Global Energy Review

Rebuilding Iraq: the Outlook for the Energy Sector

A Report by Dr Paul McDonald
Consulting Editor, Oil and Energy Trends

Contents

List of Tables

Introduction

Iraq is likely to produce just under 1.9 mn bpd of oil during 2005. This is well below what it used to produce before the US-led invasion of March and April 2003. In 1999 and 2000, Iraq's output was at or above 2.5 mn bpd and was close to that figure in the January and February immediately preceding the US invasion.

The reason for the drop in output is not hard to find. Law and order have broken down in Iraq since the fighting formally ended in May 2003. The US has lost more then 2,000 military personnel, the British nearly 100, whilst thousands of Iraqi civilians have also been killed in an almost complete breakdown of civil society.

All this makes the rebuilding of Iraq's energy industries extremely difficult. The situation is made worse by the fact that Iraq's oil industry in particular was in a poor state before the invasion after nearly 13 years of UN trade and investment sanctions, following Iraq's invasion of Kuwait in August 1990.

Not only is the energy infrastructure in a parlous state as a result of more than two-and-a-half years of sabotage, Iraq's prolific oil reservoirs may have been permanently damaged because of the inability of the state oil industry to repair and maintain them. Iraq's oil reserves may therefore be lower than currently reported as a result. The downstream oil, natural gas and electricity industries are similarly in a poor state.

The short term outlook for all of Iraq's energy industries is highly discouraging. No significant improvement is possible without the return of peace to large areas of Iraq, and there appears to be little prospect of this in the foreseeable future. The Iraqi authorities appear tacitly to recognize this insofar as they have revised several of their oil productions downwards. Even some of the new, lower targets may still prove to be unattainable. Iraq will be lucky if it is able to produce much more than 3.0 mn bpd by 2010.

OET ARCHIVE

'Does OPEC have enough spare capacity?' Focus May05

'World oil production: does Iraq matter?' Focus May03

Iraq's Oil Industry

Reserves and Production

Iraq's oil industry ought to have a most promising future. Its estimated proven reserves of 115 bn bbl are the third-largest in the world, after Saudi Arabia (262 bn bbl) and Iran (126 bn bbl). It has, according to these estimates compiled by the authoritative Oil & Gas Journal, more proven reserves than the whole of either Africa or South America. Moreover, its reserves are sufficient to last for 165 years at current rates of production (see Table 1) giving it the highest reserves:production ratio of any oil-exporting country.

Things are not as they seem, however. Oil production is well below planned levels; civil unrest not only inhibits efforts by the Iraqis and foreign oil companies to raise the level of production, but even prevents routine maintenance in most of the country's oilfields. As if this were not bad enough, Iraq's oilfields have been under constant attack from dissident Iraqi groups since the US and its allies occupied the country in the Spring of 2003, and have as a result sustained severe damage to production and infrastructure in a number of areas.

As a result of all this, Iraq's oil reserves may not be as high as generally reported. One-and-a-half decades of poor management, exacerbated by a shortage of spare parts-caused by a UN embargo imposed after Iraq's invasion of Kuwait in 1990-have almost certainly led to a decline in reservoir pressures in a number of cases, making some oil deposits economically impossible to extract. Some of Iraq's oil reserves may have been lost permanently as a result of damage to reservoirs.

Table 1
Iraq: Oil Reserves and Production, 2005
2005
Reserves: 115.0 bn bbl
Production: 1.9 mn bpd (estimate)
Target: 2.5 mn bpd
Reserves:Production Ratio: 165:1
Recent Production History
2002: 2.0 mn bpd
2003: 1.3 mn bpd
2004: 2.0 mn bpd
Highest Post-War Total: 2.5 mn bpd (May 2004)
Source: (Reserves) Oil & Gas Journal; (Production) OET Table 4.2; (Target) Ministry of Oil.

In view of all this, Iraq may well not prove to be the 'oil bonanza' that some consultants and oil journalists have claimed, or have the 'unlimited potential' that one energy information service has claimed. It is impossible to say how much of Iraq's reserve endowment has been lost since the security situation there prevents any detailed work being done on the ground. Apart from loss of reservoir pressure, there are likely to be incidences of coning * in several reservoirs. Iraq's current state of lawlessness is only likely to exacerbate the situation.

The problems of Iraq nevertheless do not stem entirely from the US-led invasion of March 2003. It was affected by war damage during the Iran-Iraq war of 1980-88. In 1980, Iraq's crude oil production averaged 2.6 mn bpd. The following year-the first full year of the war - it was down to 0.9 mn bpd. After the mid-1980s, output began to recover, reaching 2.8 mn bpd in 1989, before falling to 0.3 mn bpd in 1991 following Iraq's invasion of Kuwait and the imposition of UN sanctions on trade and investment. Output did not really recover until 1997: the year the UN's Oil-for-Food Programme allowed the export of oil by Iraq and the import of some spare parts for the production sector under a highly restrictive trade regime (see Table 2).

The restoration of law and order to Iraq should enable the country to increase its oil production to its pre-Gulf War capacity of around 3.0 mn bpd, though it is by no means clear how long this will take. Experience with Iraq's two co-belligerents, Iran and Kuwait, suggests that it will take about three years to turn round the oil industry and begin a sustained process of expansion. Russia, on the other hand, took more than a decade to reverse the collapse in production that began in the late 1980s and bring output back up to pre-collapse levels. Iraq's experience may be closer to Russia's than that of its two neighbours.

Table 2
Iraq: Crude Oil Production, 1990-2004
Year Production
(mn bpd)
1990 2.1
1991 0.3
1992 0.5
1993 0.7
1994 0.5
1995 0.5
1996 0.6
1997 1.2
1998 2.1
1999 2.6
2000 2.5
2001 2.3
2002 2.0
2003 1.3
2004 2.0
Source: OET Annual Statistical Reviews; (2004) Pearl Oil

OET ARCHIVE

'Iraq's oil sector mired in problems despite successful election' Focus Feb05

'Bush gambles on new plan for Iraq' Focus Jan04

The Current Situation

Civilian and military casualties continue unabated. The US has lost more than 2,000 of its military personnel. The British military death toll is close to 100, whilst untold thousands of Iraqis have perished since the invasion formally ended at the beginning of May 2003. Many Iraqis, including the former interim Prime Minister, Iyad Allawi, describe the situation inside the country as being close to civil war.

The continuing chaos has two main consequences for the oil industry in Iraq. It restricts the amount of oil that can be produced at present, and prevents repairs and maintenance from being carried out on oilfields, thereby threatening future levels of production. Sabotage to pipelines in both the north and south of the country kept production down to 1.6 mn bpd for much of October 2005, whilst production for the first ten months of the year averaged little more than 1.8 mn bpd: nearly 0.2 mn bpd lower than the total for the whole of 2004 (see Table 2).

More significant, perhaps, is the fact that Iraq's oil production in 2005 was well below the Ministry of Oil's target for oil production for the year. Indeed, Iraqi output was not anywhere near the Ministry's 2.5 mn bpd target at any time during 2005. At no time did it exceed 2.0 mn bpd: and in only three months-January, September and October-did it even approach that figure. The highest monthly average since the war has been 2.5 mn bpd, which has not been bettered since May 2004 (see Table 1).

The Ministry's 2.5 mn bpd target for 2005 has itself already been revised downwards substantially. In mid-2003, a plan was issued to produce 2.8 mn bpd by the second quarter of 2004 and 3.0 mn bpd at the start of 2005 (see Table 3). Of this latter total, some 2.4 mn bpd was meant to come from the country's southern oilfields, whilst the remaining 0.6 mn bpd was to have been provided by the production-complex centred on Kirkuk.

