Iraq's Pipe-dreams

Iraq has ambitious production plans for 2017 and beyond

Iraq, Production, ANALYSIS, Industry Trends

Iraq has ambitious production plans for 2017 and beyond, but infrastructure and security woes are choking production growth

Iraq’s reserve oil capacity could well exceed that of Saudi Arabia, lying fifth on the list of worlds highest proven oil reserves, Iraq is an oil industry behemoth poised to take back its crown after years of political strife, security issues and violence.

However, an over-enthusiastic government sponsored report, the Integrated National Energy Strategy, (INES), launched in 2013, has put forward oil production profiles that are not only ambitious, but almost certainly completely unattainable. These figures form Iraq’s energy plan.

The INES report puts forward three different production scenarios. At the high end of the spectrum, the Iraq government plans to increase crude oil production capacity to 13mbpd by 2017, an increase of over 9mbpd in just three years.

Production would then plateau until 2023 and then gradually decline to 10mbpd. The second mid-range production scenario is for Iraq to reach 9mbpd by 2020, and the final scenario, is reaching production of 6mbpd by 2025.

The figure of 13mbpd by 2017 put forward in the report is a direct result of IOCs over estimating production levels from individual fields.

This is a result of the Iraq government making production targets a criteria for successful bids in the round one and two field licensing, according to Dr Faleh Al Khayat, former director of planning, Iraq Oil Ministry.

“Iraq not only put the remuneration fee as the criteria for winning, it put the production target as well. So IOCs put very high production targets for each field based on preliminary studies, when they entered their bids,” he states.

For example, the Majnoon field was studied by the Iraqi government over a period of 40 years.
When Total began to study Majnoon between 1990 and 2003, it was given all the relevant field data by the government. Total and the Iraqi government agreed that the appropriate target to hit for the Majnoon field was 600,000bpd for 10 to 15 years.

“If 2003 [and the war] did not happen, Iraq would have signed a production sharing agreement with Total based on 600,000bpd. But in the licensing round, Shell and its partners put 1.8mbpd for Majnoon; that is three times the original target and they won it,” explains Al Khayat.

“Ironically, Total, who knows much more about Majnoon, gave 750,000bpd for the field in its bid. So everyone realised that reaching 13mbpd in 2017 is impossible.”

If all of the targets that were overestimated by the IOCs for the initial licensing round are added up, the total is 13mbpd, the INES profile for 2017.

“There is absolutely no way the country can reach the 13mbpd scenario,” states Al Khayat.

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Iraq’s current production capacity, is 3.4mbpd, however average exports over the whole of 2013 reached just 2.979mbpd, January 2014 production was 2.8mbpd and February skimmed 3.4mbpd, the highest recorded figure since 1979. While the increase is positive, experts say that the country will not reach any of the three huge targets outlined in the Integrated National Energy Strategy, (INES).

“My view of the stated 13mbpd target is that it is overly ambitious, perhaps just a dream,” states Terry Willis, director, Middle East, Africa & CIS, EICUK Middle East. “They certainly would have no chance without the engagement of the IOCs and to do this, they would have to radically overhaul the current terms that have been offered in the past.”

There is also the very high cost of operating in the country due to the ongoing social unrest and, to put in place production facilities to exceed Saudi’s oil output is totally unrealistic in the current environment.

“Perhaps with a 10 year target, it may be possible, but within three years? No chance,” said Willis.

The mid-range projection is also challenging. Production in recent years has been inconsistent.
In 2009 Iraq produced 2.4mbpd, figures then dropped in 2010, before reaching an annual average of 3mbpd last year. Looking at southern Iraq production, the area where all the fields and international oil companies are situated, production jumped from 1.74mbpd in 2009 to 2.340mbpd in 2013.

“In three years’ time production will increase by another 1mbpd. This means every year production will increase by 300,000bpd. At the moment we need 3.4mbpd to reach to 9mbpd in 2020, that is 5.6mbpd in seven years.

