IHS World Markets Energy Perspective | |
Significance | The first results from Iraq's large oilfield development projects are now starting to come through, indicating the looming addition of volumes to its exports, but also meaning that cost recovery will start to eat into the state's unrivalled revenue collection quite significantly during next year—something that will have to be politically managed at a time of deep deficits. |
Implications | While the quick initial volume gains underline Iraq's need for IOCs after years of failure on its own, the cost recovery phase—as investments are ratcheted up massively during 2011—will actually result in a dent in government revenue, something many parliamentarians and cabinet members will struggle to see justified. |
Outlook | With initial production capacity gain results starting to be proclaimed, the Iraqi public's hopes of the promised rapid economic development and recovery will start to rise quickly, but at a time when the Iraqi government might in fact face a delay in rising revenues and initially even have to accept cuts. |
Promising Results
The Shell-led consortium developing the Majnoon field has become the latest consortium to say that its initial production capacity gain is ready to come onstream, announcing that the production capacity of the field (which is slated to reach a plateau of 1.8 million b/d in six years' time) has increased from just about 40,000–45,000 b/d to some 65,000 b/d. This is significantly higher than the mandatory 10% increase that the IOCs have to deliver within a year and, as the 10% figure is the threshold for starting cost recovery and receiving payments, Shell and its partner Petronas now too will be able to claim their expenses. The Majnoon success comes as the Eni-led consortium developing the Zubair supergiant to a production capacity of 1.2 million b/d has also said the initial threshold had been reached. That field's production capacity has risen from the 183,000-b/d contractual baseline to over 201,000 b/d on a sustainable basis, according to Platts. Eni is joined in the Zubair venture by U.S. midsize Occidental (Oxy), and South Korea's KOGAS. Previously BP had said that it was on track to deliver a 100,000–150,000-b/d increment on the Rumaila field developed with partner CNPC by the start of 2011, from the Rumaila field's 1.066-million-b/d contractual baseline production level (see Iraq: 17 November 2010: BP, CNPC Confident of Meeting 10% Increment Target by Year-End at Iraq's Rumaila). ExxonMobil has also been very upbeat on its West Qurna-1 project, saying last week that it is close to delivering an initial increment that would bring it above the 10% minimum requirement, aiming to reach the required level by May next year (see Iraq: 29 November 2010: Greater Reserves See ExxonMobil, Shell Raise Iraq's West Qurna-1 Production Target). The discovery of additional reservoir layers on West Qurna-1 has also allowed the companies to increase the field's recoverable reserves dramatically—underpinning the official total reserve estimate recently formulated by Iraq—and add 500,000 b/d of production capacity to its targeted plateau production level in six years' time, bringing West Qurna-1 to 2.825 million b/d, close to the 2.85-million-b/d level intended for Rumaila.
Early Development Plans at Iraq's 11 Signed TSCs | ||||||
Oilfield | Current Output (or first production target; b/d) | Targeted Plateau Production (b/d) | Number of Wells Planned So Far | Early 2011 Production Target | Remuneration Fee(US$/b) | Developer |
Rumaila | 1,000,000 | 2,850,000 | 130–150; 49 awarded already (2010-11) | 17 | 2 | BP and CNPC |
Zubair | 195,000 | 1,200,000 | 502 (17 in 2010, 146 in 2011–13, 339 in 2014–17) | 4 | 2 | Eni, Oxy, KOGAS |
West Qurna-1 | 200,000 | 2,825,000 | 58 (2010–early 2011) | 268,000 (May) | 1.9 | ExxonMobil, Shell |
West Qurna-2* | (120,000 end-2012) | 1,800,000 | 3 | . . | 1.15 | LUKoil, Statoil |
Majnoon | 45,900 | 1,800,000 | 15 (by mid-2012) | (175,000 by 2012) | 1.39 | Shell, Petronas |
Halfaya | 3,100 | 535,000 | 1 (drilled by Iraq this year; operators still to change) | 5,000 | 1.40 | CNPC, Petronas, Total |
Najmah* | (20,000) | 110,000 | . . | . . | 6 | Sonangol |
Qayarah* | (30,000) | 120,000 | . . | . . | 5 | Sonangol |
Gharraf* | (50,000 –by 2012) | 230,000 | 2 | . . | 1.49 | JAPEX, Petronas |
Badrah* | (15,000) | 170,000 | 17 (7 by 2011) | (15,000 by 2013) | 5.5 | Gazprom, KOGAS, Petronas, TPAO |
Maysan/Missan | 100,000 | 450,000 | . . | 110,000 | 2.3 | CNOOC, Sinochem |
* undeveloped fields | ||||||
With all the recent confident statements counted up, there should be at least 160,000 b/d of additional production capacity coming onstream in Iraq between now and the middle of the second quarter next year, taking the country's production from just under 2.5 million b/d to closer to 2.7 million b/d. Should a resolution to the impasse between the autonomous Kurdistan Regional Government (KRG) and Iraq's government about the control of the region's oil resources also be achieved in the next couple of months, a further 100,000 b/d of production could be added with little to no advance warning.
Outlook and Implications
PR Challenge
There is, however, one snag with the incredibly hasty development programme required by the Iraqi government under the technical service contracts (TSCs) awarded to IOCs during 2009 and signed since. With all the massive oilfield developments going on at once, according to roughly the same schedule and contract deadlines, all companies will be undertaking the most costly parts of their investment programmes pretty much at the same time, while being allowed to claim the capital expenditure (capex) back under what appears to be a very accelerated schedule. This is likely to result in significant IOC capex starting to be recovered as soon as during next year, with this figure growing sharply through 2012–13 into 2014–16 when investment is likely to peak, whereas incremental oil output gains during 2011–13 are quite likely to fail to keep up with the much higher expenditure to be recovered. Even if Iraq sees a rise in its oil export revenues during 2012–13 after cost recovery, the amount of money it will receive from the increment is likely to seem very low, while next year it is unlikely that revenues will actually rise by any noticeable amount. (Indeed, there might even be a negative impact on government revenue in the second half of the year.)
At a time when Iraq is struggling with a huge deficit anyway, seeing what in effect appears to be massive IOC production shares moving out of the country could very easily stir populist sentiments in parliament and within broader layers of the population, where the suspicion that foreign oil companies have come to suck the country dry in a return to colonial days has never really abated and where—especially among the Sunni section of the population—there is a sense that politicians have been selling out to foreign interests. With that in mind, it is important that both the Iraqi government and IOCs undertake significant public relations work to disseminate the long-term benefits for Iraq of the development and make clear where the money is going and for how long the cost recovery will continue—as well as to clarify how low the actual remuneration fee paid to IOCs actually is. Largely, the necessity is to manage people's expectations, particularly since those expectations were inflated to unbelievable levels as part of the government's efforts to make the oil contracts more palatable to the population in the past two years: there had been promises of Iraq producing 12.5 million–13 million b/d of crude in a relatively short space of time, translating in the public imagination into Iraqis being promised a massive windfall inflow, as well as very rapid progress on reconstruction. When increased state borrowing is all they will see of the raised oil production next year, some form of political backlash cannot be entirely discounted, even if a new government under Nuri al-Maliki can be seen as a stable guarantor of the oil contracts' sanctity.