Table 3
Iraq: Planned Production Targets to 2010
Year Target Actual
(mn bpd)
2002 3.5 2.0
End-2003 2.3 1.8
Second quarter 2004 2.8 2.2
End-2004 3.0 1.8
End-2005 3.5 2.0
2.5† -
2010 10.0 -
6.0-8.0† -
5.0† -
† Revised target
Source: (Targets) Ministry of Oil; Actual OET Table 4.2

Whilst Iraq is physically able to produce more than the 2.0 mn bpd it averaged during 2005, its actual capacity level remains somewhat theoretical as long as output is constantly interrupted by acts of sabotage. These attacks were initially targeted on remote sections of pipeline, especially the export pipeline linking Kirkuk with the Turkish Mediterranean port of Ceyhan. Such attacks serve to limit the amount of oil that can be produced at Kirkuk, and can reduce output there to levels around 0.2 mn bpd, compared with a theoretical capacity of up to 0.6 mn bpd.

A rather more worrying trend has begun to emerge, however, as attacks take place in areas that were thought to be reasonably well defended. These have included the oilfields around Basrah, which account for the majority of Iraq's production (see Table 4). The deteriorating security situation means that damage inflicted on the production and transport systems cannot always be rapidly repaired. The lack of security also disrupts the routine maintenance programmes that are essential to maintain proper levels of pressure inside the reservoirs. Long term neglect of maintenance can seriously degrade oil and gas reservoirs, causing millions of barrels of potential production to be lost. Iraq's officially reported proven reserves of 115 bn bbl need to be viewed in the light of this, since they almost certainly represent an overstatement of the oil that is available.

The violence in Iraq is taking a further toll on the industry in the form of lost revenue, much of which is needed to repair and expand the upstream sector. In mid-2005, the Ministry of Oil estimated that production lost as a result of acts of sabotage translated into a loss of revenue since the overthrow of Saddam Hussain in early 2003 of $11.4 bn.

Iraq's theoretical output capacity is around 2.6 mn bpd (see Table 4), of which some 2.0 mn bpd is in the south and 0.6 mn bpd in the northern fields of Kirkuk. The country's largest field, Rumailah, has a capacity of 1.3 mn bpd. In practice, the problems of maintaining reservoirs, the lack of spare parts, not to mention the continuing attacks on the production and export infrastructure, mean that Iraq is unlikely to be able to produce at 2.6 mn bpd for a sustained period over the next year or so. A more realistic estimate of Iraq's production capacity might be in the region of 2.2-2.3 mn bpd.

Iraq's immediate pre-war output capacity was estimated at nearly 3.0 mn bpd, of which Kirkuk accounted for approximately 1.2 mn bpd. Before Iraq's invasion of Kuwait in 1990 and the subsequent imposition of UN sanctions, Iraq was capable of producing some 3.5 mn bpd. Years of UN sanctions, however, kept the oil sector short of spare parts and new technology and almost certainly reduced production capacity by some 0.5 mn bpd between 1990 and 2003.

OET ARCHIVE

'War in Iraq: it is about oil' Focus Apr03

'War in Iraq: will oil stocks rescue the market?' Focus Mar03

'The consequences of war with Iraq' Focus Sep02

Hyper-links:
Table 4
Iraq: Oil Production Capacity, 2005-6
Field Capacity
(th bpd)
Northern Fields
Kirkuk 600
Total North 600
Southern Fields
Rumailah 1,300
West Qurnah 300
Zubair 130
Misan 100
Majnoon 50
Subba/Luhais 50
Others 70
Total South 2,000
Total Iraq 2,600
Source: Pearl Oil estimate

Raising Capacity

Increasing Iraq's oil production capacity will be no easy task. As a first step, the oil-producing areas must be pacified in order to allow the fields and associated infrastructure to be repaired and maintained. Security is not the only problem, however: there are major technical and political obstacles to be overcome as well.

The northern fields centred on Kirkuk are old and in long term decline. The Kirkuk field was discovered in 1927 and has been in continuous production since the Second World War. Its output peaked in the late-1980s and early 1990s, around 1.3 mn bpd. Kirkuk's production capacity was assessed at 1.2 mn bpd early in the present century by various foreign oil companies, but this figure is somewhat theoretical. Output was running at around 0.7 mn bpd at that time and its total capacity is likely to have been below 1.0 mn bpd.

The field complex has been badly affected by years of UN sanctions and poor depletion policies. Reservoir pressure has fallen and attempts to improve production rates by injecting heavy fuel oil into various horizons has almost certainly caused long-term problems in some reservoirs. Kirkuk-like other Iraqi fields - has suffered from abrupt changes in Iraqi oil policy under Saddam Hussain. Production levels were often changed for political reasons at short notice, allowing no opportunity for wells to be shut-down and then reopened in a gradual manner, according to standard international practice. This, again, may have caused permanent reservoir damage in some cases.

The Kirkuk field system is estimated to contain about 10 bn bbl of proven reserves. Some outside sources claim that there is up to 15 bn bbl awaiting discovery, but this is little more than guesswork at this stage. It is not totally beyond the bounds of probability for Kirkuk's decline to be reversed-at least temporarily - and for production to rise to somewhere in the region of 1 mn bpd. This would nevertheless a massive injection of new technology and - needless to say - several years of peace.

Whilst Kirkuk has undoubtedly suffered more than any other oil-producing area in Iraq from the point of view of reservoir management, other areas have by no means been immune from such practices, including the fields around Basrah, which now account for most of Iraqi output.

Several fields there are old and in the mature stage of their development, including the country's largest field, Rumailah, discovered in 1953. Reservoir management has been hindered by a shortage of spare parts since 1990. Equipment vital for the maintenance of reservoir pressure, such as water injection systems, continues to function badly and, recently, the situation has been made worse by acts of sabotage in the fields of the south. One consequence of the recent troubles is that the quality of the Basrah Light export blend has started to deteriorate.

The Iraqi government is trying to tackle the problems in the southern fields by bringing in outside help. In January 2005, the Ministry of Oil awarded a contract to Shell for a technical appraisal of the Rumailah field complex and, in September, it asked the Irish company, Petrel Resources, to help develop the Subba/Luhais field, also in southern Iraq. The aim is to raise production from the 2 bn bbl field from 50,000 bpd to 200,000 bpd. Work cannot start on these or any other southern fields, however, until the security situation is brought under control.

Political Problems

In the meantime, various political problems are beginning to threaten progress in Iraq's upstream oil sector. Many of these reflect the geopolitical make-up of the new Iraq, in which the Sunni Arabs, who once controlled the country, now find themselves having to share power with Kurds from the north and Shi'i from the south. The Sunni Arabs live, for the most part, outside the main oil-producing regions. Many of them fear that control of the oil regions is passing into the hands of the Kurds and Shi'i, putting them in control of the country's economy and therefore, ultimately, its government.

A major argument is developing in the north of the country over the future status of Kirkuk. The oilfields lie in areas traditionally occupied by Kurds. Under Saddam Hussain, many Sunni Arabs were moved into the area in an attempt to maintain the central government's authority in the region, where there were growing calls for greater regional autonomy. The situation deteriorated sharply with increasing attacks on Kurds, culminating in the infamous poison gas attack on Halabja.

Many Kurds are now pressing for the establishment of a new autonomous Kurdish region, to include Kirkuk, which at present lies outside the Kurdish provinces. The Kurds have also demanded a greater degree of control over Iraq's oil policy. Some Kurds have even called for a separate national oil company covering the northern fields. Finding a workable compromise between the Kurdish desire for more control of the oil industry in the north and Sunni Arab fears that they will be disadvantaged as a result will not be easy. Meanwhile, in the south, the Shi'i want more control of oil production there and a reduction in the proportion of the country's oil reserves that go to the central government in Baghdad.

Another major political problem has arisen from a clash of ideologies between the United States and many of Iraq's politicians and officials. The US wants Iraq's upstream industry opened-up to foreign (especially US) oil companies. The Ministry of Oil has proposed to introduce production-sharing agreements, allowing foreign companies to develop oilfields for periods of 25 years or more. Such agreements could cover some two-thirds of Iraq's oil production.

It is proposed to provide for production-sharing contracts in a forthcoming Petroleum Law, but several Iraqi parliamentarians have threatened to vote against them, arguing that these agreements favour foreign oil firms at the expense of Iraqi interests. Others maintain that Iraq's new government is too weak to insist on fairer terms for itself. Oil companies, on the other hand, are likely to want attractive terms before investing in what is at present a dangerous and unstable country.

