Iraq Oil - part 2
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Oil Field Development, War, and Current Status
Iraq's southern oil industry was decimated in the Gulf War, with production capacity falling to 75,000 bbl/d in mid-1991. The largest producing oil field in this region is Rumaila. The war resulted in destruction of gathering centers and compression/degassing stations at Rumaila, storage facilities, the 1.6-million bbl/d (pre-war capacity) Mina al-Bakr export terminal, and pumping stations along the 1.4-million bbl/d (pre-war capacity) Iraqi Strategic (North-South) Pipeline. Seven other sizable fields remain damaged or partially mothballed. These include Zubair, Luhais, Suba, Buzurgan, Abu Ghirab, and Fauqi. Generally speaking, oilfield development plans have been on hold since Iraq's invasion of Kuwait, with Iraqi efforts focused on maintaining production at existing fields.
The Kirkuk field, with over 10 billion barrels in remaining proven oil reserves, forms the basis for northern Iraqi oil production. Bai Hassan, Jambur, Khabbaz, Saddam, and Ain Zalah-Butmah-Safaia are the other currently-producing oil fields in northern Iraq. An estimated 60% of Northern Oil Company's (NOC) facilities in northern and central Iraq were damaged during the Gulf War. In 2001, output from all northern fields (Kirkuk, Bai Hassan, Jambar, Khabbaz, Saddam, Safiya, and 'Ain Zalah/Butnah) was around 1 million bbl/d. In December 2001, the Turkish Petroleum International Corporation won a U.N.-approved contract to drill for oil in northern Iraq, specifically at the Khurmala field near Kirkuk. Two Russian companies -- Tatneft and Zarubezhneft -- have won U.N. -approved upstream contracts at the Bai Hassan, Kirkuk, and Saddam fields. Tatneft is to drill 78 new wells in Iraq, marking the largest foreign company oil involvement in Iraq since 1990. In early December 1999, Russian energy company Zarubezhneft said that it was drilling multiple wells at Kirkuk, and that this did not violate U.N. sanctions (Russian officials have denied that any work was being done). Zarubezhneft hopes to boost Kirkuk production capacity from its current 900,000 bbl/d to around 1.1 million bbl/d.
Iraq's southern fields -- mainly North and South Rumaila, plus al-Zubair, the Missan fields, West Qurna, Luhais, and Bin Umar -- produced around 1.5 million bbl/d in 2001. Zarubezhneft also has a contract to drill approximately 100 wells in the North Rumaila field. In January 2002, Tunisia signed a deal with Iraq to develop an oilfield near the southern province of Najaf.
Another major Iraqi oil field is the 11-billion barrel East Baghdad field, which came online in April 1989. This centrally-located field currently produces 50,000 bbl/d of heavy, 23o API oil as well as 30 million cubic feet per day (Mmcf/d) of associated natural gas.
In March 2000, U.N. Security Council agreed to double the spending cap for oil sector spare parts and equipment (under Resolution 1175 of June 20, 1998), allowing Iraq to spend up to $600 million every 6 months repairing oil facilities. U.N. Secretary General Kofi Annan had warned of a possible "major breakdown" in Iraq's oil industry if spare parts and equipment were not forthcoming. In August 2000, a senior Iraqi oil official stated that delays by the United Nations in approving contracts to upgrade Iraq's oil sector were threatening production levels. The United States has said that the $300 million should be used only for short-term improvements to the Iraqi oil industry, and not to make long-term repairs. Iraq's oil sector distribution plan for the "Oil-for-Food" program's 12th phase reportedly includes $350 million for upstream contracts, including development work on the Hamrin, Suba, and West Qurna fields.
As of early January 2002, the head of the U.N. Iraq Program, Benon Sevan, expressed "grave concern" at the volume of "holds" put on contracts for oilfield equipment, and stated that the entire program was threatened with paralysis. According to Sevan, these holds amounted to nearly 2,000 contracts worth about $5 billion, about 80% of which reportedly were "held" by the United States. Overall, Iraq has imported about $1.2 billion worth of equipment to upgrade oil facilities over the past three years under the "Oil-for-Food" program. Sevan also said that retroactive pricing was resulting in lower Iraqi oil exports, and therefore revenues, under the "Oil-for-Food" program.
