Expert analysis: Iraqi supergiant development

IHS Global Insight comments on the ExxonMobil and Shell Iraq win

Competition for contracts in Iraq has been intense
Competition for contracts in Iraq has been intense

ExxonMobil and Shell recently triumphed over a LUKoil and ConocoPhillips consortium to be awarded Iraq’s 8.6 billion barrel West Qurna-1 project. Samuel Ciszuk, IHS Global Insight Middle East energy analyst, takes a closer look at the deal.

Iraq’s massive 15-billion-barrel West Qurna reservoir complex has long been seen as one of the big prizes in the oil industry, with production being cheap and easy to develop and the possibility of more oil being discovered in deeper horizons thought to be rather high. The field, located in the prolific and relatively stable southern Basra governorate is currently producing 270,000-280,000 b/d, but will according to earlier comments by the winning consortium be developed to a production plateau of 2.1 million b/d, within the Oil Ministry’s stipulated seven-year development and production ramp-up period.

ExxonMobil and Shell’s offer (ExxonMobil 80%, Shell 20%) is, however, somewhat lower then their initial bid to raise production to 2.325 million b/d in the unsuccessful first licensing round, although the companies at that point were unwilling to agree to the Oil Ministry’s low US$1.9/b remuneration fee for the increment, offering US$4/b themselves.
LUKoil will be particularly disappointed to lose out, having done work and studies on the West Qurna field complex and working tirelessly to revive an old production-sharing agreement (PSA) signed by the previous regime, but then rescinded shortly before the 2003 invasion. The company was hoping that its reservoir knowledge would help it win the field, although it came in with bids outlining far lower production targets than ExxonMobil and Shell and only managed to submit a matching bid (on a volume level) in the last weeks.

As IHS Global Insight wrote yesterday after the signing of BP and CNPC’s Rumaila contract, the terms offered by the Iraqi side have improved significantly, although for domestic political reasons—trying not to be portrayed as making approaches to companies with cap in hand—these changes have only been referred to as clarifications. Most significantly, the Iraqi Oil Ministry has changed the way the country will apply a 35% tax, only levying it on “profit oil” and not on the part of the remuneration covering the cost recovery. There is also a question about the “soft loan” signatory bonuses that the Iraqi government was demanding during the first licensing round, but which no one has commented on in the awards of the Zubair and West Qurna-1 fields since. The soft loan to the Iraqi state would, if it still remains in place, call on the Eni-led consortium to pay US$300 million to the government for the Zubair contract and ExxonMobil and Shell US$400 million for West Qurna-1.

IOCs have evidently also changed their views on the Iraqi contracts, not only because of the revised tax conditions, but also because of different political circumstances and much more favourable timing. While agreeing to a contact in the mid-year first licensing round—in the vein of BP and CNPC—might have resulted in having to undertake significant investments a good few months before the mid-January 2010 general election in Iraq, agreeing at this point means that no material investment has to take place before the results of the ballot are well known and the strength of the country’s political factions can be accurately assessed.

Given the political opposition to foreign and/or private investment in Iraq’s oil industry in many quarters and the continued lack of a national oil law—making it relatively easy for a future government to scrap or substantially renegotiate contracts—this has been a very tangible fear among IOCs. This timing issue will now, however, also—together with the encouraging examples of the Rumaila, Zubair, and West Qurna-1 contracts—be positive news for the second licensing round, where interest and competition for those fields not laying in contested northern areas now looks like it could be quite high.
The Iraqi Oil Ministry is hoping to be able to send the deal on to the cabinet for imminent ratification, as the two sides appear to already have made headway in agreeing terms and specifications. Hence, it looks likely that both the Eni-led Zubair deal and the West Qurna-1 contract will be signed before the mid-December second licensing round, raising optimism and interest ahead of the event.

The agreement on these three crucial fields in Iraq will significantly strengthen the government, but will also draw the ire of its hardest opponents, both in parliament and among insurgents, raising the risk that the oil industry will be increasingly targeted during the run-up to the election. The fact that several years of failed attempts at single-handedly starting development by the dilapidated Iraqi state-owned oil industry, or to bring in IOC help now finally seem to have yielded results will nevertheless be seen as positive by many in Iraq, rekindling a hope of accelerated reconstruction among the population, which the government will have to manage closely in order for it not to be turned into quick disappointment.
The Iraqi Oil Ministry will also have to look closely into rapidly expanding its pipeline network and export terminal capacity, so as to keep up with the rapid development envisaged by itself and the oil companies further upstream. Most of Iraq’s transport and export infrastructure is in a terribly bad state, while it remains under-dimensioned to handle the increased crude and associated gas, condensate, and natural gas liquids (NGL) flows targeted. Downstream bottlenecks have the potential to wreak havoc on Iraq’s plans and the large-scale capacity increases needed will require the Oil Ministry to get to work more or less imminently.

A solution to the companies’ large-scale water needs—for injection into the oilfields—will also have to be reached even quicker, with talks on this point believed to be at advanced stages. Nevertheless, in currently drought-ridden Iraq, this is a contentious and controversial issue.
 

Samuel Ciszuk is theMiddle East energy analyst for IHS Global Insight.

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