Another political problem to be resolved is the legal status of exploration agreements between foreign oil companies and the ousted regime of Saddam Hussain. These include deals signed with Russia's Lukoil, PetroChina, India's ONGC, PetroVietnam and Petronas of Malaysia. Some Iraqis have called for these agreements to be abrogated.

The Ministry of Oil is anxious for an early resolution of all these issues since it wants to offer further blocks for exploration by foreign oil companies, including tracts in under-explored regions along Iraq's borders with Syria and Jordan. In the meantime, it is trying to interest outside firms in a series of technical service agreements. Unlike production-sharing agreements, these do not provide for a direct share of oil production in the fields concerned. Several companies have nevertheless expressed interest in providing technical assistance, including ExxonMobil, Japex, Pertamina of Indonesia, Repsol and Total.

Hyper-links:

Export Routes

Iraq's oil production cannot be increased much further without a corresponding rise in export capacity. At present, Iraq can only export around 1.8 mn bpd via the Basrah Oil Terminal. There is a small amount of additional capacity in the south at Khor al-Amaya, but exports via the Persian Gulf are restricted by problems with pipelines to the Basrah terminal and a lack of storage nearby. There have also been attacks on the other Gulf terminal at Khor al-Amaya.

Iraq's Mediterranean outlet, at Ceyhan in Turkey, has been closed for much of the period since the invasion owing to attacks on the pipeline from Kirkuk. The line is nominally capable of carrying 1.2 mn bpd, though some observers put the operational capacity nearer 0.8 mn bpd. There seems little prospect of any exports via this route on a sustained basis for the next year or more.

Without further export capacity, Iraq is unlikely to be able to produce much more than 3.5 mn bpd. For this reason, it is planning additional outlets to the Mediterranean, the Persian Gulf and the Red Sea. Some of these involve the re-opening of pipelines that were in operation before the Gulf War of 1990-91 (see Table 5). Discussions with the relevant parties, however, are at an early stage and no firm dates exist for any of the new projects.

Table 5
Iraq: Present and Future Export Outlets
Route Capacity
Present
Basrah Oil Terminal (BOT)* 1.80
Khor al-Amaya* 0.40
Kirkuk-Ceyhan 1.20
Total 3.40
Proposed †
BOT* 0.20
Khor al-Amaya* 1.20
Kirkuk-Ceyhan 0.80
Haditha-Zarqa 0.35
Haditha-Banias 0.30
Rumailah-Kuwait TBD
Zubair-Yanbu 1.65
Total 4.50
* Marine terminal. Rest are pipelines
† Figures are for additional capacity only
TBD = to be decided
Source: State Oil Marketing Organization; Arab press reports.

OET ARCHIVE

'Violence threatens future levels of output in Iraq' Focus Dec05

Hyper-links:

Oil Consumption and Refining

Oil Consumption

Iraq consumes an estimated 415,000 bpd (see Table 6) of which gasoline and gasoil account for nearly two-thirds (see Table 7). Damage to Iraqi refineries means that there are major shortages of refined products, which necessitates a large volume of imports, particularly of gasoline and gasoil (see Table 8).

Table 6
Iraq: Oil Balance, 2005
(mn bpd)
Production 1.90
Consumption 0.42
Net Trade
Exports 1.70
Imports 0.22
Total 1.48
Source: GER estimate

Gasoline consumption has risen sharply since the end of the war following the import of large numbers of vehicles without the payment of any taxes across Iraq's poorly-defended borders. The military occupation has created a large demand for both diesel and jet kerosine. Damage to heavy industry and power stations has led to a fall in demand for heavy fuel oil compared with before the war, giving Iraq a surplus, which Iraq has tried to export in return for lighter fuels. There are widespread shortages of liquefied petroleum gas (LPG), which is commonly used for cooking and heating. The situation has been made worse by a shortage of specialized vehicles for handling LPG. Shortages have been particularly severe in the north, where production from the North Gas Plant at Kirkuk has been constrained by the continual attacks on the oil production and export system there, necessitating frequent cuts in the output of the field from which the associated gas is derived.

Table 7
Iraq: Oil Consumption, 2005
(th bpd)
LPG 50
Gasoline 140
Kerosine 50
Gasoil 125
Heavy Fuel Oil 50
Total 415
Source: GER estimate

Product Imports

The shortage of refined products has led to the need for Iraq to import large quantities of LPG, gasoline and middle distillate. Such imports nevertheless have not been easy to arrange owing to a shortage of funds with which to pay for civilian fuel supplies and because of the poor security situation, which has led to attacks on vehicles carrying fuel and, occasionally, the closure of border crossings, preventing the import of refined products by certain routes, particularly those in the north. The situation is made worse by the fact that Iraq does not have pipelines through which products may be imported, forcing it to rely on a lorry and tanker fleet that is insufficiently large to handle all the fuel that Iraq requires.

Gasoline accounts for most of Iraq's refined product imports, followed by gasoil (see Table 8). The products have been mainly supplied by neighbouring states such as Turkey, Kuwait and Iran. Retail prices are kept artificially low by the government, but widespread shortages have led to a black market with correspondingly high prices.

Table 8
Iraq: Refined Product Trade, 2005
(th bpd)
Imports
LPG 35
Gasoline 100
Kerosine 25
Gasoil 75
Total 235
Exports
Heavy Fuel Oil 20
Total 20
Net Trade 215
Source: GER estimate

The US and its allies appear to have believed that the import of refined products was likely to be a short-lived phenomenon pending the resumption of full production from Iraq's refinery system. The new Iraqi government, however, appears to be anticipating a much longer period as an oil importer and has begun efforts to try and put its import arrangements on a much longer term basis.

In July 2005, the governments of Iraq and Iran agreed to a long term deal involving the exchange of crude oil from Iraq for Iranian refined products. Under the arrangement, Iraq is to supply crude oil from its southern oilfields to Iran's Abadan refinery. The crude is to be supplied via 150,000 bpd pipeline from Basrah to Abadan and two further pipelines are to be built to carry gasoline and middle distillate from Iran to southern Iraq. The Iraqi oil ministry says that the crude pipeline's capacity could be increased eventually to 370,000 bpd.

Whether the agreement is actually implemented is another matter altogether. Iran does not have any gasoline to sell to Iraq: it is already a net importer. It is barely self-sufficient in middle distillate, either. There have been discussions for some years about supplying Abadan, which lies fairly close to southern Iraq: all to no avail. The whole scheme may have more to do with Iran's desire to increase its political influence in the Shi'ite areas of southern Iraq than with any oil supply agreement.

Oil Refining

The best long term solution to Iraq's shortages of refined products is to rebuild, expand and upgrade the country's refining system; but this cannot realistically proceed without the return of peace to large areas of the country. Iraq had eight refineries at the start of the war in 2003, with a nominal capacity of nearly 600,000 bpd. The oil ministry claims capacity of 650,000 bpd (see Table 9), but some 200,000 bpd of this appears unusable.

Table 9
China: Refinery Expansion Plans
Refinery Crude Distillation Capacity
(th bpd)
Baiji 310
Basrah 150
Daura 100
Kirkuk 30
Haditha 16
Kasak 10
Others 34
Total 650
Source: Iraqi press reports; Ministry of Oil

Some outside estimates put Iraq's crude distillation capacity higher than the 650,000 bpd figure given in late-2005 by the oil ministry. One of the ministry's advisers, Ahmad al-Barifcani, estimated the country's crude distillation capacity in mid-2004 as follows:

North Refinery Company    402
Middle Refinery Company    122
South Refinery Company    190
Total    714

Since the formal ending of hostilities in 2003, there have been several announcements of new refinery projects (see Table 10). It is not clear which of these are to go ahead. Apart from the need to pacify Iraq before such major construction works can be undertaken, there are other unresolved issues, such as the financing of such large scale projects.