Post-U.N. Sanctions Development Plans
As of October 2002, Iraq reportedly had signed several multi-billion dollar deals with foreign oil companies mainly from China, France, and Russia. Deutsche Bank estimates $38 billion total on new fields -- "greenfield" development -- with potential production capacity of 4.7 million bbl/d if all the deals come to fruition (which Deutsche Bank believes is highly unlikely). Iraq reportedly has become increasingly frustrated at the failure of these companies actually to begin work on the ground, and has threatened to no longer sign deals unless firms agreed to do so without delay. Iraqi upstream oil contracts generally require that companies start work immediately, but U.N. sanctions overwhelmingly have dissuaded companies from doing so. Following the lifting of U.N. sanctions, Iraq hopes to increase its oil production capacity to over 6 million bbl/d or higher.
In recent weeks and months, Iraq reportedly has signed a flurry of deals with companies from Italy (Eni), Spain (Repsol YPF), Russia (Tatneft), France (TotalFinaElf), China, India, Turkey, and others. According to a report in The Economist, Iraq has signed over 30 deals with various oil companies, offering generous rates of return ("on the order of 20%") as part of its "Development and Production Contract" (DPC) model. Iraq introduced the DPC in 2000 to replace the previous "Production Sharing Contract" (PSC) arrangement.
Russia, which is owed several billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development, including a $3.5-billion, 23-year deal to rehabilitate Iraqi oilfields, particularly the 11-15 billion barrel West Qurna field (located west of Basra near the Rumaila field). Since the agreement was signed in March 1997, Russia's Lukoil (the operator, with a 68% share, heading a Russian consortium plus an Iraqi company to be selected by the Iraqi government) has prepared a plan to install equipment with capacity to produce 100,000 bbl/d from West Qurna's Mishrif formation. Meanwhile, in August 2000, Iraqi engineers reportedly completed work on two degassing stations at West Qurna, with two more planned, potentially raising production at the field (one of the world's largest) significantly, from around 140,000 bbl/d currently. West Qurna is believed to have potential production capacity of up to 1 million bbl/d. In October 1999, Russian officials reportedly said that Iraq had accepted a Russian request to delay work on West Qurna given the continuation of U.N. sanctions. This followed an Iraqi warning that Lukoil could lose its contract (and possibly be replaced by another Russian company) at West Qurna if it did not begin work immediately (Lukoil has been restrained from doing so by U.N. sanctions). As of October 2002, however, Lukoil had not begun work on West Qurna. In October 2002, Lukoil's Chief Executive (Vagit Alekperov) said his belief that the West Qurna contract would "be upheld no matter what happens" in Iraq, and that he had received "guarantees" on this matter from Russian President Vladimir Putin.
In October 2000, the Iraqi Oil Ministry expressed frustration with the slow pace of progress by Russian and Chinese firms, and in January 2001, Shell announced that it had held talks with the Iraqi Oil Ministry regarding "potential opportunities" at the 1-billion-barrel Ratawi oilfield. In March 2001, the Deputy Oil Minister announced that Iraq might terminate contracts with the Chinese and Russian companies.
In October 2001, a joint Russian-Belarus oil company, Slavneft, signed a $52 million service contract with Iraq on the 2-billion-barrel, Suba-Luhais field in southern Iraq, and expecting to sign a service contract to begin drilling later this year. Full development of Suba-Luhais could result in production of 100,000 bbl/d at a cost of $300 million over three years. As of March 2002, Slavneft reportedly was awaiting approval from the United Nations to drill 25 wells as Luhais.
The Saddam field contains 3 billion barrels of oil and 5 trillion cubic feet (Tcf) of associated gas. Iraq is seeking foreign assistance for a second-phase Saddam development, which would raise oil production capacity to 50,000 bbl/d, as well as 300 Mmcf/d of gas. In early April 2001, Russia's Tatneft and Zarubezhneft reportedly received U.N. approval to drill 45 wells in the Saddam field, plus Kirkuk and Bai Hassan, as part of an effort to reduce water incursion into the fields. As of October 2002, however, work on these fields had yet to begin.
The largest of Iraq's oilfields slated for post-sanctions development is Majnoon, with reserves of 12-20 billion barrels of 28o-35o API oil, and located 30 miles north of Basra on the Iranian border. French company TotalFinaElf reportedly has signed a deal with Iraq on development rights for Majnoon. Majnoon was reportedly brought onstream (under a "national effort" program begun in 1999) in May 2002 at 50,000 bbl/d, with output possibly reaching 100,000 bbl/d by the end of 2002 (according to Oil Minister Rashid). Future development on Majnoon ultimately could lead to production of up to 600,000 bbl/d at an estimated (according to Deutsche Bank) cost of $4 billion. In July 2001, angered by France's perceived support for the U.S. "smart sanctions" plan, Iraq announced that it would no longer give French companies priority in awarding oil contracts, and would reconsider existing contracts as well. Iraq also announced that it was inclined to favor Russia, which has been supporting Iraq at the U.N. Security Council, on awarding rights to Majnoon and another large southern oil field, Nahr Umar.
