IHS Global Insight Perspective | |
Significance | Iraq's South Oil Company (SOC) yesterday issued a tender for the drilling of 20 wells at the Nassiriya field, as well as a 75,000-b/d crude processing facility at the South Rumaila field, in order to get development of the fields under way as soon as possible. |
Implications | Both the Nassiriya and South Rumaila fields are being offered to IOCs under long-term contracts—either as part of one of the licensing rounds, or in a special tendering—raising the question of whether the expedited government-led development will collide with incoming IOCs and whether the now-launched development will be compatible with IOC plans. |
Outlook | Iraq is currently suffering falling or stalled crude production levels, while negotiations about a model contract on which to base long-term IOC-deals are delaying progress, with still significant uncertainty about whether IOCs will be able to commit without an oil law in place. From this perspective launching at least some development looks necessary, with compatibility issues possible—albeit more time-consuming—to work out at a later stage. |
Launching and Negotiating
Iraq has over the past month issued a number of drilling tenders for some of its largest southern oilfields, in order to raise production levels rapidly, or at least arrest decline at its currently operating assets (see Iraq: 31 March 2009: Tender Issued for 45-Well Drilling Programme at South Rumaila Elephant Field in Iraq and Iraq: 18 March 2009: Czech Companies Awarded Refinery Upgrade Contracts as 30-Well Tender is Launched in Iraq). The initiatives come after late 2007 and all of 2008 were spent with the Oil Ministry entirely focused on the forthcoming licensing rounds and the possible revival of old production-sharing agreement (PSA) framework deals struck by the previous regime, under a technical service contract (TSC) structure. Only one of the latter deals has eventually resulted in a new contract so far, with China's CNPC agreeing to take on the development of the al-Ahdab field under Iraq's new and much tighter financial terms. Other companies have shunned the conversion of more profitable PSAs into TSCs—especially in the absence of a national oil law—so far (see Iraq: 11 November 2008: China's CNPC Signs US$2.9-bil. al-Ahdab Field Development Service Contract with Iraq).
With a model contract still not formally having been agreed between Iraq and the pre-qualified IOCs, the bid submission deadline for Iraq's first licensing round in June looks increasingly over-optimistic, with likely knock-on delays for the second licensing round at the end of the year also at risk. The start-up of deployment and work by awarded IOCs on Iraq's dilapidated production facilities and fields is thus likely to be delayed into 2010 for those fields included in the first round, and into late 2010 for the second licensing round. In light of this the Oil Ministry, prodded by domestic political criticism amid falling export revenues, has launched development on some of the main fields, in order to arrest mature decline and undertake a rapid restoration of once-installed production capacities.
Drilling and Processing
This week has seen the Oil Ministry's southern region upstream subsidiary SOC launch a new drilling tender on the Nassiriya field, calling for the drilling of 20 wells, as well as a tender for a 75,000-b/d crude processing facility at the South Rumaila oilfield. The 2.6-billion-barrel Nassiriya field, which could hold as much as 4.4 billion barrels according to Iraqi calculations, calls for drilling works to be completed within 14 months of the award, with the bidding deadline set for 1 May. In the meantime, the Nassiriya field—initially expected to be part of the second licensing round—has been offered to companies looking for a long-term development contract in a separate invitation-only bidding round, involving Italy's Eni, Spain's Repsol-YPF, and Japan's Nippon Oil.
The South Rumaila processing plant is expected to be the first facility of four planned to be tendered over the coming months on the super-giant field, where a 45-well drilling contracts was recently tendered (see first link above). The 5-billion-barrel field is likely to hold as much as 7.5 billion barrels of reserves and has an installed production capacity of about 800,000 b/d, although actual output has lingered below 500,000 b/d for much of the past few years. Bids for the tendered degassing, dehydration, and desalination facility will have to be submitted by 15 May and follow the very recent tendering of two similar-size plants at Iraq's southern West Qurna mega-field (see Iraq: 1 April 2009: SOC Issues Tender for Two West Qurna Crude Processing Facilities in Iraq).
Compatibility Issues?
The initial political pressure to re-focus the Oil Ministry's attention on launching projects as soon as possible using domestic means, instead of waiting until deals could be reached with IOCs, was largely launched by forces opposed to greater involvement by foreign companies (see Iraq: 18 February 2009: Nassiriya Field Award Set for March; Storm Clouds Gather over Iraq's Oil Strategies and Iraq: 13 February 2009: Oil Future Set to Move Up Iraq's Political Agenda as Oil Ministry's Vision Attacked). While Oil Minister Hussein al-Shahristani, whose policies to focus Iraq's strategies on attracting IOCs to develop and rehabilitate its ministry attracted much criticism, appears to have ridden out the storm and incorporated the initiative into his overall strategy, fears remain that the launch of state-led projects will interfere with IOCs' plans after they have been awarded the right to work and develop these same fields under long-term projects.
While IOCs and the Oil Ministry are negotiating the scope of their projects as well as the agreement of a "base case" production level on each field (in order to calculate the operator's compensation for achieving incremental production), the state-owned upstream companies will construct projects on the fields, which in many cases are unlikely to be completed when the IOCs step in and take over—unless the licensing round process is completely derailed.
Outlook and Implications
The launch of projects by the government on its main fields will complicate the licensing rounds—and potentially the swift progress of IOC-led development after work is commenced—by changing the base-case scenarios now being negotiated between IOCs and the Oil Ministry, as well as causing confusion about the overall scope and development plan for the fields. Given the centrality of oil export revenue for the recovery of Iraq, however, these complications seem to be preferable to Iraq seeing output slip further and remaining completely exposed to licensing round delays. Launching projects using the state's own means will at least provide Iraq with a back-up option should the licensing round process still be derailed by its political opponents. Given that further delays to the licensing rounds are likely anyway, all efforts to halt sliding output should be welcome. Simultaneously, the extremely limited resources and capabilities of the state companies are likely to result in project management being delayed, which might suggest that, if the licensing rounds stay at least close to target, not too much work of uncertain quality will have been completed on the fields before IOCs come in.