Table 10
Iraq: Proposed Refinery Expansion
Refinery Proposed Expansion Capacity
(th bpd)
Baiji Catalytic Cracker 40
Isomerization Unit 20
Basrah Hydrocracker 35
Desulphurization Units 30
Platformer 10
Isomerization Unit 10
Daura CDU 70
Desulphurization Unit 18
Platformer 10
Isomerization Unit 10
Diwaniya CDU 30
Jarf al-Sakhr CDU 140
Koya CDU 70
Nahrain CDU 140
CDU = Crude Distillation Unit
Source: Iraqi press reports

The government's plans include 450,000 bpd of new crude distillation capacity and 183,000 bpd of additional upgrading capacity (see Table 10). There have been other proposals as well. The ministry says that 100,000 bpd of capacity will be added between 2005 and 2007. This looks optimistic, however. The government only allocated $3 bn in its 2005 budget for the rebuilding of the oil industry, and that figure includes the upstream sector and the pipeline infrastructure. The cost of the Nahrain refinery alone is put at $1.5 bn and other new refineries are also likely to cost in excess of $1 bn each.

Gas and Power

Iraq has large reserves of natural gas, but the gas business has been somewhat neglected in favour of oil since the invasion. This comparative neglect was evident in previous years, though in the late 1990s, the government began talks with foreign companies in a bid to expand the industry and to begin exporting natural gas. At present, large quantities of gas are flared. Some US estimates put the volume in the region of 1 bn cfd.

Any revival of gas production will require large amounts of capital and the pacification of the country. The main market for the gas is likely to be power generation, but the government is also likely to want to earn money from the export of gas. To this end, it has agreed in principle to supply Kuwait with 35 mn cfd of gas from the Rumailah field in southern Iraq for five years, during which the infrastructure will be expanded to allow the export of 200 mn cfd. The whole scheme is expected to cost $820 mn, of which Iraq's share is to be just over $350 mn. Kuwait may also assist in the development of new gas fields in Iraq.

Table 11
Iraq: Natural Gas Reserves, Production & Consumption, 2005
2005
    Reserves: 110.0 trillion cf
    Production: 150 mn cfd
    Reserves: Production Ratio: 2,000:1
Recent Production History
    2002: 192 mn cfd
    2003: 137 mn cfd
    2004: 153 mn cfd
Source: (Reserves) Oil & Gas Journal; (Production)
OET Annual Statistical Review, 2005; Pearl Oil.

Natural gas production in Iraq, like that of oil, dates from 1927. It reached its zenith at 1.9 bn cfd in 1979, before the Iran-Iraq War put paid to further expansion. It began to fall the following year and its decline accelerated after the imposition of sanctions in 1990. In the last full year before the US-led invasion, output was down to 192 mn cfd (see Table 11). In 2005, commercial production was in the region of 150 mn cfd, though up to 1 bn cfd may have been flared.

Natural Gas Liquids

The decline of natural gas production has also constrained the production of natural gas liquids (NGL). Most of these are in fact recovered in association with oil production, with output now in the region of 30,000 bpd (see Table 12). Iraq has several large undeveloped dry gas fields. Much of any increase in NGL production is likely to come from gas produced in association with crude oil.

Table 12
Iraq: NGL Production, 1990-2004
Year Production
(mn bpd)
1990 20
1991 *
1992 5
1993 5
1994 5
1995 5
1996 5
1997 15
1998 15
1999 15
2000 15
2001 20
2002 20
2003 20
2004 30
* Negligible
Source: OET Annual Statistical Review (various)

Power Generation

Of all the principal energy sectors in Iraq, the electricity industry appears to have been the most badly affected by the violence following the invasion of 2003. It is also the most politically sensitive sector since its absence is felt by almost all Iraq's citizens on a more or less regular basis. Power shortages also affect oil production and exports by preventing pumps and other equipment from working.

Table 13
Iraq: Electricity Sector, 2005
Installed Generating Capacity: 11.0 GW
Capacity Required: 7.0 GW
Usable Capacity: 5.5 GW
Generating Mix: Steam Turbines 49%
Gas Turbines 23%
Hydro-electricity 23%
Diesel Generators 5%
Source: Ministry of Electricity

Iraq has approximately 11 GW of installed capacity, of which it requires some 7 GW in order to meet normal, peace-time demand (see Table 13). There is often less than 5 GW available at any one time as a result of war damage and sabotage, giving rise to severe electricity shortages across the country.

In addition to the shortage of usable generating capacity, there are chronic shortages of fuel, especially natural gas for the operation of the gas turbine stations, which make up nearly a quarter of the generating mix (see Table 13). Shortages of diesel have prevented the use of many diesel generators used as back-up. For the same reason, it has proved impracticable to build small (<5MW) diesel generating stations to supplement the present, inadequate generating system.

War and sabotage have also disrupted the transmission and distribution of electricity across Iraq. Power lines have been attacked and destroyed and distribution stations looted. This has broken up the national transmission and distribution network, making it impossible for power stations in less violent areas, such as the south, to transmit power to areas of shortage, such as Baghdad.

Electricity Plans

The US authorities set a target of refurbishing the generating system so as to achieve a usable generating capacity of 6.0 GW by June 2004. In the event, the plan proved to be over-ambitious. Even by the end of 2005, usable capacity was at most 5.5 GW. Apart from the security problems, the US found it difficult to source spare parts for the programme, especially where these were needed for power plants with ancient or obsolescent equipment. The impossibility of ensuring regular maintenance at power stations means that the 5.5 GW of capacity that is nominally available can seldom be fully utilized.

The Ministry of Electricity wants to increase installed generating capacity to 25 GW by 2010. It also plans to refurbish the 400 kV and 132 kV transmission system by then. The total cost of all this is estimated by the Ministry at $30-50 bn. There are plans to bring in private capital, for example, via build-own-operate (BOO) schemes, but private contractors will be unwilling to become involved until peace returns and, more specifically, they see themselves as being able to obtain payment for their output. It is estimated that under the US-imposed Coalition Provisional Authority (CPA) collection rates in Baghdad were around 30%, and in some areas of the country as low as 0%.

OET ARCHIVE

'Iraq struggles to rebuild electricity sector' Gas & Power Apr04

Hyper-links:

Power Imports

Iraq has transmission links to Turkey and Syria, but these are only small in capacity. Talks have been held with these two countries, plus Kuwait, Jordan and Egypt, over the possibility of importing electricity, but power lines remain particularly vulnerable to acts of sabotage, especially in remote border regions.

Outlook for the Energy Sector

It is difficult to forecast future levels of energy output for Iraq in the absence of law and order across much of the country. Moreover, the situation could easily deteriorate over the next few years. In the worst case, the country could disintegrate as a coherent political entity. What appears almost certain is that the government's present targets for the levels of output for oil, gas and electricity will prove to be over-ambitious.

Table 14
Iraq: Energy Output, 2005-2010
Oil
2005 1.9 mn bpd
2010 3.0 mn bpd
Natural Gas
2005 150 mn cfd
2010 300 mn cfd
Electricity (Capacity)
2005 5.5 GW
2010 7.5 GW

The forecasts presented in Table 14 must be considered somewhat tentative. They assume some amelioration in the security situation, especially in strategic areas such as oil fields and around major power stations. The complete pacification of Iraq, on the other hand, is not assumed. If the security situation should deteriorate inside Iraq-and this can by no means be ruled out-even the modest increases predicted may not be achieved.

Latest Developments

War Update

Iraq announced plans to boost output by 400,000 bpd within about a year and revealed a long term plan to raise production from its current 2.4 mn bpd level to 6.0-8.0 mn bpd by 2013. The Oil Ministry has also indicated that it will hold two more upstream licensing rounds in 2009, bringing the total to four.

