Iraq regards the U.S.’s refusal to extend waivers for countries importing oil from Iran as a tacit endorsement for it to pump its own oil to the maximum. This dovetails neatly into its Oil Ministry’s internal targets – conveyed last week to OilPrice.com by a source who works closely with the Ministry – of increasing crude oil production to at least 6.2 million barrels per day (bpd) by the end of 2020 and at least 9 million bpd by the end of 2023.
At around the same time, the Oil Ministry announced that it had agreed preliminary terms with ExxonMobil and PetroChina to rollout the South Integrated Project (SIP), an important infrastructure project that should result in some degree of output increase. This deal, though, is far from certain, said the Iraqi source, and – critically – does not necessarily include the contract for the full-scale Common Seawater Supply Project (CSSP).
This would involve taking and treating seawater from the Persian Gulf and then transporting it to oil production facilities in order to be used for water injection to boost pressure at southern Iraq’s ‘Big Four’ oil fields: Rumaila, Majnoon, Zubair, and West Qurna. The CSSP is regarded by traders, analysts and politicians alike as being the key to unlocking all of Iraq’s massive oil potential, the top-case production scenario according to the International Energy Agency being at least 12 million bpd.
Russia, whose corporate proxy Rosneft already controls Iraq’s oil and gas industry in the north – through a deal done in November 2017 with the government of the semi-autonomous region of Kurdistan (KRG) – wants to consolidate its position in the south as well. Last week, it instructed its main corporate vehicle in the region – Lukoil – to dramatically increase the pace of its development of the supergiant West Qurna 2 oil field, in which it holds a 75% stake, with the remainder held by Iraq’s state-run North Oil Company.
“There is huge political pressure from the Kremlin for Russian oil companies to maintain, and where possible expand their presence across all of Iraq, in light of recent moves by U.S. companies to re-establish the U.S. footprint across the country,” the Iraqi source told OilPrice.Com last week. “Russia regards moves being made by U.S. companies in Iraq as being similar to the way in which the British used the East India Company to consolidate its economic and political grip over India,” he said.
This increase in pressure was the result of a recent meeting between Russian President Vladimir Putin’s Special Envoy to the Middle East and Africa, Mikhail Bogdanov, and Iraq’s nominal Prime Minister, Adil Abdul Al-Mahdi. Present at that meeting as well were senior representatives of the real power in Iraq, the ultra-nationalist cleric Moqtada al-Sadr.
“Al-Sadr’s policy is to play off all sides against each other, making a deal recently with Iran to jointly develop shared oilfields but also allowing for the involvement of ExxonMobil in the SIP, and encouraging Russia to increase its presence on the oil fields,” said the Iraqi source. “In this way, he thinks he will get the best from each, and will also live up to his election promise of not allowing Iraq to become dependent on any one country again,” he added.
In line with this, Lukoil recently announced that it is set to increase the output from the West Qurna 2 field to 480,000 bpd in 2020 and then to 800,000 bpd in 2025. Given that the current production from the field is around 400,000 bpd – about 9% of Iraq’s total oil production – this latter figure may look like a tall order. The truth, though, is very different.
Located 65 kilometres northwest of the southern port of Basra and with roughly 14 billion barrels of reserves in place, West Qurna 2’s initial production target was 120,000 bpd. The target for the second phase was 480,000 bpd, based largely on developing the Mishrif formation. Phase 3 will focus on the deeper Yamama formation, to add another 650,000 bpd to the mix, and from there the intention is still to reach the plateau target of 1.8 million bpd.
So far, Lukoil’s apparent progress has been mixed. It took longer than the government expected for it to hit the Phase 1 target, particularly in light of the relatively easy geology attached to the field. Specifically, according to the IEA, the operating cost (‘lifting cost’) per barrel in West Qurna 2 is US$2 per barrel. This includes all expenses incurred by the operator during day-to-day production operations but excludes taxes or royalties levied by the government as well as other compensation to the operator. The capital cost of development of West Qurna 2 is also relatively low, estimated to be US$7,000-12,000 per barrel.
Given these extremely low-cost parameters, Lukoil’s remuneration per barrel of US$1.15 looks justified. However, the rate has caused ongoing disagreements between the government in Baghdad and Lukoil, as it is the lowest for any field development by some margin. The next lowest was for Shell’s agreement to develop Majnoon at US$1.39 per barrel, from which it has now withdrawn. By direct contrast, and particularly galling for Lukoil, Exxon’s original contract for developing the adjunct West Qurna1- with exactly the same geology – was US$1.90 per barrel remuneration.
The latest flare-up came late last year. According to Oilprice.com’s source, Iraq’s Oil Ministry found out that the Russia had not only hit 650,000 bpd production over various extended periods in the prior two months, but also that it could sustain production of at least 635,000 bpd – it was just choosing not to do so because of the low per barrel remuneration rate.
“At that point, given the lack of other international oil companies wanting to take part at such a low rate, the Oil Ministry agreed to extend the timeframe of the contract to 25-30 years, effectively reducing the daily cost of capital per barrel of oil recovered and to also allow Lukoil the option of increasing its stake from the present 75% to 80%,” the Iraqi source told OilPrice.com. “In return, Lukoil agreed to invest an extra US$1.4 billion in the short-term and a further US$3.6 billion down the line, depending on variables including OPEC quotas, Iran export levels, and the continued development of export capacity in the south,” he said.
Given this, not only is 635,000 bpd achievable almost immediately but, according to the Oilprice.com source, Lukoil believes that it can reach 700,000 bpd by the end of next year, not 480,000 bpd, and 800,000 bpd by the end of 2021, not 2025. As an adjunct to this, Chinese contractors have also been told – by Iraq and Russia – to expedite their drilling work. In this context, China’s Bohai Drilling Engineering Company earlier this year agreed a deal with the Oil Ministry under which it would drill 28 new production oil wells at West Qurna 2 by the end of 2020.
The additional incentive for Lukoil to pick up the pace on West Qurna 2 is that Iraq’s Oil Ministry is unimpressed by ExxonMobil’s progress on West Qurna 1, and is considering encouraging the company to leave the field. “It depends on whether it [ExxonMobil] agrees to the final terms of the SIP and takes on the full CSSP at a reasonable price,” said the Iraqi source. West Qurna 1 has expected recoverable reserves of over 20 billion barrels, according to Japan’s Itochu, which bought Shell’s stake last year for US$406 million via its subsidiary, CIECO West Qurna Limited.
Again, in order to encourage ExxonMobil to increase its pace of development on the field after Shell left, it was offered an official commencement date for the West Qurna 1 contract of two years after the actual date but with no increase in required investment. This meant that ExxonMobil would have more time to recoup money and make more profits over time. Despite this, though, there has been no progress for some time on the field, which is still producing around 400,000 bpd, with no signs of progress on the horizon.
“Achieving plateau production of 2.825 million barrels per day for West Qurna 1 and 1.8 million barrels per day from West Qurna 2 is absolutely vital to Iraq’s long-term plans to overtake Saudi Arabia as the world’s biggest oil producer, as it could do,” said Oilprice.com’s source. He then added that “if Exxon doesn’t make real progress soon then the Oil Ministry will offer the field to another firm, maybe Lukoil if it has done well on West Qurna 2,”. “This would be a key advance in Russia’s policy of cementing its presence in the two central areas in the Shia arc of power that runs from Syria in the north, through Iraq and then Iran, and into Yemen in the south,” he concluded.