Iraq faces obstacles in efforts to lift output

While the country unboubtedly has the potential to rejoin the world’s leading oil producers, decades of war and sanctions mean that many hurdles still have to be overcome. Only then can it start to move in the right direction.

Iraq is looking to reboot its long-thwarted ambition to push oil output capacity back up among the top ranks of world producers, but it still faces a number of high hurdles.

The country’s oil minister, Jabbar Al Luaibi, last week signalled that the government is ready to push ahead when he picked a new head of upstream after a year-long wait, naming Kareem Hattab, previously head of the Iraq Oil Exploration Company, to the job.

An Iraq oil ministry spokesman says the appointment is one of several Mr Al Luaibi now wants to make as the country’s industry comes through one of its most difficult periods, its finances generally start to stabilise, and with international oil companies ready to start making capital investments again.

There is reason to be sceptical, though, as hopes for Iraq’s production potential have previously been dashed.

Iraq’s giant and super-giant southern oilfields have the reserves in place to allow it to raise output capacity to 10 million barrels per day (bpd)-– which would rank it up with Russia, Saudi Arabia and the US, among the world’s top tier producers – but actual capacity is still about less than half of that and “harsh technical services contract terms and a myriad technical, political and security factors have all conspired to subdue growth,” according to Ian Thom, Middle East upstream analyst at energy consultancy Wood Mackenzie.

Iraq’s oil industry has had to contend with decades of war and sanctions. Recovery from the 2003 invasion and its aftermath has been slow and erratic, breaking through 4 million bpd only in 2015 and currently restricted to about 4.35 million bpd under the terms of the Opec deal that Iraq has signed up to through to next March.

The most obvious obstacle the country faces is the war with militants in the west and north. However, the south – where the vast bulk of its oil reserves sit – is relatively free from the violence centred around towns like Mosul, or sporadically spilling into major oil producing areas like Kirkuk in the centre of the country, the dangers are still an obstacle.

Companies cannot ignore the fact that Iraq ranks as the world’s riskiest country for foreign workers with risk-assessing outfits like Verisk and Maplecroft, even if, as Luay Al Khatteeb, head of the Iraq Energy Institute, points out, the instances of violence in the southern part of the country and in the Kurdish region are no more than in Saudi Arabia.

The ongoing conflict has put severe financial restraints on Iraq, which has been exacerbated by the oil price crash and now output restraint.

On Monday, Iraq said it agreed a supplementary budget for this year and next to get US$800 million from the IMF, the second tranche of a $5.35 billion three-year loan deal agreed last December. The country has to keep tight fiscal controls while protecting social spending, but the deficit this year is still projected to be $19bn even with overall spending cut by 6 per cent to $86bn.

This has had a knock-on effect that the international oil companies operating in the south – BP, Royal Dutch Shell, Exxon Mobil, Lukoil, Inpex, etc – have had to restrain investment at the direction of the government, which cannot afford to pay for those investments under the terms of the old contracts.

There is some sign of this loosening up. Earlier this year, Shell tapped oil services company Halliburton to drill a number of development wells at the giant Majnoon field, which it operates. That marked a turnabout from last year when Shell cut back staff sharply from the field and was rumoured to be looking to sell up.

Mr Thom says the government has shown a willingness to negotiate terms of its existing contracts to give companies an incentive to take on more of the risk in return for a greater share of the rewards.

“It’s come to that point where operators have some good leverage with the government to say, ‘look, here is where we want to invest,’ and there could be some discussions to make those investments go ahead within the existing model,” he says.

If the investment logjam can be broken there still are some very difficult technical ones to contend with, including a lack of transportation and storage infrastructure, the trend toward more costly and harder-to-market heavy oil and most especially the challenge of bringing in water to provide the pressure needed to boost production.

For the easier-to-access oil, like the Zubair formation at the BP-operated Rumaila field, they have managed to find water solutions, with water coming in from the nearby Shatt Al Arab river. But for the bulk of remaining projects, the inland water system is not sufficient so it has long been planned to bring seawater in via a system of aqueducts and pumps – the estimated $10bn Common Seawater Supply Facility, for which US firm Parsons won the front-end engineering and design contract two years ago.

“The real challenge is [that] they are going to need to integrate the water supply and upstream developments,” says Mr Thom. “Bringing it all together and funding it is looking very difficult; but after the midstream projects if you want to expand upstream you need to push on with that.”

Mr Al Luaibi has set the relatively modest target of boosting capacity to 5 million bpd by the end of this year. But to make any real progress towards the 9 million bpd he says he wants by 2020, Iraq will probably need to find common ground with the international oil companies who could help make the big infrastructure investments needed.

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