All these measures form part of a $50 bn programme aimed at both raising production and exports and boosting refinery capacity. The Ministry says that 140,000 bpd will be added to the combined capacities of the Basrah and Daura refineries and that five new refineries will be built with capacities totalling 840,000 bpd. The new units will be at East Baghdad, Karbala, Kirkuk, Nasiriyah and Misan, with completion scheduled for 2015

Oil Production

OET ARCHIVE LINK: ‘Iraq forges ahead with production plans’, Focus, April 09

Previous:

War Update

Despite planned cuts in investment budgets in other parts of the oil industry, Iraq is planning to spend $200 mn to increase its oil production.  The money will be used first to try and stabilize output in a number of key fields and then to raise the level of output across the country. Production capacity is officially estimated at 2.5 mn bpd, but output has not been at that level since August 2008. Oil Ministry plans for 2009 suggest a 0.1 mn bpd decline in the main southern oilfields this year to 1.8 mn bpd.

Upstream contract terms are also to be improved to attract more foreign investment, according to a Ministry report in February, which saw the signing of a deal with South Korea to invest $3.6 bn in Iraq’s oil infrastructure, including a new refinery. Korean companies will receive in return rights to develop oilfields in Iraq. In a similar deal, Japanese firms may be awarded upstream contracts in return for financing a 300,000 bpd refinery at Nassiriyah.

Mitsubishi is to join Shell in developing gasfields in southern Iraq for the domestic market. The possibility of LNG has also been discussed.

Iraq reports that it is now supplying 10,000 bpd of crude oil to Jordan’s Zarqa refinery and plans to increase this to 30,000 bpd.

War Update

Iraq announced a series of spending cuts in the oil industry resulting from the fall in export revenues since July 2008. The decline was caused by a combination of falling prices and a decline in production in the south, where falling reservoir pressures are being reported.

Baghdad announced that oil production was meant to be 2.8-3.0 mn bpd in 2009. Last year’s output was an estimated 2.4 mn bpd.

In an attempt to boost production, Iraq announced a second upstream bidding round covering 11 fields, including the West Qurna, Halfaya and Majnoon Fields. The Oil Ministry announced that it no longer considered Majnoon to be shared with Iran.

The State Company for Oil Projects (SCOP) awarded front-end engineering and design (FEED) contracts to build four new refineries: a 300,000 bpd unit at Nassiriyah; and three of 150,000 bpd, in Karbala, Kirkuk and Maissan.

War Update

The UN mandate under which US and British forces operated in Iraq expired on 31st December.  They now operate under the Iraqi authorities.

Hopes of an early start to oil exports from Kurdistan (see ‘The Month in Brief’, December 2008) received a setback when the Kurdistan Regional Government revealed that it had not received formal approval for this from the government in Baghdad.

War Update

Crude oil exports from Kurdistan came a step nearer with the agreement in principle that oil produced there could be exported via Iraq.  Baghdad had called upstream contracts signed by the Kurdistan Regional Government “illegal” but is now discussing the building of a spur-line to the Tawke and Taq Taq fields.

Iraq’s own crude exports were hit by two explosions on the pipeline to Ceyhan.  The first was said to be the result of a ‘technical problem’, whilst the second was claimed to be the work of Khurdish separatists.  Oil flows resumed on 24th November.

China’s CNPC signed a $2.9 bn 20-year service contract to develop the 110,000 bpd al Ahdab field. Production is scheduled to begin in late-2011, at a rate of 25,000 bpd.

The US and Iraq have agreed that all US troops will leave on 31st December, 2011.

A 10,000 bpd distillation column has been inaugurated at Qadisiyah as the first stage of a 20,000 bpd refinery.

War Update

Iraq confirmed that 35 companies had pre-qualified to bid in the country’s first post-invasion upstream licensing round.  The six fields on offer are estimated to have a combined production capacity of 1.5 mn bpd.  They are to be developed under 20-year service contracts with the country’s state-owned North and South Oil Companies.  Bids are due in April 2009 and the results of the bidding are expected in mid-year.  Baghdad wants the fields to be in production within two years from the start of the contracts.

Two further bidding rounds are planned after this one.  The aim is to raise production to 4.5 mn bpd by 2013.  Output has recently been at a post-invasion high of 2.5 mn bpd but slipped slightly in September.

OET ARCHIVE LINK: ‘Iraqis argue over gas plans’, Gas&Power, Nov08

War Update

Iraq for once provided some positive news by announcing major oil and gas development deals with CNPC and Shell. There was talk of gas exports from the second deal, which involves the recovery of associated gas from Iraq’s southern oilfields.

As Iraq’s oil production rose to pre-invasion levels, the government announced plans to award service contracts for six major oilfields with combined reserves of 43.4 bn bbl, with the prospect of a further licensing round involving up to 51.3 bn bbl.

OET ARCHIVE LINK: ‘Iraq launches ambitious Production Drive’, Focus, Oct08

War Update

Iraq’s oil production remained close to 2.5 mn bpd but the government appears to be becoming impatient with foreign companies reluctant to sign service contracts since Baghdad cut the duration of them from two years to one.  There is also mounting domestic opposition in Iraq to what are seen as over-generous terms to foreign contractors.  The government has nevertheless been able to sign a service agreement with the China National Petroleum Corporation to develop the 125,000 bpd al-Ahdab field and an associated power plant.

Kurdistan meanwhile is pressing ahead with plans for a large industrial development based on the Chemchemal gas field.

Iraq has agreed to supply 10,000 bpd of crude oil to Jordan with an option to raise the volume to 30,000 bpd, extending an agreement signed in 2006.  The oil will be priced at $22/bbl below that of Brent.

War Update

Iraq’s ‘exclusion zone’ round the crude export pipeline to Ceyhan completed its first year having greatly reduced disruption to the pipelines serving the northern fields.  Production there remains above 600,000 bpd and national output in June exceeded 2.5 mn bpd for the second month running.  The Oil Ministry launched the first post-invasion licensing round but immediately attracted criticism from those who wanted foreign companies to be confined to undeveloped fields rather than the six existing oilfields and two gasfields initially on offer.

The government says it wants to speed-up the award of service contracts for strategic energy projects but there is still confusion about the precise role foreign companies will play, what level of foreign ownership will be permitted in oil projects and what precisely the service contracts will say.  Baghdad says its new hydrocarbons law will be ready “shortly” but issues remain unresolved, including the status of contracts already signed with the Kurdistan Regional Government.  Kurdistan produces 10,000 bpd from the Tawke field, but plans to commission a new field at Taq Taq next year.  The Kurdish government said in July that this would enable Kurdistan to export 250,000 bpd by the end of 2009 though, as yet, no agreement exists with Baghdad to permit this, nor do the Kurds have the means to handle so much crude.

The Iraqi government meanwhile has filed law suits against several oil companies including Chevron and Vitol alleging they paid bribes to the government of Saddam Hussain in order to secure contracts under the UN’s Oil-for-Food Programme

War Update

Iraq’s crude oil exports rose above 2 mn bpd for the first time since the US-led invasion of March 2003.  The main reason is better security in the north of the country, which has cut the number of attacks on the export pipeline from Kirkuk to Ceyhan; but exports from the south via the Persian Gulf have also risen.  Flows along the Ceyhan pipeline, however, fell by nearly half at the end of June to 240,000 bpd.

Improvements in security have enabled Baghdad to renew the deal to supply Jordan with 100,000 bpd of crude oil for another three years from 15th August.  Attacks on the road-tanker convoys had reduced deliveries and threatened the entire contract.  The oil is supplied at a discount of $18-22/bbl off the official selling price.

The government has decided against production-sharing contracts for foreign oil companies but will invite them to bid for service contracts

War Update: April 2008

An upsurge of violence in Iraq threatened a recovery in output that began earlier this year. Production in the northern fields hit a post-invasion high of 620,000 bpd in March, rising by 180,000 bpd in one month. Fighting in the south, however, cut production there by more than 100,000 bpd as government troops tried to subdue Shi’ite militias in and around Basrah.Oil installations damaged in the south included a pipeline and a pumping station.

The Iraqi government nevertheless announced that oil production would reach 2.9 mn bpd by the year’s end, requiring an increase of nearly 500,000 bpd over April 2008 levels. Foreign help is to be sought via a series of technical service agreements and–later this year–an upstream licensing round. Japan’s Ministry of Economy, Trade and Industry says it wants a bigger role for Japanese oil companies in both the upstream and downstream sectors in Iraq.

