Iraq's oil industry looking to bounce back

Iraq's oil industry looking to bounce back

Jul 03, 2017
6 min read
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Ian Thom, principal analyst, Middle East Upstream, Wood Mackenzie spoke to Pipeline Magazine’s Julian Walker about why Iraq’s oil production growth has under-performed but opportunities remain

Iraq has always had high ambitions and back in 2009 the country opened up its giant and super-giant fields to international investment. It attracted competitive bids from many of the world’s most capable operators. The country even claimed that its oil production target was 12 million bpd. Wood Mackenzie recently released a report on Iraq’s oil industry outlook.

Thom explained: “The report looks at the Basra area and the Masan area where the majority of Iraq’s giant fields are and where the greatest scope is for production growth. So if you look at Iraq and you take away the fiscal terms and the on-ground country risk characters you will be looking at resources that could reach 10 million bpd but it is only when you overlay the hard fiscal terms and country risk factors then you can see what isn’t being achieved.”

In its report, Wood Mackenzie said that Iraq’s southern technical service contracts (TSCs) have added 2.3 million bpd of oil production since 2009 – a remarkable achievement given the challenges. Of this, 700,000 bpd or 30 per cent is offsetting baseline decline while 1.6 million bpd or 70 per cent is growth. However, they are producing 4.7 million bpd below the current 8 million bpd plateau production target (PPT), and excluding baseline production, they have only achieved one-third of the incremental production required to meet the PPT.

“The South of Iraq is really a large resource base and it will drive the Iraq production story,” said Thom. According to the report, Rumaila has added the greatest amount of incremental production among the TSCs at 700,000 bpd. This is a brownfield development with renovation and upgrades of existing facilities, drilling of wells and crucially a large-scale water injection scheme.

BP has suggested the natural decline rate is 17 per cent, implying the TSC could be responsible for more than 1 million bpd of incremental production. West Qurna 2 has been a greenfield success adding 450,000 bpd of new production. West Qurna 1, Majnoon, Zubair and Halfaya have all added more than 200,000 bpd of production.

Meanwhile the smaller Missan Oil Fields, Gharraf and Badra TSCs have added a combined 250,000 bpd of production. On a relative measure, Rumaila and Halfaya are the most advanced at 50 per cent of the incremental production needed to meet the PPT. West Qurna 1, Majnoon and Missan Oil Fields are all below 25 per cent progress to the PPT. In many cases, the progress relative to the PPT is due to constraints outside the control of the contractor.

Constraints on Iraq’s oil growth

Wood Mackenzie highlighted a number of commercial, technical, political and security constraints on Iraq’s production growth. The decision to extend OPEC’s agreed production cut until March next year will certainly have an impact this year.

“This year the OPEC production agreement is going to be a main feature that will constrain Iraq’s oil production growth this year. We certainly expect monthly production to be roughly flat but I do not expect production to be cut from the southern IOC-operated fields.” In the November 2016 OPEC meeting, Iraq agreed to a production level of 4.35 million bpd for H1 2017.

This is a decrease of 210,000 bpd on its reference level. In the report, Wood Mackenzie explained that Iraqi oilfields will require large-scale water injection to achieve the expected recovery rates. The Rumaila field is currently injecting close to 1 million bpd of water sourced from the Shatt alArab river. This will support a 60 per cent recovery factor in the Main Pay (Zubair Formation).

Other fields have more limited access to water supply. For fields producing from the Mishrif Formation water supply is ever more critical. Mishrif oil is heavy and aquifer support is poor, resulting in rapid well decline rates. Long-term sustained production requires pressure support from water injection. “The other strains in the report are longer term in nature, such as mid-stream expansion or some of the water injection schemes. These are multi-year projects that require investments for a number of years to turn around and put the facilities in place and then to build the capacity up with drilling of wells,” he said. On the political front bureaucracy is seen as a major hurdle.

“Bureaucracy is certainly something that operators highlight as a main issue in operating in Iraq and it cuts across central government, Ministry of Oil, cabinet approvals for projects to the local entities. Across the board it is a challenge and the nature of the TSC contracts in Iraq is that you want to get a quick investment and then a quick ramp up of production. So anything that slows it down will be detrimental to the projects’ returns. For that reason it is a real challenge. It is a frustration for IOC’s in Iraq,” said Thom.

Iraq has a number of plans in place to increase the use of gas as more than 1 bcfd of gas is flared in the country. The Basrah Gas Company has been established to develop gas infrastructure. “The challenge is that the projects that Basrah Gas Company wants to implement will cost a lot of money and at the moment this is in short supply with Iraq having such a high reliance on oil revenue and that has fallen dramatically in the last couple of years. I expect that there will be a focus on the smaller, more incremental type projects that can be delivered in the current financial environment. There is clearly a lot of gas resource in Iraq but at the moment it is a lack of funds that is stopping final go-ahead. Some of the estimates we have seen for the more ambitious gas utilisation projects are particularly expensive and will be less likely to be progressed.The fundamentals are there for Iraq and clearly there to capture a great amount of its own gas resources. We expect it to continue but on a smaller scale while financial constraints remain.”