominant world oil producer.