No respite for Iraq’s oil industry

Last week I attended the Platts Middle East Crude Oil Summit in Dubai, which discussed the various aspects of the current — and expected — oil market developments. And especially in the light of the latest Opec decision — or non-decision — not to specify a level of oil production for the coming six months and its attendant impact on falling oil prices.

One of the important revelations out from the summit is the situation of Iraq’s upstream oil industry. This was deemed to be important as Iraq increased its production during 2015 by almost 550,000 million barrels a day over 2014.

However, it became questionable whether Iraq is likely to repeat this performance in 2016 or even later. Iraq is mired by problems of security, political and economic instability due to the precipitous decline of oil prices and its impact on the budget and investment spending.

The 2016 budget is unrealistically based on an oil price of Iraqi crude oil of $46 (Dh169) a barrel, which equates to almost $50 a barrel for the Opec basket of crude oils that is now at the level of $34.8 and falling.

Iraq was selling its Basra heavy crude at $30 a barrel and Basra light at $35 a barrel approximately.

Iraq’s oil revenues are now projected at $50 billion this year compared to about $84 billion in 2014 even though exports increased by about 500,000 bpd in 2015. In the 2016 draft budget, only $21.5 billion is allocated for overall investment compared to almost $47 billion in 2013. Therefore, the government is unlikely to allocate more than half to the oil sector and that will be restricted to capacity maintenance. Iraq is said to be “oil-rich and cash-poor” and “will be as volatile in the next five years as it has been for the past five years”, according to one presenter at the Platts summit.

Iraq’s production now stands at 3.6 million bpd in the south, which is likely to be maintained in 2016. Add to it the 180,000 bpd from the remains of the fields still in the hands of the government in the north, plus the 550,000 bpd of what the Kurdistan Regional Government (KRG) is likely to produce from its fields that it took from the North Oil Company when the Peshmerga occupied Kirkuk.

Gone are the days when Sharistani, the former oil minister and later deputy prime minister for energy, could say Iraq’s production will be 6 mbd. Some Iraqi officials are now most vocal in criticising the bid rounds and the contracts signed then, and asking for the deals to be renegotiated which the Ministry of Oil is in the process of doing.

But the contracts were amended by extending the duration to 30 years instead of 25, and accompanied by the reduction of the Iraqi partner’s share from 25 to 6 per cent, the removal of penalty clauses and the reduction of the plateau production level. It is therefore difficult to see what renegotiation is likely to bring more than the already conceded advantages to the oil companies.

It is telling us that the Ministry of Oil is discussing the additional awards of two oilfields to ExxonMobil and a Chinese partner if they finance and implement the common seawater facility for injection to maintain reservoir pressure in the fields. Although the project is delayed, developing more oilfields at a time when oil prices are so low and Iraq already unable to reach current targets, is a great mistake.

There is more to the outlook for the Iraqi oil industry and that deserves another column.