By Munir Chalabi
On June 30, 2009, the Iraqi Federal Ministry of Oil in Baghdad hosted the first bid round of a live auction offering international oil companies (IOCs) the control and development of two of Iraq's giant gas fields and six huge oil fields, by means of 20-year "technical service contracts."
The six oil fields included in the bid are the Rumaila (North and South), Zubair, and West Qurna Phase-1 oil fields in Basra, the Misan oil field in the Amara, and the Kirkuk and Bai Hasan oil fields in the North. These fields were all planned to be developed by the Iraqi National Oil Co (INOC), as listed in Annex 1 of the draft of the oil and gas law dated February 2007. Between them, these fields generate about 80 percent of the 2.5 million barrels per day (b/d) of oil which Iraq produces today.
The additional information that has became available within the past four months since my previous article on the 1st bid round,[1] indicates that all the factors listed in that analysis still stand and that three of the six oil fields listed in the 1st bid round have either been awarded to several giant IOCs or are in their final stages of being awarded, with the fourth possibly to be awarded very soon.[2]
The first of the awards was the 17.8 billion barrel Rumaila North and South fields, which were awarded as a single field to BP/CNPC during the June 30th auction. BP/CNPC's contract pledges to increase Rumaila's oil production from 0.9 million b/d today to 2.85 million b/d within seven years, which will represent an increase of 1.95 million b/d.
The second award was the 8.7 billion barrel West Qurna Phase 1 project, which was given to the US giant Exxon Mobil with junior partner Shell on November 5, 2009, after a bidding war with Lukoil and junior partner Conoco Phillips. The Exxon Mobil group has agreed to increase oil production from 300,000 b/d today to 2.35 million b/d within six years.
The third award was the 4 billion barrel Zubair field, in which the Italian giant Eni, with partners Occidental Petroleum and Korea Gas Corp., will meet over the coming days to finalize an all but assured deal. Eni's group has agreed to increase production on the Zubair field from 200,000 b/d to 1.1 million within six years.
The fourth award is the Kirkuk field, which is a more complicated sell for Shell. It is Iraq's oldest field, commercially producing for eight decades. It also saw some of the worst oil field practices under the Ba'ath regime and the sanctions, including re-injecting crude oil back into the field. Kirkuk is producing 700,000 b/d currently. Shell's bid offers to raise this to 825,000 b/d.
If we assume based on the information available today that all of the above fields will be awarded, then the total output from these fields will increase from the existing 2.1 million b/d to 7.125 million b/d, which represents an increase of over 5.0 million b/d within a period of six to seven years.
The above figures were corroborated by PFC Energy, the industry consultants who pointed out that the "extra oil which foreign energy companies such as Exxon, BP and Eni have promised to tease out of other Iraqi oil fields adds up to about 4.7m b/d."[3]
As the existing total Iraqi oil production is around 2.5 million b/d and the above four fields produce 2.1 million b/d, this therefore indicates that the other oil producing fields produce no more then 400,000 b/d.
The only other new oil fields that are planned to be developed outside the 1st and 2nd bid rounds are:
First, the giant Al Ahdab oil field, which was awarded to the Chinese national oil company, CNOC, in 2008, which should produce 400,000 b/d within four years.
The second is the 4.4 billion barrel Nassiriya oil field which is very likely to be awarded to Nippon Oil and their two other partners, Inpex and JGC Corp., also of Japan. The two year deal will see the field reach between 150,000 b/d and 200,000 b/d, from the 20,000 b/d now, which will represent an increase of around 150,000 b/d .[4]
The 2nd bid round was announced on December 31, 2008, and the contracts for that round will be awarded on December 11-12, 2009. It intends to execute full development of ten explored, but not yet fully developed oil fields distributed widely throughout the country under the so-called Development and Production Service Contract (DPSC). The foreign companies winning a 20-year DPSC will fully operate the fields on offer, including exploration, development and production, with the state entity only owning a 25% interest in the contract. The bid includes Majnoun, West Qurna Phase 2, Halfaya, Gharaf, Badrah, East Baghdad, Central Euphrates oil fields (Kifil, West Kifil and Marjan), Diyala oil fields (Qamar, Gilabat, Naudoman and Khashm al-Ahmar), Najmah and Qayara in the North.
Five of the largest oil fields within the 2nd bid round are listed in Annex 1 of the draft oil and gas law dated February 2007 and were planned to be developed by INOC. Four of the five amounted to super giant fields by international standards. They include Majnoun (listed as No.16 in the Annex) with 12.6 billion barrel (bb), West Qurna/2 (No.26) with 13.0 bb, East Baghdad (No.9) with 8.2 bb and Halfaya (No.11) with 4.1 bb.
