Iraq enters the new year with its oil production 20% lower than a year ago, its energy infrastructure in ruins, and as a significant importer of oil. For the USA, January 2004 marks the start of an election year in which President George W. Bush will be under considerable pressure to come up with something to fix the problem of Iraq. The USA and Iraq have between them concocted a plan to revive Iraq’s oil production, increase oil exports and rebuild the refining and distribution system. It is important for both parties that it succeeds.
At the core of the US-Iraqi plan is an ambitious proposal to increase oil production by 33% between December 2003 and the end of March 2004. The plan was announced at a meeting of OPEC’s oil ministers on 4 December (see ‘The Month in Brief’), at which the Iraqi delegation stated Iraq’s aim of raising oil production to ‘about 2.8 mn bpd’ by the end of the first quarter of 2004. This would represent an increase of 0.7 mn bpd on Iraq’s estimated output in December 2003, and is also some 0.2 mn bpd higher than Iraq’s pre-war production of 2.6 mn bpd. The first-quarter target of 2.8 mn bpd is even 0.1 mn bpd above Iraq’s estimated immediate pre-invasion production capacity (see Table A).
| Table A | |
| Iraq: pre- and post-invasion production | |
| Date | Production (mn bpd) |
| Pre-invasion | |
| January 2003 | 2.6* |
| (Production capacity Jan 03 | 2.7) |
| Invasion | |
| April 2003 | 0.2† |
| Post-invasion | |
| December 2003 | 2.1 |
| Target | |
| End-March 2004 | 2.8 |
| * Year’s high | |
| † Year’s low | |
The OPEC delegation’s statement was short on details but appears to anticipate that the increase in production will come entirely from the southern fields, which together provide the crude that is exported as the Basrah Light blend. Output from the other main production area, the northern fields of Kirkuk, is constrained by constant acts of sabotage that have interrupted pipeline deliveries to the domestic refinery system and prevented altogether exports of Kirkuk blend crude via the Mediterranean port of Ceyhan. Kirkuk’s production is about 0.4 mn bpd, part of which has to be reinjected into the reservoir owing to the inability of the Iraqis to transport the crude safely within Iraq.
The southern fields were producing about 1.7 mn bpd at the end of 2003, of which over 1.5 mn bpd were exported via the nearby marine terminal of Mina al-Bakr (renamed the Basrah Oil Terminal in November 2003). Production is mainly concentrated in two fields: Zubair and Rumailah.
In the absence of any large-scale improvement in the security situation in the northern fields, nearly all the additional production planned by March 2004 will have to come from the fields in the south. This implies output in the south of somewhere in the region of 2.5 mn bpd by the end of the first quarter with net production (after reinjection) from Kirkuk around 0.3 mn bpd.
At the beginning of 2003, the southern fields were capable of producing about 2.1 mn bpd. Since then, production capacity has fallen as a result of damage to oilfield equipment and the reduction of water reinjection in some areas owing to war damage, looting and sabotage. Capacity is probably nearer 1.9 mn bpd at present.
It is not at all clear how capacity in the south can be raised by around 0.6 mn bpd in so short a time. Nor is it clear how the exercise is to be financed. The plans also presuppose a period of order and stability that will allow the necessary work to be undertaken. On present evidence, they appear to be overoptimistic.
The oil ministry is nothing if not optimistic. It is proposing further expansion soon after the first quarter of 2004 with an extra 340,000 bpd of output from four new field developments at Luhais and Suba in the south and in the two northern fields of Hamrin and Khurmala. It is also planning to host a meeting of international oil companies in Baghdad in February to discuss further upstream investment in Iraq. How many industry representatives will attend, given the lack of security in Baghdad, is another matter altogether. It is not clear either what agreements might be reached at such a meeting. Foreign oil companies are most unlikely to want to sign long-term agreements with an interim government for fear these might be challenged by a future Iraqi administration.
