IHS Global Insight Perspective | |
Significance | Drilling in the shared Iraqi/Kuwaiti Safwan oilfield is imminent, according to the Iraqi Oil Ministry, although it remains unclear whether Kuwait has even have been contacted about the project; meanwhile, IOC project negotiations seem to be dragging out even further. |
Implications | With little evidence of talks between the two states, fears that Kuwait will feel strongly about this are real, given that Iraq in 1990 justified the invasion of its tiny neighbour through accusations of overdevelopment on the Kuwaiti side of the reservoir. Nevertheless, Iraqi oil minister Hussein al-Shahristani's likely motivation is merely rapid incremental production increases in order to replace falling output elsewhere. |
Outlook | Creating a potential international furore, however, is only likely to involve more political actors in Iraq's oil industry, bringing further unwelcome parliamentary attention for al-Shahristani's strategies as well as involvement from the Kurdish presidency, risking project delays and serving to weaken the oil minister further—especially if Kuwait makes full use of its political clout. |
The Curse of Shared Blessings
The Safwan oilfield, on the border with Kuwait, arouses significant hard feelings and bad memories for the Kuwaitis, who remember allegations that they were overproducing from the reservoir as one of the main justifications used by the Iraqi government—led by then-president Saddam Hussein—for its 1990 invasion. While it is hard to see a new row about the field flaring up into armed bilateral conflict, any hurried unilateral Iraqi development of a field loaded with such symbolism might ultimately backfire on Iraq's Oil Ministry. The apparently reinstated Oil Ministry spokesman Asim Jihad was quoted by Reuters as saying "The oil minister visited Safwan oil field and inaugurated the instalment of many rigs, which are due to start drilling in a few days…we will start drilling more wells in the border field of Safwan to make the most of crude available to raise production and export rates". (Jihad was arrested earlier this month on allegedly politically motivated charges and was rumoured to have been fired from his post, see Iraq: 17 April 2009: Shell South Gas Deal Under Pressure as Political Manoeuvring Increases in Iraq.) In the meantime there have been no reports of talks set up between Iraq and Kuwait to regulate production from shared fields, of which Safwan is one, on which there are no agreements. This is likely to see Kuwait react unfavourably to Iraq's creation of a precedent of unilateralism when it comes to developments of shared reservoirs.
With both Iraq and Kuwait expecting to see some of their main future production growth coming from these common border areas, there is a long-term interest on both sides to resolve the outstanding issues and install frameworks for bilateral development and negotiation. Kuwait, given its relative size, will be particularly keen to make sure that good practices are developed at this point, while Iraq is still suffering the fall-out from the 2003 U.S.-led invasion and hardly can afford to pursue more unilateral policy directions.
Oil Ministry Foreign Policy
Consequently, Iraqi Oil Minister Hussein al-Shahristani would be ill advised to provoke Kuwaiti sensitivities, which could see him stray into foreign-policy territory if a spat with one of Iraq's neighbours is sparked, since that is rather dominated by Iraqi Kurdish factions with whom he has been in a long-running dispute over his centralisation policies.
If Kuwait brings all its regional influence to bear on the matter, forcing Iraq's Foreign Ministry, as well as Iraqi president Jalal Talabani, to step in, the issue of the Safwan project could easily spill over into talks about projects on all shared fields, causing delays for output-boosting projects at some of Iraq's main producing fields such as Rumaila—which is also shared with Kuwait, but has been in production for decades and represents one of Iraq's main near-future sources of crude production increments. With factions aligned with the Kurdish parties having already tried to dislodge al-Shahristani over recent years, or hijack the development agenda in order to stop or modify the inflow of foreign oil companies, this project could prove an invaluable opportunity. Still, there has been no official reaction on the matter from Kuwait, which would be needed to start the domestic ball rolling and give the oil minister's opponents reason for action.
IOC Negotiations Drag On
Simultaneously, negotiations between IOCs and the Oil Ministry over their bids for the Nassiriya field development have been delayed, as the submitted bids have been sent back to the IOCs for some requested adjustments, Upstream Online reports. Italy's Eni, Spain's Repsol-YPF, and Japan's Nippon have been bidding for the Nassiriya project in an invitation-only auction that is separate from the country's two ongoing licensing rounds, and the Oil Ministry earlier this year aired hopes that the project would be awarded before the end of March (see Iraq: 18 February 2009: Nassiriya Field Award Set for March; Storm Clouds Gather over Iraq's Oil Strategies and Iraq: 15 April 2009: Closing of Nassiriya Field Auction Imminent; Russian Companies Press for Upstream Access in Iraq). "Eni, Repsol and Nippon Oil have recently submitted their technical offers to the Oil Ministry. After studying these offers, we had some remarks and we asked them to review their offers and submit new ones", al-Shahristani has told Reuters, adding that the IOCs were expected to submit their updated bids very shortly. The project is hoped to result in a production capacity of 100,000 b/d being installed within 18 months and a possible peak production figure closer to 1 million b/d, according to Eni.
There were no reports on what caused the disagreement between the IOCs and the Oil Ministry, but it is likely—given the legal and political uncertainties—that IOCs favour dragging out negotiations as long as possible, in order to await a clearer idea of which way the Iraqi political winds will blow, especially with regard to the aftermath of parliamentary elections later this year.
Outlook and Implications
Oil Minister al-Shahristani might be treading a very dangerous path if he unleashes an international spat with Kuwait, following what appears to be the launch of a unilateral development project at the shared Safwan field. The rapid launch of quick-result development projects has been an answer to critics within the Iraqi parliament, the Oil Ministry, and other ministries, who have criticised him for inaction on Iraq's faltering crude output and one-eyed focus on time-consuming licensing rounds (see Iraq: 13 February 2009: Oil Future Set to Move Up Iraq's Political Agenda as Oil Ministry's Vision Attacked and Iraq: 4 March 2009: Government Hopes Two-Pronged Oil Strategy Will Not Discourage IOC Investment in Iraq). Nevertheless, the risk that the Safwan field creates a pre-condition for some of his opponents to target al-Shahristani even more for upsetting Iraqi foreign policy cannot be ruled out, and could potentially undermine the ongoing licensing of other already-producing shared fields, such as the super-giant Rumaila. This adds yet another dimension to the frail balance in Iraqi oil policy, where it might be wise to procrastinate somewhat on signing long-term contracts from an IOC perspective, although potentially losing access to the world's largest volumes currently on offer is not an option either (see Iraq: 23 March 2009: Three IOCs in Bilateral Negotiations as Iraq Attempts to Improve Licensing Round Terms).