New international contracts as a tool to boost #Iraq oil production

| April 24, 2018

The Iraqi cabinet has approved a plan to raise the national oil production capacity by 2022. A key instrument for achieving this goal will be the further attraction of foreign capital, including European oil majors’ investments. However, low profitability and overly stringent technical conditions of existing contracts make oil companies revise their development plans in the country towards reduction.

The development of oil production capacities in Iraq directly depends on the activities of transnational oil corporations, including Total, Eni, Exxon Mobil, BP, LUKOIL and Royal Dutch Shell. Due to their active engagement, oil production in the country has grown over the last decade by more than 2 million barrels per day.

The largest international oil companies, including a number of European majors, feel insecure due to the investment and technical conditions of the contracts. The current contracts are low-yield and tied to the growth of oil production, including associated products, such as liquefied, hydrocarbon and dry gases.

The vast majority of market players are currently negotiating with Baghdad to reduce their production levels.

For example, BP is in discussions with Iraq’s Ministry of Oil over cutting the plateau production level for its Rumalia field, which has estimated reserves of 17 billion barrels.

In August last year, the Iraqi Oil Minister Jabar Ali al-Luaibi confirmed that at the West Qurna 2 oilfield, which provides up to 10% of Iraq’s oil exports and is developed by the consortium of LUKOIL and the North Oil Company (NOC), the target production plateau will be reduced to 800,000 barrels. For several months, the company has been negotiating to revise the terms of the contract. It is obvious that the amount of compensation, target levels and time limits set by the Iraqi Oil Ministry are not attractive for the investor.

The Russian Gazprom Neft also appealed to Baghdad with a request to limit the target oil production capacity for the Badra field. “At the moment, about 85,000 barrels are produced here per day, and in our opinion, this is the peak of production”, says the company’s representative Denis Sugaipov.

Japan’s INPEX Corporation in conjunction with LUKOIL is conducting geological exploration of Block 10. The block, with an area of 5,600 square kilometers, is located 120 kilometers west of Basra. According to preliminary assessments, it is one of the most significant discoveries in Iraq over the past 20 years. With regard to preliminary estimates of its reserves, further development of the field can be promising enough only if the terms of the contract are significantly better than those for West Qurna 2.

This year, Shell alongside with Malaysia’s Petronas will finally withdraw from the Majnoon project with estimated reserves of 12.8 billion barrels of oil equivalent. The companies entered this project in late 2009. A target plateau was originally set at 1.8 million bpd and later provisionally reduced to 1.2 million bpd. Today, the oilfield’s output has dropped to 230,000 bpd.

Given the ambiguity of the terms of the contracts and, as a consequence, the plans of the oil companies to reduce production, the goals of Baghdad for a many-fold increase on a national scale will be difficult to achieve.

Nowadays, Iraq produces about 4.5 million barrels of crude oil per day. An adoption of new concession contracts for the exploration and exploitation of oil and gas deposits in 11 concession areas may facilitate the increase of country’s oil output capacity to 6.5 million bpd by 2022. The announcement of the results on proposals for the new blocks is scheduled for June 21.

It is expected that the new contracts will formalize the link between the current oil prices and cost recovery, as well as the share of royalties.

Otherwise, Iraq’s oil output capacity of 5 million barrels per day is unlikely to increase. In the case of unfavorable investment conditions and taking into account the natural reduction of the reserves of the operating wellsites, one can count only on maintaining the current level with the trend towards a gradual decline.


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Category: A Frontpage, Energy, Iraq

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