Kurdistan says it is negotiating with Baghdad to export oil produced from new oil fields there. The central government does not recognize production agreements drawn up by the Kurdistan Regional Government.

The EU–desperate for gas to fill its Nabucco pipeline–has approached Iraq for up to 1 bn cfd

War Update: March 2008

Violence in Iraq continued to affect world oil markets.  Unrest in the south of the country–where most of the oil is produced–threatened to spiral out of control as government troops moved into Basrah in order to disarm local Shi’i militias. An attack on one of the pipelines serving the Basrah Oil Terminal cut exports by 200,000 bpd to just over 1.3 mn bpd. A subsequent attack on a pipeline feeding the oil terminal at Faw was reported to have stopped the flow of up to 800,000 bpd, though the South Oil Company was able to pump oil via other routes, leaving export levels unaffected in the short term. Southern Iraq’s ports of Basrah and Khor al-Amaya account for around 80% of Iraq’s crude exports.

In an attempt to provide more export routes, Iraq is trying to re-open a 250,000 bpd pipeline from Kirkuk, in the north, to Banias in Syria. The line was put out of action by US air attacks in March 2003. The government has just agreed a preliminary deal with Russia’s Stroytransgaz to rehabilitate the line. It has also issued tenders for the construction of a 150,000 bpd crude pipeline from southern Iraq to the Abadan refinery in Iran and a 75,000 bpd line carrying products from Abadan to Basrah.

Russian companies may soon have an increased role in Iraq following a decision by Moscow to forgive $13bn of debt run-up under Saddam Hussain. Russia wants Lukoil to be re-awarded a contract made by Saddam’s government for the development of the West Qurna field.

Baghdad has announced proposals for three grassroots refineries: two of 150,000 bpd at al-Nahrain and Amara and a 300,000 bpd unit at Nassiriyah. The Najaf refinery has been expanded by 10,000 bpd to 30,000 bpd

War Update: February 2008

Iraq has halted the pumping of crude to Ceyhan following an attack on its northern export pipeline. Exports to South Korea’s SK Energy have been suspended following the signing of an upstream contract by SK with the Kurdistan Regional Government. SK imported 90,000 bpd from Iraq. Baghdad has declined to renew a 3,000 bpd contract held by Austria’s OMV, for the same reason.

War Update: January 2008

Iraq continued to provide its quota of violence, even if there appeared to be less of it than usual. A fire at the Baiji refinery led to a cut in Kirkuk’s crude oil production. Output was further reduced by a power cut in the production-area, caused by damage to transmission lines, and by problems restarting the export pipeline to Ceyhan. At the height of the troubles more than 250,000 bpd of Kirkuk’s production was shut-in. Power shortages caused the temporary closure of refinery units at Baiji and Daura and a fire shut-down the country’s newest refinery, at Shuaiba. Both the Baiji and Shuaiba fires appear to have been caused by poor maintenance rather than sabotage.

OET ARCHIVE LINK: ‘Iraq tries to return to normal’, Looking Ahead, Feb08

War Update: December 2007

Iraq continued to export crude oil via Ceyhan following repairs to the bomb-damaged pipeline, which were completed on 17th November.  State trader SOMO was even able to agree term contracts with 11 buyers for 300,000 bpd for the first quarter of 2008.  December’s crude oil production was reported at just over 2.5 mn bpd: the highest since the US-led invasion of March 2003.  The government has announced that it expects production to be “approaching 3 mn bpd” by the end of 2008.

It is also planning to reopen a 250,000 b/d crude export pipeline to the Syrian port of Banias to provide an additional export outlet for its northern fields around Kirkuk.  The line has been closed since it was attacked by US forces in March 2003.

The output of natural gas is to be increased.  The 50 mn cfd Akas field is to be expanded to 500 mn cfd with a view to exporting the gas.  There are also plans for enhanced oil recovery from existing fields.  Iraq nevertheless still does not have any comprehensive legislation covering foreign oil investment, which may delay several of its production plans.

War Update: November 2007

Iraqi worries centred on a Turkish threat to take military action against terrorists operating from the Kurdish areas of northern Iraq. Kurdistan provided an additional headache in the form of new production-sharing contracts with US, Canadian and French oil companies. The Oil Ministry in Baghdad said the contracts had no standing with the central government. The Kurdish Regional Government said it was forced to act unilaterally following the failure of the government in Baghdad to pass a federal oil law. The Iraqi parliament has yet to vote on a draft law drawn up by the Oil Ministry. Kurdistan meanwhile has announced that an appraisal well drilled in the new Taq Taq field flowed at 37,560 bpd and that the field itself could produce 200,000 bpd.

Northern Iraq’s oil production rose sharply in September to 434,000 bpd–the highest since October 2004–thanks to a drop in attacks on pipelines in the north of the country. This, in turn, led to a build-up of Iraqi crude at the Ceyhan oil terminal in Turkey. The sudden reappearance of crude there led to difficulties in finding sufficient tankers to move the oil. The continuing threat to Iraqi exports was nevertheless underlined when the Kurdish separatist PKK organization threatened, as part of its dispute with Turkey, to blow-up the pipeline to Ceyhan if Turkish troops crossed the border into northern Iraq. The Iraqis did manage to deliver crude oil from the north by road tanker to Jordan to mark the resumption of exports to that country. Jordan is supposed to receive 10,000 bpd in this way at concessionary prices. The Iraqi parliament postponed discussion of a law governing foreign involvement in refining and product imports

War Update October 2007

Iraq’s exports of crude oil via Ceyhan hit a post-invasion record of 235,000 bpd in September. The Iraqis have recently been able to pump around 300,000 bpd through the damaged pipeline serving the Kirkuk oilfields, allowing them to accumulate 7.1 mn bbl at the Turkish port, which were sold in three tenders. A further tender–of 5.0 mn bbl ;was scheduled for 8th October. The pipeline nevertheless continued to be attacked, and another pipeline serving Kirkuk–that connecting it with the Baiji refinery north of Baghdad–was attacked and damaged on 18th September, spilling oil into the River Tigris and causing a fire. Despite these and other setbacks, Iraq’s total exports for the third quarter of 2007 look like being close to 1.6 mn bpd: another post-invasion record.

Iraq has also resumed oil exports to Jordan for the first time since March 2003. About 10,000 bpd is to be supplied by road tanker to Jordan’s Zarqa refinery following resumption of the oil trade between the two countries in late September. The oil is supplied at preferential rates

War Update September 2007

Violence in Iraq involved the national oil industry when the Deputy Oil Minister Abd al-Jabbar al-Wagga’a was kidnapped at gunpoint in Baghdad, along with four other oil officials. The gunmen, who were wearing uniforms used by the Iraqi security forces, broke into a compound housing the State Oil Marketing Organization (SOMO). All five were released on 28th August after a fortnight in captivity.

The government has told Lukoil that it does not recognize the contract the Russian company signed with the government of Saddam Hussain in 1997 to explore the West Qurnah oilfield, one of Iraq’s largest. Lukoil has been informed that it must resubmit its bid to develop the field, where it will face competition from other international companies. Another important oilfield, Majnoon, was shut-in for five days in August after nearby inhabitants blockaded the production site in protest against the lack of jobs there for local people. Majnoon’s output–at 40,000 bpd–remains well below the field’s capacity as a result of violence in the south of Iraq (see ‘Focus’).

Despite the unrest across Iraq and the lack of laws covering foreign investment, the government has recently signed deals covering the building of new pipelines and other developments with Turkey, Iran and Syria.

OET ARCHIVE LINK: ‘Iraq struggles to pass new oil law', Focus, Sep07

War Update August 2007

Iraq’s parliament failed to agree yet again on a new hydrocarbon law. Kurdish members objected to a proposal that Baghdad should have the right to veto any oil and gas contracts signed by the regional government in Kurdistan, whilst three Sunni parties refused to vote on the proposed law, as part of a wider protest against the actions of the Shi’i dominated government in Baghdad. The parliament did, however, approve a draft law that would allow foreign companies to invest in refineries in Iraq. A report on Iraqi television suggested that the prices of refined products sold from these refineries would not be subject to government controls.

