Iraq’s oil ministry has begun the takeover of Majnoon, one of the largest oil fields in the world, following the exit of majority stakeholder Shell from the southern concession.
A new management team has been formed to handle production from the field, where output currently stands at 235,000 barrels per day, the ministry said in a statement on Thursday. The ministry said it plans to raise production to 400,000 bpd, giving no timeline. It originally aimed to reach the production level by 2020.
“The priority of the new management team is to cut the cost of producing a barrel (of crude) from Majnoon by 30 percent,” Iraqi oil minister Jabar Al Luaibi said in the statement.
Shell announced plans to exit the field in September, after the world's largest oil trader received approval from the Iraqi ministry to quit the field, said to hold an estimated 38 billion barrels of oil.
Shell, which held a 45 per cent stake in the concession along with Malaysia’s Petronas, was said to have been disadvantaged through its technical services contract with the ministry, which hadn’t been reviewed following the decline in oil prices.
“Shell was [earning] $1.39 per barrel [before the price crash] but now it’s around five cents a barrel, so it doesn’t make it worthwhile for them," said Luay Al Khateeb, non-resident fellow at the Centre on Global Energy Policy at Columbia University.
"This is very much the case [also] for Petronas, so without reviewing these contracts, it will be quite difficult to maintain presence for any company,”
Petronas was reported in October to be looking to be discussions to offload its 30 per cent stake in the field. The Malaysian state-owned oil firm was not immediately available for comment on Thursday.
With the exit of Shell, the prospects for Iraq increasing its production capacity to its desired five million bpd target looks increasingly dim without the finance and expertise brought in by international oil companies (IOCs).
“Despite being discovered 40 years ago, only one per cent of the oil in place has been produced – the potential for further development is enormous,” Ian Thom, principal analyst, Middle East upstream at Edinburgh-based energy consultancy Wood Mackenzie.
“However, progress with the CPF-2 [central processing] facility to expand production to 400,000 bpd is less certain now with Shell leaving the project. IOCs were invited to Iraq for a reason: to provide finance, technology and project execution capability,” he added.
There are hopes that IOCs may return to Majnoon, following Mr Al Luaibi’s comments on the sidelines of Opec’s gathering in Vienna in November, where he suggested a consortium of US’s Chevron, France’s Total and PetroChina may be invited to operate on terms different to that agreed with Shell.
For now, however, production from Majnoon is unlikely to be increased to 400,000 bpd without adequate budgeting allocated to the South Oil Company, formerly known as Basra Oil Company, in the federal government budget for 2018, which is currently being reviewed by the country’s parliament.
Financing remains a challenge for Iraq, which has plans to tap into the bond markets next year to raise $2 billion to plug its fiscal deficit.
“When it comes to the development of the field, you need to do maintenance in terms of arresting any potential decline and also adding new oil above production plateaus, that will require a lot of money,” said Mr Al Khateeb.
“If the government doesn’t allocate meaningful budget for the Basra Oil company to do such operations, it will be difficult for it to undertake it singlehandedly.”
Following its exit, Shell's only remaining stake in Iraq is through its involvement with the Basrah Gas Company, in which it holds a 44 per cent stake with the South Gas Company (51 per cent) and Japan's Mitsui (5 per cent). Development of natural gas in Iraq falls in line with Shell's current corporate strategy to develop more gas projects globally.
The Basra Gas Company was formed in 2013 under a 25-year contract between the parties to reduce flaring of gas associated with oil production from Iraq’s southern fields.
The National reported in November that Iraq - one of the top offenders globally for gas flaring - had added around 400 megawatts to its power grid this year as part of a new programme of gas recovery being championed by the country's oil minister.