There are still no real indications as to the possible outcome of this round, but some clues are emerging.
In a press interview on October 12, 2009, the Federal Oil minister Dr. Shahristani stated "Iraq will reach up to 12 million b/d, the capacity of Saudi Arabia today," and added, "Within the next 6 years, Iraq will be one of the biggest oil exports in the world and in this case it will not be needed to depend on other resources for the development of the country."[5]
PFC Energy, the industry consultants, indicated that the fields that are likely to go under the hammer at Iraq's next oil auction (the 2nd bid round) will add at least another 3 million b/d.
What are the national concerns arising from the two rounds?
The first concern is about the future of the Southern Oil Co. (SOC), the North Oil Co. (NOC), and INOC -- the backbone of the "Iraqi National Oil and Gas Industries" -- following the 1st and 2nd bid rounds. These concerns were covered in detail in my previous analysis.[1]. The additional information which has became available since July 2009 only corroborates the concerns and conclusions in that analysis.
If 7.6 million b/d of the 8.0 million b/d total Iraqi production will be produced by the IOC's under the 1st bid round agreements, then the new INOC including the existing 3 Iraqi nation oil companies (SOC, NOC and MOC) will only produce 400,000 b/d or about 5% of the total, down from the existing 2.5 million b/d, representing 100% of existing Iraqi oil production.
If Iraqi oil production reaches 12.0 million b/d including the additional production from the 2nd bid round, then the 400,000 b/d to be produced by INOC will only represent around 3% of the total Iraqi oil production.
If we add to the statistics above the reality that Iraqi politics after the January 2010 election will continue to be founded on political compromises between the political blocs, and that the Kurdistan Regional Government (KRG) will insist that some of the Production Sharing Contracts (PSCs) that they've signed with the IOCs still have to go ahead, then this will further reduce the share of the oil produced by INOC and could even make it as low as 2% of the total oil produced from Iraqi oil fields. Such an amount will be so negligible that it will make it economically favorable to end all INOC activities for oil production in the future.
There are other questions which are linked with this issue:
The first is, if Iraq can produce this amount of oil without a new law, then what is the aim of passing a new Oil Law? Is it to ensure privatization of the other major oil fields which have been discovered, but are still not producing, by signing new PSC agreements with the IOCs?
Also, what will happen to the 24 or so PSC agreements that have already been signed by the KRG in Irbil? Even if only some of them are accepted by the Federal Oil Ministry, how much will this add to oil produced by the IOCs?
There are rumors circulating around Baghdad that the Federal Oil minister has changed his plans.
Some of the Iraqi oil experts who are close to the Federal Ministry of Oil in Baghdad believe that the information available to them indicates that the Federal Oil minister Dr. Shahristani has planned to abandon the draft of the new Hydrocarbon law and that he only wants to go ahead with the execution of all contracts signed in the 1st bid round. Furthermore, they also believe that the minister will go ahead with the second bid round in order to have some indication of the extent to what the Iraqi oil production can reach and to take his plan a step further as a backup to his policies. But, those experts believe he will not go ahead and sign any of the 2nd bid round contracts with the IOCs.
These views, of course with all respect to these experts, could be no more than wishful thinking. Even if these beliefs have any foundation, what guarantee do we have that Dr. Shahristani will even be the Federal Oil minister after the up-coming general election in January 2010, and that he won't be replaced by the IOC's and KRG's favored Mr. Thamir Al Ghadban? And even with the assumption that he will be re-appointed oil minister after the January general election, knowing the background of the Iraqi political arena which is founded on compromises with the KRG in Irbil, what guarantee do they have that he will be able to achieve his goals?
These views also do not answer the main concerns on the future of the Iraqi National Oil and Gas industries.
The second concern relates to Iraq's future place in OPEC (the Organization of Petroleum Exporting Countries).
Iraq is a member of OPEC, but Iraq today only exports 1.8 million b/d. If we assume that the Iraqi export oil quota could be allowed to increase to the 3.2 million b/d which was the level of the Iraqi quota accepted by OPEC back in 1979 and also in1990 (out of the 3.9 million b/d Iraq was producing), then what will happen to the additional 4.0 million b/d which Iraq will have as a surplus from its 8.0 million b/d production in six years, or 8 million b/d if production reaches 12 million b/d in seven to ten years?
Such export increases will pose two major challenges for OPEC.[6] One is related to the organization's ability to maintain supply at a level that ensures oil prices remain within the range that guarantees adequate revenues to its member countries, and the other concerns the unity within OPEC, with members each competing for higher production quotas.
OPEC's medium-to-long-term outlook expects that world oil demand will reach 91 million b/d in 2016 and 93.5 million b/d in 2018 from the 85.5 million b/d in 2008.
