International oil companies that are attempting to exit their operations in Iraq will make it harder for OPEC's second biggest producer to maintain its output at some fields, let alone boost its oil production capacity to 7 million b/d in the next few years.
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IOCs' unhappiness with Iraq's energy policies came to the fore with ExxonMobil's decision to seek arbitration against state-owned Basra Oil Co. over the US major's stalled sale of its 32.7% stake in the giant West Qurna 1 oil field.
The case, filed end of June at the International Chamber of Commerce, comes after ExxonMobil had intended to sell its stake to PetroChina and CNOOC, a move that was met with an Iraqi counter proposal to give the stake potentially to unnamed US companies and then another attempt to get Basra Oil Co. to take over the holding.
ExxonMobil said it wants to exit Iraq to focus on other assets, particularly in the Americas. However, even Iraqi oil minister Ihsan Ismaael said during a parliamentary grilling that the country's inappropriate investment climate is dissuading IOCs from staying put.
"The largest complaints among IOCs have typically focused on financial terms offered at the large southern fields, in addition to the slow bureaucratic pace of approving capacity additions and infrastructure upgrades," said Paul Sheldon, chief geopolitical adviser at S&P Global Platts.
"Given shrinking investment budgets in a post-coronavirus market reality, companies will take a harder look at where to focus their capex. Iraq maintains some of the world's largest and cheapest reserves, but concerns over financial terms, insecurity, political instability, and infrastructure bottlenecks add headwinds to capacity expansion plans."
ExxonMobil unveiled plans in February to sell most of its UK North Sea operations as part of a roadmap to divest $15 billion in assets by 2021 and $25 billion by 2025.
Meanwhile, Iraqi authorities refused Russian energy company Lukoil 's request to sell part of its 75% stake in the West Qurna 2 oil project, CEO Vagit Alekperov said July 22, according to the Prime news agency.
BP, which operates the Rumaila oil field, Iraq's biggest – which can produce around 1.5 million b/d out of the country's estimated 5 million b/d capacity – is also considering exiting Iraq, Ismaael said July 4.
"Exxon's departure removes a major source of engineering capabilities, project management expertise and capital," said Tom Kenison, Middle East upstream oil analyst at FGE. "Similar scenarios occur when assessing the potential exit of BP at Rumaila."
BP is selling assets as it expects to see its oil and gas output fall by 40% by 2030 as it shifts toward lower-carbon energy production.
IOCs, including ExxonMobil, have also come under shareholder pressure to have greener operations.
Iraq's oil fields are notorious for burning rather than treating associated gas, a situation that has turned the country into the world's second worst gas flaring nation after Russia since at least 2016, according to the World Bank.
But the biggest drawback for Iraq from IOCs fleeing its fields will be the country's inability to implement an oil capacity boost to 7 million b/d.
"The next decade for Iraqi upstream development will be both more expensive and technically complex as fields move into secondary recovery and field development costs increase," said Ahmed Mehdi, Visiting Fellow, Oxford Institute for Energy Studies.
"Yes, production can be maintained and will grow, but it will be impossible for Iraq to achieve its target of 7 million b/d by 2025."
One reason for Iraq's inability to boost its oil production capacity without IOCs' help is the potential entry of Chinese oil companies to replace the Western majors in mega fields.
"It is only natural that with Iraqi crudes as baseloads for Chinese refineries and in light of the upgrading capacity installed by Chinese players in recent years, the Chinese have a strong interest in upstream investment and equity cargoes from Iraq," said Mehdi. "But it is overly simplistic to see Iraq's oil sector being hostage to the Chinese."
One case in point is ExxonMobil's interest in selling its stake to Chinese companies, although Iraq had a different take on the matter.
Iraq is the third biggest oil supplier to China and Chinese companies have stakes in some of the country's biggest fields. For example, PetroChina has 32.7% in West Qurna 1 and CNPC a 37% holding in Rumaila.
"There are few/no other viable buyers for these large projects, [and] the Iraqis can't develop them on their own (they can operate existing fields), and the Chinese will be willing to buy anything that comes up. The limit is how much the Iraqis are willing to let them have," said Robin Mills, CEO of Qamar Energy, a Dubai-based consultancy.
"Chinese companies have different business models and priorities that work better in Iraq, are supported by Chinese service companies, and serve strategic goals."