Blending problems slow Lukoil plan to boost Iraq production

Lukoil’s plans to increase production at its West Qurna-2 oilfield in southern Iraq have been curtailed by the government because of difficulties in adjusting the country’s export crude blends, an executive said yesterday.

West Qurna-2, in which Russia’s Lukoil has a 75 per cent stake, produces heavy oil.

Iraq traditionally exports Basrah Light, a crude that includes heavy blends. But an increase in production of heavy crudes such as the one from West Qurna-2 has affected Basrah Light’s API gravity, which is a measure of the crude’s density.

“The issue they [Iraqi authorities] are facing is because it [West Qurna-2] is heavier than Rumaila and Zubair [oilfields], it is making the overall blend a little bit heavier,” said Gati Al Jebouri, senior vice president at Lukoil Overseas. “As a result, to maintain the stability of the export blend at the moment they are curtailing production at a number of fields, not only West Qurna-2.”

He was speaking on the sidelines of the Middle East Petroleum and Gas conference in Abu Dhabi.

Rumaila and Zubair are southern oilfields.

Currently, West Qurna-2 oil production is little more than 350,000 barrels per day, has a production capacity of 450,000 bpd and a target production plateau of 1.2 million bpd, he added.

To solve the heavy blend problem, Somo, Iraq’s state organisation for oil marketing of oil is promoting a new blend, Basrah Heavy, besides its traditional Basrah Light crude, following complaints from traders about the quality of Basrah Light.

Somo released this month the first official selling price for the Basrah Heavy grade for May loading.

“It has to do with Iraq’s desire to maintain a stable export blend, which was creating significant difficulties at the end of last year and early this year,” said Mr Al Jebouri. “They are currently working hard on getting the Basrah Heavy, but to do that SOC [South Oil Company] has to make some changes and create infrastructure in the south to enable the Basrah Heavy to be exported. They are forecasting to do that through one of the SPMS [single point moorings] and they are hoping to do that in the next two months.”

Mr Al Jebouri expects Iraq’s oil production growth rates to slow down in 2016 and 2017 because of the oil price slump. International oil companies (IOCs) such as Lukoil that are developing the country’s large fields are paid in oil that is equivalent to the money they are owed in cost recovery and remuneration fees.

This means that Iraq needs to give IOCs about double the amount of oil compared with last year, when oil prices were twice as much as today. Brent has dropped from about $115 in June last year to about $60 per barrel owing to an oil supply glut and weaker demand in Europe and Asia.

“Around 25 to 30 per cent of their [Iraqi] budget is paid as cost recovery for IOCs. That’s not sustainable,” said Mr Al Jebouri.

That is why the Iraqi government and IOCs are in talks to amend their working programmes.

“Every year we are effectively working with the Iraqi government, with the ministry of oil to agree what development they are capable of financing and what development they would like to achieve,” said Mr Al Jebouri. “In this process of reviewing the work programmes and reducing the capital expenditure, it will lead to a postponement in production. I see significant reduction in those [oil production] growth rates for 2016 and 2017, unless there is an increase in oil prices.”

Lukoil is also looking at investing in Iraq’s petrochemical industry and the Al Nasiriya integrated refinery and field project, he added.

The Al Nasiriya project envisages the development of the Nasiriya oilfield, which has more than 4 billion barrels of oil, alongside the construction and operation of a 300,000 bpd refinery.

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