| Table B | |||
| Iraq: export outlets, January 2004 | |||
| Route/terminal | Capacity (mb bpd) |
Status |
Proposed Capacity (mn bpd) |
| Marine Terminals | |||
| Basrah Oil Terminal | 1.60* | Open | |
| Khor al-Amaya | 0.40 | Under refurbishment | 0.70 |
| Pipelines | |||
| Kirkuk–Ceyhan (Turkey) | 1.20 | Closed by sabotage | 1.95 |
| Hadithah–Banias (Syria) | 0.25 | Under repair | 0.25 |
| Zubair–Yanbu (Saudi Arabia) | 1.65 | Closed | 1.65 |
| Proposed pipelines | |||
| Iraq–Kuwait | — | Gas/condensate pipeline conversion | N/A |
| Iraq–Iran | — | New pipeline | 0.35 |
| Iraq–Israel | 0.10† | Reopening of former pipeline | N/A |
| * Nameplate capacity. Usable capacity of just under 2.0 mn bpd | |||
| † Capacity on closure in 1948 | |||
| N/A not available | |||
A further problem is the financing of longer-term developments. Iraq will not be able to borrow internationally until it has an internationally recognized government. Even then, there would be the question of the repayment of the previous regime’s debts. Saddam Hussain’s government ran up an estimated $100–130 bn of debts to foreign governments and other institutions. Any new commercial lending is therefore likely to be on harsh terms: either at high interest rates or involving repayment directly from oil revenues. Future oil revenues, however, are already earmarked for Gulf War reparations and for the rebuilding of Iraq’s industrial and civilian infrastructure. The USA and its allies may provide aid and loans on non-commercial terms, but the US government in particular will be constrained by domestic political opposition to the mounting cost of the occupation of Iraq.
Another complication is the status of upstream contracts signed with the old government. Any attempt by a future government to annul these deals could produce years of litigation. Iraq will also need to negotiate a permanent deal with Kuwait over oilfield boundaries in the south of the country. Long-term production agreements are likely to take a number of years to negotiate even under the most favourable circumstances. Iraqi officials have recently talked of raising production to 8 mn bpd by 2010. This is impossible given the legal and other problems cited above. The Iraqis will be lucky to achieve even half this (see forecast on Global Energy Review website).
Iraq’s oil-production plans are aimed principally at increasing exports of oil. At present Iraq’s exports are severely restricted by the fact that all of them have to pass through the Basrah Oil Terminal. The terminal is designed to handle 1.6 mn bpd, though throughputs of nearly 2.0 mn bpd are possible in certain circumstances. Another terminal is being refurbished nearby at Khor al-Amaya but this will only add 0.4 mn bpd to Iraq’s Persian Gulf outlets (see Table B).
Before the invasion, Iraq exported up to 1.2 mn bpd via the Mediterranean port of Ceyhan in Turkey. This served the oilfields of Kirkuk in northern Iraq, but the line has been closed since the Spring of 2003 owing to repeated acts of sabotage. Given both the length and the remoteness of the pipeline, it is difficult to see how the Ceyhan route can be restored to normal operation in the foreseeable future.
The oil ministry is exploring several ways of increasing export capacity, including raising the capacity of the Kirkuk-Ceyhan line, expanding the Khor al-Amaya terminal, reopening pipelines to Syria and Saudi Arabia, and building a new pipeline to Iran. It is also holding talks with Kuwait about reopening a condensate pipeline to enable Iraq to export heavy fuel oil via Kuwait. There is also an intriguing proposal — not from the ministry — to reopen an export route to the Israeli port of Haifa.
Khor al-Amaya should be operational once more in 2004. The Ceyhan route is unlikely to operate normally this year, though the oil ministry is trying to repair the line. The pipeline to Syria is reported to be under repair, but the US government is unlikely to want to see it reopened, given Washington’s poor relations with the Syrian government. Saudi Arabia has shown no interest in reopening the Iraqi Pipeline to Saudi Arabia (IPSA), which was closed in 1990 when Iraq invaded Kuwait. Parts of the line are reported to be damaged and corroded.
Of these proposed new pipelines, the one to Kuwait looks to have the best chance of success. The idea is to convert two parallel pipelines, originally built to transport gas and condensate, to refined products’ use. One line would allow the export of heavy fuel oil from Iraq while the other would be used by Iraq to import gasoline via Kuwait. The conversion could probably be carried out within a couple of months. The arrangement appears principally designed to relieve short-term shortages of gasoline in Iraq whilst allowing it to export surplus fuel oil (see below).
Iran is proposing to build a 350,000bpd pipeline to connect Iraq’s southern oil fields with its main refinery at Abadan. In return for supplying the refinery, Iran would sell on Iraq’s behalf an equivalent amount of its own oil from its Kharg Island export terminal. The project has the advantage of being quick and fairly cheap since Abadan is close to the Iran–Iraq border and the pipeline itself would be no more than 8 miles long. As in the case of the Syrian line, the USA would be likely to object to any proposal to export Iraqi crude via Iran.