TotalFinaElf apparently has all but agreed with Iraq on development of the Nahr Umar field. Initial output from Nahr Umar is expected to be around 440,000 bbl/d of 42o API crude, but may reach 500,000 bbl/d with more extensive development. The 2.5-4.6 billion-barrel Halfaya project is the final large field development in southern Iraq. Several companies (BHP, CNPC, Agip) reportedly have shown interest in the field, which ultimately could yield 200,000-300,000 bbl/d in output at a possible cost of $2 billion.
Smaller fields with under 2 billion barrels in reserves also are receiving interest from foreign oil companies. These fields include Nasiriya (Eni, Repsol), Tuba (ONGC, Sonatrach, Pertamina), Ratawi (Shell, Petronas, CanOxy), Gharaf (Japex, TPAO), Amara (PetroVietnam), Noor (Syria), and more. Italy's Eni and Spain's Repsol appear to be strong possibilities to develop Nassiriya.
In addition to the 25 new field projects, Iraq plans to offer foreign oil companies service contracts to apply technology to eight already-producing fields. Meanwhile, Iraq has authorized "risk contracts" to promote exploration in the nine remote Western Desert blocs. Iraq has identified at least 110 prospects from previous seismic work in this region near the Jordanian and Saudi borders. In late 2000, India's ONGC was awarded Block 8 in the Western Desert region, and in April 2002, Indonesia's Pertamina signed an exploration contract for Block 3. Other companies reportedly interested in the Western Desert region include: Repsol, Lundin, Sonatrach, MOL, Petronas, Ranger, and TPAO.
In total, Deutsche Bank estimates that international oil companies in Iraq may have signed deals on new or old fields amounting to nearly 50 billion barrels of reserves, 4 million bbl/d of potential production, and investment potential of more than $20 billion. Development of southern fields may be complicated by infrastructure damage, the presence of land mines (from the Iran-Iraq war), and marshy conditions. Major companies with deals in Iraq include TotalFinaElf (with estimated reserves of 12.5-27 billion barrels, according to the Wall Street Journal), several Russian companies (Lukoil, Zarubezneft, Mashinoimport, with combined reserves of 7.5-15 billion barrels), China's National Petroleum Company (CNPC -- 2 billion barrels or so); and Eni (under 2 billion barrels).
Oil Export Pipelines/Terminals
Iraq's oil export infrastructure (pipelines, ports, pumping stations, etc.) were damaged in both the Iran-Iraq War as well as Operation Desert Storm (1991). Currently, the 600-mile, 40-inch Kirkuk-Ceyhan pipeline is Iraq's largest operable crude export pipeline. This Iraq-Turkey link consists has a fully-operational capacity of 1.1 million bbl/d, but reportedly can handle only around 900,000 bbl/d. A second, parallel, 46-inch line has an optimal capacity of 500,000 bbl/d and was designed to carry Basra Regular exports, but at last report was inoperable. Combined, the two parallel lines have an optimal capacity of 1.5-1.6 million bbl/d. Expanding capacity to this level, however, will depend on Iraq's ability to rehabilitate the IT-1 and IT-1A pumping stations, as well as the Zakho metering station near the Iraq-Turkey border and other ongoing pipeline repairs (including so-called "intelligent pigging") on the 46-inch line. This work appears to be well behind schedule, and reportedly will not be completed anytime soon (although there was at least one report in late May 2002 that the line would be fixed by July). The 40-inch line has additional pumping stations and fewer bottlenecks than the 46-inch line, which allows for greater throughput than that of the larger line. Currently, Iraq is bypassing the crucial but damaged IT-2 pumping station, located about 93 miles south of the Turkish border, making it more difficult to reach the 1.6 million bbl/d dual-line capacity. To make IT-2 operational, Iraqi officials have said that they need controls and associated valves costing around $50 million. The IT-1 pumping station near Kirkuk received lighter damage and is presently functional.
On August 20, 1998, Iraq and Syria (which reopened their border in June 1997 -- after a 17-year closure -- for trade and official visits) signed a memorandum of understanding for the possible reopening of the 50-year-old, rusting Banias oil pipeline from Iraq's northern Kirkuk oil fields to Syria's Mediterranean port of Banias (and Tripoli, Lebanon). As of October 2002, the pipeline reportedly was being used (see above), and there also was talk of building a new, parallel pipeline as a replacement.
