Global Policy Forum

Iraq Surveys Its Oil Fields as Prices Keep Bubbling


By Heather Timmons and James Glanz

New York Times
August 4, 2004

The Iraq Oil Ministry is undertaking the most comprehensive evaluation ever of the giant oil fields that are the country's biggest natural resource, an important first step toward understanding the potential output of the fields and estimating the amount of investment needed.

Officials have invited dozens of foreign energy companies to compete for the work as they seek an outsiders assessment of the two crown jewels in Iraq's oil empire, the Rumaila oil fields in the south and the Kirkuk fields in the north. At least 16 companies, ranging from the oil majors to independent contractors, are preparing bids for an Aug. 15 deadline, say executives from two participating companies. A winner is expected to be chosen by October.

The evaluation comes as world oil prices are setting new highs. On the New York Mercantile Exchange, oil for September delivery was up 23 cents Tuesday afternoon at $44.05 a barrel, the highest level since the exchange began oil trading in 1983. Brent oil in London was up 57 cents at $40.54 a barrel. The project will mark the first time in more than 20 years that the most up-to-date technology is applied to Iraq's oil industry. "These are our oldest fields," said Falah al-Khawaja, commercial manager of the Oil Ministry, speaking of the Kirkuk fields, which have been producing oil since the 1920s. "It is high time that they are investigated," he said.

Though the size of the contracts - estimated at about $10 million each - is small, their impact could be huge, both to Iraq and to the world's oil markets, say officials and outside experts. Determining exactly how big Iraq's producing fields are, and the figuring out the best way to recover the pools of crude are integral first steps to reconstructing and modernizing the country's oil industry, they say. The information could also calm the turbulent oil markets, which have been bouncing higher, buoyed by fears of terrorism and supply shortages.

The market's skittishness was highlighted on Tuesday, when the president of the Organization of Petroleum Exporting Countries, Purnomo Yusgiantoro, said that OPEC did not have any capacity to spare. The invasion of Iraq has been highlighted by OPEC ministers in recent months as one cause of high prices. Iraq's potential oil yield is a controversial issue. The country's existing fields are widely estimated to have about 115 billion barrels of oil reserves, just less than half the world's largest producer, Saudi Arabia. But more than a decade of sanctions, coupled with the impact of war, has left Iraq with an old and crumbling infrastructure.

The problem has been compounded by poor management of the fields, some say. Since the U.S.-led invasion, pipeline sabotage has crippled production even further, and Iraq is now pumping one million barrels less a day than its year-end targets. "There is considerable debate around the official numbers" attached to Iraq's oil reserves and the country's potential, said Peter Nicol, director of oil and gas research for ABN AMRO in London. The markets want to know "how much is based on hard fact, and how much is based on extrapolation, on rules of thumb," he said.

Iraq officials say the information will help determine how they can build up Iraq's infrastructure in the future. "The idea is to build a geological model that which is used as an input for simulations," in order to predict production needs, said Hazim Sultan, director general of reservoir and fields development for the Oil Ministry. The participants in the project vary widely. Both BP and Royal Dutch/Shell Group are considering bidding on the contracts, said spokesmen from the two oil companies. Total of France is not bidding for the business, or is Statoil of Norway, spokespeople for the two companies said. Nonoil company bidders include Tigris Petroleum, and the independent oil engineer Wayne Kelley, who is working with Ryder Scott, the Houston company.

Bidders say Western investment is not the ultimate goal. "This is going to allow the Iraqis to manage their own assets themselves," said Norman Davidson Kelly, founder of Tigris Petroleum. The project, which officials expect will to take several months to complete, is "the start of a redevelopment process for these fields" that will be undertaken by the Iraqis, Kelly added. Foreign companies may provide help with continuing operations, but any production from the Rumaila and Kirkuk fields will be for the benefit of the Iraqi Oil Ministry, rather than outside investment, said Wayne Kelley, the independent engineer.

Halliburton unit Kellogg Brown Root, which was contracted by the U.S. government to repair Iraq's above-ground oil infrastructure was not invited to participate in the bidding, say some participants. Schlumberger, an oil technology company, would not confirm whether or not it had been invited to participate, because it does not comment on any future work contracts, said spokeswoman Linda Silinsky-Kephart in an e-mailed message.

Iraq's oil production problems have been compounded, some Iraq and foreign experts say, by poor management of the biggest oil fields, where water or crude oil have been injected to bring oil to the surface. Iraq's oil fields "have not been produced optimally since the first Gulf war," said ABN Amro's Nicol. Sultan, the reservoir director general, dismisses the idea that the Northern fields have undergone special deterioration.

Potential participants and Iraqi officials say the oil field engineering surveys can done without much on-ground presence, mitigating safety concerns. Much of the historical data, as well as petrophysial properties and production and injection data will be provided by the government, Sultan said. If BP were to win a bid, the study would be done out of the country, said spokesman Ronnie Chappell. "There would be no need for any of our staff to be in country until security improves," he said.

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