Undoubtedly the most controversial proposal is one that appears to emanate from Israel that Iraq should revive and export route to the Mediterranean via the Israeli port of Haifa. The original line dates from 1934 when, under the British mandate in Iraq, it was decided to export oil from Kirkuk via Palestine, then also a British mandate territory. The pipeline ran from Hadithah to Haifa, and was closed in 1948 following the establishment of the state of Israel. In later years, it was proposed to use the route to supply Iraqi crude to the Zarqa refinery in Jordan, but parts of the line were eventually used to carry refined products in Jordan and a further section became part of a water supply scheme. Some support for the idea of an Israeli route is reported inside the Pentagon, but the US State Department is likely to resist the idea as unnecessarily complicating US relations in the Middle East. The scheme is a non-starter.
Damage to Iraq’s refining and distribution systems and other parts of the domestic energy infrastructure means that the country is short of oil products, natural gas, liquefied petroleum gas (LPG), and electricity. As a short-term measure, the oil ministry and Iraq’s interim government, the Coalition Provisional Authority (CPA) are trying to arrange the import of products in short supply. Over the longer term, the ministry and the CPA plan a major refurbishment of the refinery system and the whole energy distribution network.
| Table C | ||||
| Iraq: refined product balance, * December 2003 | ||||
| Gasoline | Kerosine | Diesel | Fuel Oil | |
| (th bpd) | ||||
| Demand | 100 | 100 | 100 | 50 |
| Domestic production | 42 | 45 | 60 | 144 |
| Imports (Exports) | 38 | 15 | 25 | (24) |
| Surplus (Deficit) | (20) | (40) | (15) | 70 |
| * excludes use by coalition armed forces | ||||
Many of Iraq’s domestic energy shortages stem from the failure of the US-led coalition to restore order in the country. Sabotage to oil and gas pipelines constantly interrupts supplies. Oil storage depots are another popular target of insurgents (see ‘The Month in Brief’). Attacks on the electricity supply system not only plunge homes and businesses into darkness but also interrupt the operation of oil refineries. The refining system is, in any case, damaged itself and working well below capacity. The result is widespread shortages of refined products.
The most politically sensitive of these shortages concern gasoline. Long queues at petrol stations frequently lead to scenes of violence, including rioting. In December, two US soldiers were killed by angry motorists lining up at a gas station. The oil ministry has tried to improve the situation by imposing rationing, but this does nothing to create new supplies. Meanwhile, a black market flourishes where motor spirit sells for $1.85 a gallon, compared with official prices as low as 5 cents a gallon.
In a further embarrassment for US authorities, an American company, Halliburton, has been accused of overcharging for the gasoline it imports on behalf of the US government into Iraq. According to the US Army Corps of Engineers (USACE), Halliburton’s subsidiary, KBR, which handles the business, charges $2.64 a gallon for gasoline imported from Kuwait, making it 175% more expensive than gasoline imported from Kuwait by the Iraqi State Oil Marketing Organization (SOMO). US embarrassment is all the more, given that Halliburton used to be headed by Dick Cheney before he became Vice-President in 2001. Halliburton says that its work is ‘hazardous’ and that its profits on the contract are small. A 24-cent mark-up on the delivered price revealed by USACE documents was described by a spokeswoman from Halliburton as there to cover administrative costs, such as ‘light bulbs’ and ‘paper’.
Kerosine and diesel fuel are also in deficit (see Table C). Iraq’s unsophisticated refineries, on the other hand, produce more heavy fuel oil than the country can consume. SOMO has tried to barter fuel oil for lighter products, but a shortage of road tankers and ships has restricted exports severely. Shortages of kerosine have led to a run on LPG for cooking and winter heating. Iraq has tried to import supplies from Turkey for Baghdad but most lorry drivers are refusing to go further south than Mosul. LPG is available in the south from a terminal at Khor al-Zubair, leaving central Iraq short. LPG is currently on sale in Baghdad at 20 times the official price.
Iraq’s priority is to import more refined products. SOMO has just signed contracts with Turkey, Kuwait, Jordan, and Syria to raise existing deliveries from 38,000 bpd to 91,000 bpd. It is also trying to step up imports of kerosine, diesel, and LPG, though sabotage, thefts of fuel, and a shortage of hard currency are all major obstacles. The country’s main refineries at Basrah, Baiji, and Daurah (Baghdad) are trying to raise production as well, though the 320,000bpd Baiji unit was reported shut down in December following explosions on two pipelines serving the plant. Product shortages are likely to last throughout 2004 and will go on until order is restored across Iraq.