In order to optimize export capabilities (i.e., to allow oil shipments to the north or south) , Iraq constructed a reversible, 1.4-million bbl/d "Strategic Pipeline" in 1975. This pipeline consists of two parallel 700,000-bbl/d lines. The North-South system allows for export of northern Kirkuk crude from the Persian Gulf and for southern Rumaila crudes to be shipped through Turkey. During the Gulf War, the Strategic Pipeline was disabled after the K-3 pumping station at Haditha as well as four additional southern pumping stations were destroyed. In early 2001, Iraqi oil ministry officials claimed that the pipeline had been rehabilitated, providing Iraq with increased export flexibility. However, a U.N. assessment team which visited Iraq in March 2001 concluded that the country's downstream sector "had declined seriously in many respects" over the past 18 months, including increased leakage from pipelines, particularly the North-South "Strategic" line.
In the Persian Gulf, Iraq has three tanker terminals: at Mina al-Bakr, Khor al-Amaya, and Khor al-Zubair (which mainly handles dry goods and minimal oil volumes). Iraq also has additional dry goods ports at Basra and at Umm Qasr, which is being outfitted to accommodate crude tankers. Mina al-Bakr is Iraq's largest oil terminal, with four 400,000-bbl/d capacity berths capable of handling very large crude carriers (VLCCs). Gulf War damage to Mina al-Bakr appears to have been repaired in large part and the terminal currently can handle up to 1.2-1.3 million bbl/d. A full return to Mina al-Bakr's nameplate capacity apparently would require extensive infrastructure repairs. Mina al-Bakr also is constrained by a shortage of storage and oil processing facilities, most of which were destroyed in the Gulf War.
Iraq's Khor al-Amaya terminal was heavily damaged during the Iran-Iraq War (and completely destroyed during Operation Desert Storm in 1991) and has been out of commission since then. As of March 2001, reports indicated that Iraq had largely completed repairing two berths at Khor al-Amaya. According to the Iraqi Oil Ministry, the terminal, with export capacity of 500,000-700,000 bbl/d, would "soon be ready to receive oil tankers." Upon full completion of repairs, Iraq projects Khor al-Amaya's capacity will rise to 1.2 million bbl/d, and will help prevent delays at Mina al-Bakr while repairs are conducted there. In March 2002, Platt's Oilgram News reported that a Russian company was "awaiting the green light from the U.N.....to help restore Iraq's Mina al-Bakr and Khor al-Amaya crude loading platforms." Iraq will need U.N. Security Council approval to export from Khor al-Amaya, since it is not part of the approved export outlet of Mina al-Bakr.
Refining
Iraq's refining capacity as of January 2002 was believed to be over 400,000 bbl/d (although the Iraqis claim 700,000 bbl/d), compared to a pre-Gulf War, nameplate capacity of 700,000 bbl/d. Iraq has 10 refineries and topping units. The largest are the 150,000-bbl/d Baiji North, 140,000-bbl/d (or higher) Basra, and 100,000-bbl/d Daura plants. During the Gulf War, both Baiji in northern Iraq as well as the refineries at Basra, Daura, and Nasiriyah were severely damaged. Today, a lack of light-end products, low quality gasoline, and rising pollution levels because of a lack of water treatment facilities are some problems faced by Iraq's refining sector. Post-sanction plans include attracting foreign investment to perform refinery upgrades (Iraq has identified dozens of such projects) and to build a new $1-billion, 290,000-bbl/d "Central" refinery near Babylon.
NATURAL GAS
Iraq contains 110 trillion cubic feet (Tcf) of proven natural gas reserves, along with roughly 150 Tcf in probable reserves. About 70% of Iraq's natural gas reserves are associated (i.e., natural gas produced in conjunction with oil), with the rest made up of non-associated gas (20%) and dome gas (10%). Until 1990, all of Iraq's natural gas production was from associated fields. In 2000, Iraq produced 111 billion cubic feet (Bcf) of natural gas, down drastically from peak output levels of 700 Bcf in 1979. Within two years after the lifting of U.N. sanctions, Iraq hopes to produce 550 Bcf., and within a decade, Iraq aims to be producing about 4.2 Tcf of natural gas annually. Since most of Iraq's natural gas is associated with oil, progress on increasing the country's oil output will directly affect the gas sector as well. Natural gas is both produced with oil and also used for reinjection for enhanced oil recovery efforts. Generally, Iraq's policy is to award gas and oil concessions to companies from countries supporting the easing or lifting of U.N. sanctions (i.e., France, China, Russia). Russian companies reportedly are hoping to develop a number of natural gas production and processing facilities in Iraq, including a group of fields in the Misan region of southern Iraq.
