IHS Global Insight Perspective | |
Significance | Reserve appraisals carried out in the months since ExxonMobil and Shell took over the West Qurna-1 field in southern Iraq have now enabled the companies to raise their targeted output by 500,000 b/d to 2.825 million b/d at full development, demonstrating the upside potential of Iraq's oil industry when modern technologies are applied. |
Implications | Iraq increased its total reserve estimate less than two months ago by about 24%, saying that most of the increase came from reappraisals of the West Qurna-1and Zubair fields, and this now seems to be backed up by the ExxonMobil-led consortium's ability to capitalise on this. The national reserve upgrade met with significant scepticism but will gain in credibility as its results are integrated into IOCs' development programmes. |
Outlook | West Qurna-1 is already one of Iraq's most important producing fields, but is now slated to become almost as large as the Rumaila field, as well as further lifting Iraq's future oil production capacity to about 13 million b/d if everything goes according to plan. |
Iraqi Promise
ExxonMobil and Shell have done a considerable amount of reservoir appraisal and surveying work on the West Qurna-1 field since being awarded the contract late last year, as well as significant pro bono work of the same kind in the preceding years, explaining to some extent why such massive results can be available so early. Mainly, however, the reserve and production capacity results show the huge upside potential that can be achieved relatively easily and quickly through the application of modern technologies. Iraq was underexplored for decades compared with other large oil-producing states, as little was invested in finding more reserves or developing technical abilities amid wars, sanctions, and insurgency. Hence, what has thus far been known about Iraq's vast existing reservoirs is largely based on technologies used in the 1960s and early 1970s, but there have been incredible technological leaps since then—in reservoir science for instance, or the use of computers in reservoir modelling, not to mention production technologies allowing for commercial production from much deeper layers.
Using the latest technologies, ExxonMobil and Shell have been able to quickly discover and firm up greater recoverable resources, with the certainty now allowing them to expand their production capacity target by 500,000 b/d from 2.3 million b/d to 2.825 million b/d. This inclusion of the added reserves into the work plan of two listed companies acts to raise the credibility of the Iraqi reserve review, which, when originally revealed, caused a lot of scepticism internationally. It was seen as premature for Iraq to make such a vast reserve hike given the small amount of work already carried out, but it was actually in line with what several IOCs said their initial pro bono assessments had indicated and what some of them used as significant reasons for agreeing to the tight Iraqi contractual terms. IOCs are paid a set fee per barrel produced under the Iraqi technical service contract (TSC) contract framework, so much higher production levels would also mean a significantly higher revenue flow from the project, probably with a higher incremental value to the IOC per barrel.
Development Plans
ExxonMobil and Shell will not have to develop the added volumes within the remaining six years of the timeframe to reach the initially agreed plateau production, although it will be in the companies' interest to bring the full volumes onstream as soon as possible to receive the per-barrel fee. The consortium has said that it hopes to raise production from under 240,000 b/d now to about 750,000 b/d within three years, with the help of a series of small water injection projects. After that, further large production increases will rely on a massive water desalination plant coming onstream in the south of Iraq in a joint venture between several oil companies, in order for further injection to be installed and increases to be possible. The baseline production of the West Qurna-1 project has been jointly agreed as 244,000 b/d, with the consortium aiming to achieve the 10% increase to 268,000 b/d demanded for the companies to start receiving payment on the increment brought onstream in May, as a ambitious drilling programme gets under way. Reuters reports Madhi Swati, a member of the West Qurna-1 Joint Management Committee, as saying that ExxonMobil and Shell plan to drill 100–120 new wells during 2011, perhaps making a 300,000-b/d production level possible by the end of that year. In total, ExxonMobil and Shell are understood to be looking at adding 1,500 new wells to the existing 370 in order to reach full production.
Reuters was also reporting today that Schlumberger had been awarded a 10-well drilling contract that still has to be signed, with another 15-well drilling contract tender being published with a early 2011 closing date.
Outlook and Implications
ExxonMobil and Shell are some of the first companies to show that what a lot of the industry suspected about the Iraqi upside oil reserve potential is indeed true. Modern development and reservoir assessment techniques are able to firm up reserves at a much higher level than previously though, while modern drilling and production technologies are able to produce from layers that Iraq's national oil industry has not been able to reach. Apart from adding to the country's total oil reserves—which it announced in early October—this means that the project economics for the IOCs involved can improve further, as the incremental cost of adding some additional production capacity is likely to be far outweighed by the incremental earnings from the per (incremental) barrel fee produced that the companies will earn.
At the same time, this adds to Iraq's massive ultimate production goal yet further. If all its awarded oilfields are developed according to plan, Iraq's production capacity would—when the latest West Qurna-1 increment has been added—stand at about 13 million b/d sometime after 2017, and it is highly uncertain that all this would be demanded by the world markets. There is after all no reason to assume that the existing OPEC members would like to continue keeping all of their production capacity shut in should Iraq's production levels be very high , meaning that the world market would have to be able to swallow a lot more than Iraq's 10.5-million-barrel increment by then if oil prices are not to fall substantially. Few seem to believe Iraq will achieve its full target—HIS Global Insight, for example, only sees a best-case scenario of 6 million b/d by 2020, perhaps making that question moot, though IOCs investing heavily in adding production capacity might put themselves at risk of overinvesting and then not being able to produce and earn enough to cover their costs. Alternatively, everyone is counting on massive bottlenecks in the Iraqi project and development sector over the coming years, giving the companies and Iraq ample time to scale back their plans in the face of mounting costs and equipment shortages.
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- Iraq: 19 April 2007: Oil Reserves and Production Could Double Rapidly in Iraq, Leading Consultancy Study Claims