We require 800,000bpd increment per year to reach that, yet we have only done 330,000bpd over the last few years with all the incentives to international oil companies for reaching commercial production. The INES report also calls for Iraq to reach 4.5mbpd total production in 2014. This figure must also be dismissed outright,” says Al Khayat.

“We cannot increase production by a total of 1mbpd during 2014. Even the increase of 800,000bpd to reach the 9mbpd for 2020, the Iraq energy minister does not believe in it. He said we can only aim for 500,000bpd. If we look at what has happened in the last three years, we can only reach 6mbpd in 2025. That 6mbpd is the figure which the Iraqis have always aimed for since the 1970s,” he states.

The major stumbling block preventing Iraq from hitting more ambitious production projections is the lack of infrastructure. There is a huge amount of work to be done; replacing pipelines, securing and replacing aging infrastructure and developing adequate production and transportation.

The southern Iraq crude oil pipelines can take a maximum of 3mbpd, and the Iraqi-Turkish pipeline has a capacity of 650,000bpd; creating a total capacity of 3.65mbpd. The northern pipeline is damaged, so there is no chance of throughput increasing from there. The current storage capacity in the south is also 7mbpd, only two days’ worth of production, and will need to be massively expanded as production increases.

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“I think no more than 10 storage plants will be built in the next three years, so storage will go to 10mbpd, by 2020 it will only go to 20mbpd. This is half of what the strategy needs. Critically we need the Al Fao onshore terminal to be completed, because the terminal has enough pumps to receive the oil and push it to the jetties. Without that terminal we cannot achieve the 7mbpd required to export from the south,” explains Al Khayat.

“The southern Iraq pipeline capacity is 2.6mbpd, so if we are going to increase production to export more than 2.6mbpd we will bottleneck on the total pumping capacity. By 2015 the country’s crude oil production total will be approximately 6.2mbpd.”

To attain the higher production figures in the report, the country would need 300 new wells a year, plus 200 injectors per year, plus 125 rigs per year.

“The ports cannot handle this, the roads cannot handle it, the materials cannot be found. We need about 16 production centres and connection pipes. Most of all, a common water supply. There is a big desalination plant project currently in the pipeline, which will cost about $10-12bn. It will be used to treat the water to make it suitable for injecting into the wells,” explains Al Khayat.

“This desalination station is important because a lot of new oil is medium oil and production cannot increase unless this common water supply is finished and operational.”

Building the infrastructure is one challenge, however, security is anothermajor stumbling block for oil companies in Iraq.

The main northern Kirkuk-Ceyhan pipeline has been repeatedly bombed by militants throughout 2014 and both international oil companies and national oil companies are pulling staff out of the area for their own security. This pipeline, which is unable to be fixed at the moment due to repair crews being killed, carries approximately one fifth of Iraq’s oil exports.

While Baghdad is optimistic the pipeline will open soon, the continued threat of attacks is hampering oil flows and affecting monthly production targets, as well as dramatically raising the costs for oil companies operating in the area. According to professional security experts operating in Iraq, it costs on average of $3,000 per day to secure staff operating in high risk environments in Iraq.

According to analyst firm, Lloyds Register Energy, the challenge to Iraq’s crude ambitions is the ability to build a robust and sustainable energy infrastructure supported by a strong safety culture to meet the 2017 scenario.

The firm said that it is not a completely impossible task to reach the INES scenarios if the infrastructure challenges are overcome but the supply chain issues, from drilling to exploration and production, and security concerns have not been resolved.

According to the INES report, if Iraq has any chance of attaining the scenarios it has set out, Iraq’s energy-sector ministries will need to focus on rapid, sustained, and balanced growth in the medium and long-term phases of INES, encourage international investment, and develop a strong INES governance mechanism that sets benchmarks, monitors progress, addresses obstacles, adapts plans to new circumstances, and ensures continued coordination amongst Iraq’s ministries.

It currently looks unlikely that all of these steps will be put in place to the degree necessary to hit the scenarios laid out in INES.

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