Main sources of associated natural gas are the Kirkuk, Ain Zalah, Butma, and Bai Hassan oil fields in northern Iraq, as well as the North and South Rumaila and Zubair fields in the south. The Southern Area Gas Project was completed in 1985, but was not brought online until February 1990. It has nine gathering stations and a larger processing capacity of 1.5 billion cubic feet per day. Natural gas gathered from the North and South Rumaila and Zubair fields is carried via pipeline to a 575-Mmcf/d natural gas liquids (NGL) fractionation plant in Zubair and a 100-Mmcf/d processing plant in Basra. At Khor al-Zubair, a 17.5-million-cubic-foot LPG storage tank farm and loading terminals were added to the southern gas system in 1990.
Iraq's only non-associated natural gas production is from the al-Anfal field (200 Mmcf/d of output) in northern Iraq. Al-Anfal production is piped to the Jambur gas processing station near the Kirkuk field, which is 20 miles away. Al-Anfal's gas resources are estimated at 4.5 Tcf, of which 1.8 Tcf is proven. In December 2001, Russia's Gazprom reportedly was negotiating possible development of al-Anfal. In November 2001, a large non-associated natural gas field reportedly was discovered in the Akas region of western Iraq, near the border with Syria, and containing an estimated 2.1 Tcf of natural gas reserves. It is not clear whether or not the field is associated or non-associated.
In August 2001, Iraqi oil minister Rashid announced that Iraq had reached an agreement with Turkey to build a $2.5 billion gas pipeline to Turkey, and possibly on to Europe. Iraq aims to increase its natural gas exports to Europe, and Turkey could be a key transit center. Iraq also would like to export natural gas to Syria, Lebanon, and Jordan.
ELECTRIC POWER
Around 85%-90% of Iraq's national power grid (and 20 power stations) was damaged or destroyed in the Gulf War. Existing generating capacity of 9,000 megawatts (MW) in December 1990 was reduced to only 340 MW by March 1991. In early 1991, transmission and distribution infrastructure also was destroyed, including the 10 substations serving Baghdad and about 30% of the country's 400-kilovolt (kV) transmission network. In early 1992, Iraq stated that it had restarted 75% of the national grid, including the 1,320-MW Baiji and Mosul thermal plants as well as the Saddam Dam. In 1998, Iraq's maximum available electric generation capacity was estimated (by Iraq) at around 4,000 MW, with a report in November 1999 indicating that this figure may have increased even further, to 6,000 MW. Despite this increase, power continues to be rationed throughout the country.
According to a report by U.N. Secretary General Kofi Annan, Iraq's power deficit stood at 1,800 MW as of August 2000, with blackouts a common occurrence. Iraq reportedly has signed contracts for renovating two generation units at the Harithah power plant, and another to rebuild the Yusufiyah plant, which stopped operating in 1990. Iraq's Electricity Authority reportedly also has signed several other contracts with Chinese, Swiss, French, and Russian companies, to build 3,000 MW of additional power generating capacity. These contracts require U.N. approval, and Iraq has claimed that the United States and Britain are blocking $1.5 billion worth of electrical equipment it has requested. In December 2000, it was reported that a Chinese company had completed work on the Abdullah power plant north of Baghdad. In October 2001, it was reported that Russia's Mosenergomontazh was working to modernize Iraq's Southern Heat and Power Plant in Najibia, Basra province. The project aims to add 200 MW of generating capacity to Iraq's grid. In August 2002, the Najaf governate in southern Iraq announced that two new power plants, with a combined capacity of 20 MW, had come online.
Sources for this report include: Agence France Presse; Associated Press; BBC Summary of World Broadcasts; Business Week; Chicago Tribune; CIA World Factbook 2002; Deutsche Bank; Dow Jones; DRI/WEFA; The Economist; Economist Intelligence Unit; Energy Compass; Financial Times; Gulf News; Hart's Africa Oil and Gas; Interfax News Agency; Janet Matthews Information Services (Quest Economic Database); Los Angeles Times; Middle East Economic Survey; New York Times; Oil & Gas Journal; Oil Daily; Petroleum Economist; Petroleum Intelligence Weekly; Platt's Oilgram News; Reuters News Wire; Russian Oil and Gas Report; U.N. Office of the Iraq Programme; U.S. Energy Information Administration; U.S. Department of State; Wall Street Journal Europe; Washington Post; Weekly Petroleum Argus; World Markets Energy. |