The damaged export pipeline from Kirkuk to Ceyhan has managed to deliver a small quantity of crude to the Turkish export terminal, allowing 3 mn bbl to be sold by tender in early July. The Prime Minister’s office says that Iraq plans to add up to 250,000 bpd of crude oil production capacity in the south of the country, mainly at the Rumailah field. The new capacity should be on-stream ‘within a year’. Approval has been granted for a 150,000 bpd refinery in Kirkuk.

War Update July 2007

Iraq is preparing to export oil to Turkey following the start-up of the Tawke field in the north of the country. Crude is being delivered by road tanker to northern Iraq pending completion of a spur-line to the main export pipeline to Ceyhan. The 100 mn bbl field is expected to produce 15,000 bpd. Full commercial production is being delayed by the inability of the Kurdistan Regional Government and the Baghdad government to agree the terms of a national oil law. Kurdistan meanwhile has introduced its own oil law and has announced that it will offer 40 exploration blocks to foreign companies.

At the other end of the country, Petrel Resources has announced that its redevelopment of the Subba and Luhais fields will be postponed for a year to 2010 because of delays in providing new infrastructure. The redevelopment is designed to increase the field’s output by 150,000 bpd to 200,000 bpd

War Update June 2007

Violence continued to take a heavy toll on Iraq and on the occupying forces. The government is nevertheless pressing-on with a series of proposals to rebuild the war-torn oil sector. It has invited the Iranians to build a refinery in the country and is trying to revive a plan to build a 200,000 bpd pipeline designed to export crude oil to Iran’s Abadan refinery. There are further proposals to supply a second Iranian refinery at Kharmanshah.
In the meantime, Iraq looks likely to increase imports of refined products from Iran following talks with unnamed Iranian trading companies. The US government has expressed concerns about growing commercial ties between Iraq and Iran. The EU is trying to raise its profile in Iran’s hydrocarbon sector. A delegation has expressed interest in importing natural gas from the Akas field in southern Iraq in the latest of a series of ambitious and largely unrealistic plans to transport gas across the Middle East to Western Europe

War Update: May 2007

Iraq has announced several schemes to raise its production of oil, natural gas and LPG, and to upgrade its refinery system. Work on all these projects, however, continues to be hindered by the high levels of violence, despite the arrival of more US forces in some of the worst-affected areas. The only region where reconstruction and new developments can take place is in the Kurdish north of the country, but here political tensions between the regional government of Kurdistan and Baghdad are threatening plans to develop new oilfields. Baghdad objects to a series of development deals signed between the Kurdish regional government and various oil and gas companies, one of which has led to the development of a new oilfield and associated infrastructure at Tawke, which is expected on-stream shortly with an output of about 20,000 bpd. Baghdad has drawn-up new rules stating that all such deals should be signed with the central government. Kurdistan’s regional government is fighting to retain control of its oil and gas industries. Iraq’s crude oil export pipeline from Kirkuk to the Mediterranean port of Ceyhan remains out of action as a result of earlier attacks. Baghdad is trying to increase the country’s crude exports by stepping-up production in the south, from where oil can be exported via terminals in the Persian Gulf. Its immediate target is additional production of 70,000 bpd and foreign companies have been invited to bid for the work. The government is also trying to more than double LPG production in the south to 30,000 bpd. Proposals to export gas to Kuwait are also being revived and there are plans to spend up to $8 bn on upgrading the country’s three main refineries–at Baiji, Basrah and Daura–to enable them both to produce more white products and to improve the quality of gasoline and diesel, which has in both cases deteriorated since the US-led invasion of March 2003.

Production

A field capable of producing 200,000 bpd has been reported as discovered at Taq Taq in the Kurdish part of northern Iraq. The field is being explored by Addax Petroleum of Canada and Turkey’s Genel Enerji under an agreement with the regional government. Baghdad is challenging the status of such agreements (see ‘War Update’ above).

War Update

Iraq remains troubled by violence, which is also inhibiting attempts to bring in foreign oil companies to work on oilfield developments. The government wants outside firms to help develop fields outside the present main producing-areas of Kirkuk and southern Iraq. In its latest move, it has invited bids to develop fields lying close to the Iranian border.

The government has also raised domestic refined product prices by 15% and promised further rises in an attempt to curb the smuggling of cheap products from Iraq into neighbouring countries where retail prices are higher, which in turn makes product shortages worse inside Iraq. In a further move to alleviate domestic shortages, Baghdad has signed contracts with Iraqi firms for the construction of 10,000 bpd refineries in Arbil and Sulaimaniyah, in northern Iraq, and announced proposals for a further 10 units.

Oil and Gas Production

Iraq's Cabinet has approved a controversial draft law permitting foreign oil investment and allowing regional governments to negotiate directly with foreign companies. Many in Iraq say the law is being imposed on the government by Washington as a way of ensuring that US oil companies have a large role in the production of Iraq’s oil. There is also opposition to the idea that regions such as Kurdistan and the Shi'i-dominated south should have an important role in oil policy. Moreover, there is still no firm agreement on how Iraq's oil revenues are to be shared between the various provinces.

Gas Exports

An important gas export project looks unlikely to go ahead, following Kuwait's decision not to refurbish a pipeline designed to import gas from Iraq's South Rumailah field after Iraq failed to build the infrastructure to export the gas.

War Update

The year opened with no let-up in the violence in Iraq. At the beginning of February, more than 130 were killed by a bomb in a Shi’i district of Baghdad, following a year in which some 35,000 civilians were killed, according to a UN estimate. US President George W Bush announced that extra troops are to be sent to Iraq in an attempt to bring the situation under control. Product shortages inside Iraq were exacerbated by attacks on downstream installations and the temporary suspension of product deliveries by Turkey. The Turkish government had objected to an Iraqi request for it to liaise with officials in the Kurdish-controlled region of northern Iraq over delivery schedules. Ankara refused to deal with the Kurdish regional authorities on the grounds that it was opposed to all forms of regional autonomy for Kurdish groups. Iraq withdrew its request.

Baghdad meanwhile is trying to re-establish some form of central control over the oil industry in the Kurdish north to prevent it from unilaterally signing contracts with foreign oil companies and to ensure that a proportion of any oil revenues generated in the north is remitted to the central government. Figures released by the Oil Ministry showed that oil exports rose by 7% in 2006, to 1.52 mn bpd, though exports from the northern fields fell by 8%, compared with the previous year, to 38,000 bpd as sabotage to pipelines and other facilities continued. The government of Kuwait has launched an official investigation into allegations of irregularities over the sale of refined products by the Kuwait Petroleum Corporation to the US Army in 2003.

War Update

Iraq ended 2006 with its crude oil exports at zero, its oil industry in need of “urgent attention”, according to a report delivered to the US President and Congress, and its domestic security situation spiralling out of control. The execution of former President Saddam Hussain on 30th December failed to pacify the country, as the government appears to have hoped, as more than 2,000 Iraqi civilians died during the month of December and US military casualties passed the 3,000 mark.

Crude oil exports ceased as bad weather closed the Persian Gulf terminals of Basrah and Khor al-Amaya. Exports via Ceyhan were already at a standstill, following recent attacks on the pipeline from Kirkuk . The country's main refinery, at Baiji was closed for part of December following threats to workers there and an attack on its main supply pipeline from Kirkuk . The government tried to relieve the resulting shortage of refined products by arranging to import some 6,300 bpd of fuel from Iran . The black-market prices of some refined products were reported by the Arabic newspaper, al-Hayat to have reached record levels. The Oil Ministry estimated that Iraq 's oil exports were 1.6 mn bpd during 2006. Iraq has agreed to supply Jordan with 10,000 bpd of crude oil at a discount of around $18/bbl.

War Update

A United Nations' survey estimated the number of violent deaths in Iraq during October at 3,709: the highest monthly total since the US-led invasion formally ended in May 2003. The 23rd November saw the highest daily total of civilian casualties–over 200 dead–when a Shi'ite quarter of Baghdad known as Sadr City was bombed by terrorists.