Despite oil reserves officially stated as 96.5 bn barrels, Kuwait is finding it difficult to fulfil its ambitious upstream development plans. The government’s attention has begun to turn towards natural gas but here, too, there are problems as the emirate tries to resolve a dispute with Iran over where their joint offshore border lies.
Kuwait produced 2.2 mn bpd during 2003. In some months output touched 2.4 mn bpd, but this appears to be very close to its maximum sustainable capacity. Some 0.3 mn bpd of this derives from Kuwait’s portion of the Neutral Zone, which it shares equally with Saudi Arabia. The government wants to raise total production to 3.0 mn bpd by 2005, but is facing considerable obstacles.
Much of the new production effort is focused on a group of fields in the north of Kuwait and lying along the border with Iraq. Following the withdrawal of Iraqi troops in 1991, the government decided to open the northern fields to foreign participation, prompted to a considerable extent by the notion that the presence of foreign firms would inhibit further military action by Iraq.
The scheme, known as ‘Project Kuwait’, is designed to raise production from the area to 950,000 bpd, compared with about 450,000 bpd at present. Project Kuwait, however, has run into considerable trouble as a result of objections in the National Assembly. Several members have objected to the involvement of outsiders in the country’s upstream sector, while others have criticized what they see as a lack of transparency in the process of awarding exploration contracts. Among the companies invited to bid for acreage are BP, ChevronTexaco, ExxonMobil, Shell, and Total. The project remains stalled pending agreement in the National Assembly.
Problems with the northern fields have led the Kuwaitis to look elsewhere for new production. One option is to increase output in the Neutral Zone, but the prospects are not exactly bright here, either.
Reserves in the Neutral Zone are much lower than in Kuwait itself, being about 5 bn barrels in total, of which Kuwait’s share is a half. Total production averaged just over 590,000 bpd during 2003, with 280,000 bpd of this coming from offshore fields.
Until January 2003, the Neutral Zone was operated under a 40-year concession by the Arabian Oil Company (AOC) of Japan. Since then, a new Kuwaiti company, the Kuwait Gulf Oil Company, has been in charge, though AOC continues to provide technical production assistance under a five-year service agreement. The Japanese company has also agreed to provide $750 mn in soft loans to help develop production in the Neutral Zone and to take at least 100,000 bpd of the output from Kuwait’s share of the Zone’s production.
Kuwait plans to increase its output from the current 295,000 bpd to about 350,000 bpd by 2007. This might even constitute a peak as far as the Neutral Zone is concerned, and such a level might even be achieved before 2007. There are longer-term plans for output levels for the whole of the Neutral Zone of 1 mn bpd, but these seem several years off and look over-ambitious.
Troubles in the upstream oil sector may have prompted an increasing interest in gas production. Kuwait is short of natural gas and has been trying to sign up long-term suppliers from some of its neighbours, including Qatar, Iraq, and Iran. It has already agreed to take 1 bn cfd from Qatar from the fourth quarter of 2005, but the start of deliveries is threatened by a dispute between Qatar and Saudi Arabia over the passage of a proposed export pipeline through Saudi territorial waters en route to Kuwait.
Kuwait has therefore begun talks with Iran over possible gas deliveries. In January 2003, the Kuwaitis signed a memorandum of understanding with Iran for the import of up to 1 bn cfd of gas, starting in 2005. This deal also requires a new undersea pipeline, the details of which have still to be negotiated. The gas is designed to supplement rather than replace supplies from Qatar. A prime use for all the imported gas is power generation, where it will be used to substitute for oil.
The Kuwaitis may even try and import gas from Iraq. Iraqi plans to sell gas to Turkey appear to be on indefinite hold now that Turkey has said it has overcommitted itself in terms of future gas imports (see ‘Focus’, July 2002). A Kuwait-Iraq deal nevertheless seems several years off, for now.
Kuwait does have some gas of its own, notably in the undeveloped Dorra field in the Persian Gulf, which it shares with Saudi Arabia. Reserves are estimated at about 7 tn cubic feet. Unfortunately for the Kuwaitis, Iran also claims part of the field, and the two sides have been unable to agree on a border. Kuwait has agreed to share Dorra’s production with the Saudis and has proposed international arbitration to settle the dispute with Iran, but Tehran has turned down the idea.
© Blackwell Publishing Ltd, 2004