Such expectations raise the question that if Iraq stays as a member of OPEC, will other OPEC members accept that Iraq would increase its export levels to fill up all the remaining projected increase in world oil demand? And if not, will Iraq then stay in OPEC or will it depart from it and increase its oil export independently, which will very likely lead to an oil price collapse?
Such plans will only lead to Iraq playing the role of a second "Saudi Arabia," coinciding with the plans of the governments of the United States and Western Europe to make Iraq no more than a "global oil and gas pump," used as an oil-fuelled petro-state with no function other than to service global markets and enrich local elites as well as the technocrats that assist them.
Conclusions
1. This article is intended to highlight the additional topics which have emerged since my July 2009 analysis of the 1st bid round and should be read in conjunction with that analysis. Therefore, in this article I've avoided repeating the important issues which were looked at previously.
2. This analysis is not intended to accuse the Federal Oil ministry in Baghdad of being part of an international conspiracy to hand over the Iraqi oil and gas to the IOCs, but at the same time we should remember that such plans are favored by the IOCs. This article is intended to open up a debate between the international and Iraqi oil experts and analysts who oppose privatization of Iraqi oil and gas, to look in depth at the consequences of the Federal Oil ministry's existing policies on the future of Iraq's oil and gas wealth, which are going to decide the political and economical independence of the country.
3. The time has come for the Federal Ministry of Oil in Baghdad to stop and think about Iraq's priorities. The Ministry has set short, medium and long-term targets for production capacity. However, it's clear that this is not part of a well-structured policy that defines where the sector is heading or how it should be run. Output targets are not themselves a policy, nor are successive bidding rounds, unless they form part of a well-considered plan tying all the components together.
4- The 1st and 2nd bid rounds will not rebuild and develop an independent Iraqi national oil and gas industry. To the contrary, it will lead to the dismantling of both national industries and give the real control of the industries to the IOCs for the first time since the nationalization back in the 1970s. The creation of the "field operating divisions" (FODs) in the 1st bid round gave a major role for the IOCs in the decision-making, control, management and operation of all the giant fields. In the 2nd bid round the IOCs will fully operate the fields on offer, including exploration, development and production.
The question here is: Will there be any real Iraqi national oil industries left? Or will INOC's future role be reduced to no more than a sub-holding company of the giant oil fields which are going to be fully managed by the IOCs, limiting INOC management to distant and marginal fields.
5. During a telephone interview on the November 5, 2009 with Mr. Hassan Jumma, the leader of the Iraqi oil workers' union (IFOU) confirmed that the union opposes and will continue to oppose both the 1st and 2nd bid rounds.[7] It is important that Iraqi oil experts take into consideration the views of the oil and gas workers, engineers and oil field experts who are the backbone of these industries and who will be the first to be affected by any such policies.
6. Any Iraqi national oil and gas strategies should also plan to strengthen OPEC and the newly formed OGEC (Organization of Gas Exporting Countries) and should not lead to the weakening of such vital institutions.
7. The Federal Oil Ministry's strategy for the medium and long term should focus on building a strong upstream and downstream national oil and gas industry. The plans to increase the capacity of oil and gas production should be part of this strategy and should not become "the only priority." These types of policies will only serve the interests of the US and Western European governments, who are only interested in seeing Iraq functioning as a petro-state working intimately with foreign energy firms to boost global oil supplies, with American troops, whether based in Iraq or neighboring countries providing the eventual security.[8]
References
1. Munir Chalabi, "The influence of the 1st Bid Round on the Future of Iraq's National Oil and Gas industries," ZNet, July 17, 2009.
2. Ben Lando, "Big companies getting closer to big Iraq oil fields," Iraqi Oil Report, Oct. 20, 2009.
3. Carol Hoyos, "Iraq oil deal puts pressure on OPEC," Financial Times, Nov. 5, 2009.
4. Ben Lando, "Nippon consortium wins Nassiriya," Iraqi Oil Report, Oct. 20, 2009.
5. Ben Lando, "Ministry claims oil policy vindication," Iraqi Oil Report, Oct. 14, 2009.
6. Ruba Husari, "The Rush for Oil: Iraq's Oil Capacity Potential and Regional Geopolitics," Middle East Economic Survey, Nov. 9, 2009.
7. Statement by Iraqi oil workers' union IFOU, Hassan Hafidh, "2nd UPDATE: Iraqi Oil Workers Demand Bid Round Cancellation," Dow Jones Newswires, June 22, 2009.
8. Michael T. Klare, "Will Iraq Be a Global Gas Pump?" The Nation, July 20, 2009.
