The Only OPEC Member That Could Challenge Saudi Oil Dominance

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In line with its targets for increasing crude oil production to 6.2 million barrels per day (bpd) by end-2020 and 9 million bpd by end-2023, up from the current 4.6 million bpd or so and on a par with Saudi Arabia’s output, Iraq has made it clear to foreign and domestic oil field developers alike that increases must be made or contracts will be reviewed. Three key fields are currently in the spotlight – Rumaila, West Qurna 1, and Gharraf – with more to follow shortly. Ongoing infrastructure constraints, however, may continue to thwart the realisation of these ambitions on schedule.

According to figures released recently by Iraq’s Oil Ministry, the long-time stalwart field of Iraq’s oil production – Rumaila (which together with Kirkuk has produced around 80% of Iraq’s total cumulative oil production) – produced 1.467 million bpd over the course of 2018, its highest annual rate of production for 30 years. This figure is above the 1.173 million bpd initial target output figure agreed with BP in the original 2008 contract but still well below the plateau target at that time of 2.850 million bpd, although the re-negotiated plateau target is 2.1 million bpd. Although the field has been operational for many years, it still has 55% of its ultimately recoverable resources of 35 billion barrels in place, according to the International Energy Agency (IEA). As with the vast majority of Iraq’s oil fields both north and south, the lifting cost for oil remains among the lowest in the world at around U$2-3 pb, on a par with that of Saudi Arabia.

The increase to the 1.4+ million bpd figure does reflect some improvements put into place by the field’s developers – BP and China National Petroleum Corporation (CNPC) through its PetroChina operation – in the past couple of years. Aside from a new power plant that supports Rumaila’s day-to-day functioning, new dehydrator and desalter production trains increased production capacity by 124,000 bpd. In addition, 31 new wells were drilled last year alone, and BP’s renovation of the Qarmat Ali Water Treatment Plant means that it is now capable of treating up to 1.3-1.4 million bpd of river water, allowing for greater extraction of oil from the field’s Mishrif reservoir (triple the amount, in fact, that was extracted in 2010). According to industry figures, Rumaila requires around 1.4 barrels of water for each barrel of oil produced from the north of the field, whilst the Mishrif formation in the south will require much higher water injection rates to support production.

Recent production increases at the adjunct Zubair field, principally operated by ENI (plus KOGAS and Iraqi partners), can also be attributed in significant part to BP’s efforts in Rumaila, as around 14% of the water from the Qarmat Ali Water Treatment Plant goes to Zubair. With an initial target of 201,000 bpd, Zubair now produces around 475,000 bpd, and is due to receive a further boost from the construction of a 380 megawatt power plant. These advances are likely to increase oil production to around 600,000 bpd, although not until 2030, according to the IEA and it is still far off the initial plateau target of 1.2 million bpd.

This brings Iraq back to the central problem that still constrains dramatic further gains in oil production of the level needed for it to hit its new oil output targets. “To effect any meaningful increase in Iraq production you cannot get around the fact that the CSSP [Common Seawater Supply Project] needs to be in place across the country and fully functioning, otherwise not only will Iraq not be able to effect such output improvements but also output from existing fields will be jeopardised,” Richard Mallinson, head of Middle East analysis for global energy consultancy, Energy Aspects, in London, told OilPrice.com. “Some companies – like ENI for the Zubair field and BP in Rumaila – have built their own mini-facilities and solutions but this requires a huge commitment and level of confidence that not every company on every site wants to make,” he said.

As it stands, the CSSP – which originally involved taking and treating 12.5 million bpd of seawater from the Persian Gulf and then transporting it via pipe­lines to six oil production facilities for water injection to boost pressure at these key reservoirs – is on hold for reasons exclusively revealed by OilPrice last month. The IEA now estimates that in order for Iraq to hit just under 6 million bpd – slightly below Iraq’s new official first phase target although still sufficient for it to overtake Canada as the world’s fourth-largest producer – it will need a total of 8 million bpd of water being used in selected fields, up from around the 5 million used currently. If the CSSP is not online then this volume of water will need to be met by other sources such as produced water, expansion of existing water treatment facilities, industrial water and so on. However, the fact that ExxonMobil (alongside PetroChina, and Itochu) is still working on the development of West Qurna 1 – and increasing production at the field – implies that there is still some prospect of the U.S. supermajor re-engaging at least on some version of the CSSP, if not the fully scaled-up Southern Iraq Integrated Project.

According to the most recent figures, production at West Qurna 1 – with proven reserves of 47 billion barrels of oil – has reached 465,000 bpd, up from about 440,000 bpd. This increase was largely a product of new crude processing facilities and oil storage tanks coming into operation, which, once functioning at full capacity, should boost crude oil output to at least 490,000 bpd by the end of 2020 at the latest. This compares to an initial target for ExxonMobil under the terms of the 2008 contract of 268,000 bpd and a plateau target of 2.825 million bpd, although again this has been re-negotiated down, this time to 1.6 million bpd.

In the context of its end-2020 oil target, the Oil Ministry has also put pressure on Japan’s Japex to speed up its work increasing production at the Gharaf field, up from the current 90,000 bpd to at least 230,000 bpd. This was the original plateau figure, after the initial target of 35,000 bpd had been reached, and the Japanese firm recently announced that it has allocated US$460 million for the fiscal year 2019-20 to further develop the field. Although generally regarded as a lesser field at the moment in Iraq’s oil reservoir line-up, success at Gharraf could well lead to Japex – and the other participating foreign firm, Petronas – being offered an “exceptionally favourable deal” to develop the adjacent DhiQar field of Nassiriya – according to a senior oil and gas industry source who works closely with the Oil Ministry.

Although last year saw the Ministry assign responsibility for developing Nassiriyah to two local companies, there are still ambitions to attract foreign companies to the site that has a conservatively estimated 4.36 billion barrels of reserves in place. Discovered by the Iraq National Oil Company (INOC) in 1975, only for all development plans to be shelved by Iran-Iraq war, the field came on stream in 2009 and was listed on the 2009-2010 fast-track plan.

This aimed to raise its output to about 50,000 bpd, and the first half of 2009 saw ENI, Nippon Oil, Chevron, and Repsol submit bids to develop the field on an Engineering Procurement Construction contract basis, with a consortium comprised of Nippon Oil, Inpex, and JGC Corporation looking set to win the contract before negotiations broke down again. The prospect for the field was later complicated by the addition of plans to construct a 300,000 bpd refinery as well in what would be the ‘Nassiriyah Integrated Projected’ but, with the two local firms in place, the site is now producing around 100,000 bpd, with plans to double this by the end-2020 target date.

By Simon Watkins for Oilprice.com

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