Four days later, major damage was caused to the Kirkuk oilfield by a mortar attack on the field's main oil-processing centre. The following day, all output from the 300,000 bpd field was reported to have ceased. The field is the principal source of crude supply to the Baiji refinery complex serving Baghdad .

The growing violence in Iraq has also prevented the delivery of some 10,000 bpd of crude oil to Jordan under a contract that was signed in August. The oil has to be delivered by road, in the absence of any pipeline between the two countries, but it is now considered too dangerous to operate such a large supply convoy across Iraq .

OET ARCHIVE LINK: ‘Iraq 's Oil Sector struggles for Survival?', Focus, Dec06

War Update

Iraq resumed the pumping of crude oil from Kirkuk to Ceyhan for the first time since September only to cease a few days later for what were described as ‘technical' reasons. The city of Kirkuk was hit by a series of bombings and assassinations. Output from the country's southern fields exceeded 2 mn bpd for the first time in two years.

The State Oil Company for Oil Projects (SCOP) announced the opening of a 10,000 bpd refinery at Najaf. SCOP plans a series of small refineries designed to alleviate the severe shortage of refined products in Iraq . Another small unit was opened in Amawa last year. Japan has agreed to assist in the rehabilitation and upgrading of the 150,000 bpd Basrah refinery.

Researchers at Johns Hopkins University in the US and al-Mustansiriyah University in Baghdad released a study suggesting that up to 794,000 Iraqis had died as a result of the US-led invasion and the violence that followed it.

War Update

Attacks were reported on a pipeline carrying refined products. Unspecified ‘tensions' on the Turkish border were cited by Iraqi officials as the reason for an interruption in Turkish deliveries of refined products to Iraq. The government announced that it was to seek products from elsewhere.

A memorandum of understanding has been signed with Iran for the import of 13,000 bpd of kerosine. Under the agreement, Iraq will supply up to 100,000 bpd to Iran 's Abadan and Kermanshah refineries. Iraq has also agreed to supply Jordan with crude oil at preferential prices. Deliveries will commence at 10,000 bpd but are subsequently to be raised once a pipeline is built between the two countries.

Concerns have been expressed in Baghdad over proposals by the regional government of Kurdistan to draw-up its own oil legislation, which could affect the operation of the Kirkuk oilfield.

War Update

Iraq has been struggling to produce and export oil amid warnings that the country is on the verge of civil war. The reopening of the export pipeline from Kirkuk to Ceyhan has proved to be short-lived after further acts of sabotage in mid-July. The State Oil Marketing Organization (SOMO) was forced to cancel a programme of tenders to sell Kirkuk crude. Only three had been awarded since the pipeline was reopened in June. Total sales amounted to only 9.6 mn bbl.

Tenders were used as SOMO was unable to guarantee sufficient steady volumes to any buyers wanting to buy under regular term contracts. The Iraqi state company had planned to resume regular term deals by August, but this idea has been shelved for the time-being. Exports via the Persian Gulf were down by 10% in July compared to the previous three-month period, at 1.4 mn bpd. Growing fuel shortages in Iraq have led the government to sign new contracts with Turkey and Iran for refined products. The contracts involve the delivery of a total of 5 mn bbl of gasoline, diesel and heavy fuel oil.

War Update

It was announced that Iraq 's al-Qaida leader, Abu Musab al-Zarqawi had been killed. Despite this, the violence continued unabated. During the month of June, an estimated 1,500 people were killed in Baghdad alone. Attacks on road tankers caused the suspension of exports of heavy fuel oil, which is produced to excess by Iraq 's refining industry. Lacking anywhere to store the surplus fuel oil, the government ordered what were described as ‘large quantities' to be incinerated. The one piece of good news from Iraq was the reopening of the export pipeline from Kirkuk to Ceyhan for the first time since January. Throughput was reported in late June at 325,000 bpd. Even here, though, the situation was not entirely without its troubles. The state marketing company, SOMO, received disappointing bids for the oil it was offering for sale at Ceyhan.

War Update

After a long delay, Iraq 's parliament approved a government, including a new oil minister, Husain al-Shahristani, described as ‘a Shi'i Islamist'. Dr Shahristani said his most important duty was to fight corruption in the oil sector, citing in particular the widescale smuggling of petroleum products. Official Iraqi statistics show that around 60 mn bbl of crude oil went ‘missing' during 2005. The new oil minister said he would encourage foreign investment in Iraq 's oil industry.

The new government is nevertheless handicapped by the high levels of violence inside Iraq. A government survey revealed that more than 1,000 were killed in Baghdad alone during April. A further problem may soon arise following the decision by the Kurdish parliament to establish a regional government there. The aim appears to be to loosen further Baghdad 's control of the region. The Kurds are already discussing foreign investment in oilfields in Iraqi Kurdistan.

War Update

Iraq has announced that it is standing by plans to raise production capacity to 3 mn bpd by the end of 2006 despite the widespread chaos and violence. It has not been able to produce more than 2 mn bpd on a sustained basis since the US-led invasion three years ago. Production has been close to 1.8 mn bpd in recent weeks. Exports via Basrah are being restricted by a lack of tugs, pipeline leakages, poor equipment and power cuts. The export route to Ceyhan has been closed by repeated acts of sabotage and is unlikely to reopen for at least eight months according to the country's oil ministry.

War Update

Iraq moved closer to all-out civil war following an attack on the Imam Ali al-Hadi mosque in Samarra, one of Shi'i Islam's holiest shrines, on 22nd February. In the days that followed, several hundred Iraqis died in inter-communal violence. Attacks on installations close to the Basrah Oil Terminal were reported. Earlier in the month, the main oil storage facility in Kirkuk was bombed, forcing the Northern Oil Company to shut-in the 0.3 mn bpd field. Oil and electricity supplies in southern Iraq were cut by attacks on installations some 40 miles south of Baghdad. Turkey agreed to resume product exports to Iraq after a deal was agreed on repaying Iraqi debts of $1 bn to Turkish suppliers. An official Australian inquiry into illegal payments made under the UN's oil-for-food programme is to investigate allegations involving two Australian-controlled oil firms.

War Update

Iraq 's oil sector remains disrupted by violence. The export pipeline from Kirkuk to Ceyhan was damaged yet again, following a brief period in which the line had been operating, albeit at only 0.2 mn bpd. Strikes, power shortages and bad weather disrupted exports via the Persian Gulf. Inside Iraq, oil shortages worsened as Turkey stopped exporting products there after Baghdad had failed to pay for over $1 bn worth of Turkish imports during 2005. January's exports of crude oil were estimated at 1.1 mn bpd: the lowest total since September 2003.

In attempt to relieve the shortage of refined products inside Iraq, the Ministry of Oil has begun work on two refineries in the Kurdish north of the country, in Bazian. Their effect on the national picture is nevertheless likely to be minimal, since their combined capacity is to be only 10,000 bpd.

War Update

Iraq 's latest round of elections, on 15th December, returned mainly Shi'ite parties, to protests from Sunnis and some secular parties. The country continued to suffer from high levels of violence. Oil installations were bombed, and road-tanker drivers were attacked in what was clearly a move designed to stop the delivery of refined products to Baghdad . The oil minister, Ibrahim Bahr al-Ulum, resigned in protest against a government decision to increase Iraq 's heavily subsidized fuel prices. He has been temporarily replaced by the Deputy Prime Minister, Ahmad Chalabi. Opposition to the price rises led to a 10-day strike at Iraq 's main refinery at Baiji. Operations continued to be adversely affected after the strike because of sabotage to the 200,000 bpd pipeline bringing crude oil to Baiji from Kirkuk . Sabotage to a pipeline serving the Daura refinery cut production there, and severe gasoline shortages were reported across the Baghdad region. The export pipeline from Kirkuk to Ceyhan was reopened after being idle for most of 2005, but throughputs are nowhere near capacity levels. Exports of crude oil from Basrah were disrupted by power cuts and bad weather.

Back to top