Could Iraq Really Become OPEC’s Largest Oil Producer?
Iraq’s Oil Minister, Ihsan Abdul-Jabbar, announced last week that the country plans to increase its oil production capacity to 8 million barrels per day (bpd) by 2029, compared to current production of around 3.8 million bpd that factors in OPEC-mandated cuts.
Based on its vast oil resources there is no insurmountable reason why this output level should not be attained by that time or indeed even the 9 million bpd or 11 million bpd that were posited by the International Energy Agency in its 2012 production scenario analysis for Iraq. Even the lower of these two figures would allow Iraq to overtake Saudi Arabia as the number one oil producer in the Middle East, with the Kingdom producing just 8.17 million bpd on average from 1973 to this year. To reach these new output goals, Iraq announced last week initiatives including boosting the production from the key field of Majnoon and the sale of ExxonMobil’s stake in another major field, West Qurna 1. In both cases, though, the real reasons why Iraq has been hamstrung in reaching its oil production potential over decades remain in place and, if not addressed, the country will never reach these targets.
Located around 60 kilometres to the north east of the main southern export terminal of Basra, the Majnoon site is one of the largest oil fields in the world, with an estimated 38 billion barrels of oil in place. Due to the legacy of both the Iran-Iraq War and the U.S.’s incursions, from when the licence on the field was awarded on 11 December 2009 by the Iraq government to Shell Iraq Petroleum Development (in conjunction with its Malaysian partner, Petronas, and Iraq’s Missan Oil Company) it took nearly 18 months simply to clear 28 square kilometres of land of explosives, prior to constructing and opening the first well. Production was then formally restarted on 20 September 2013 and, within a short timeframe, the consortium had managed to boost output to the 175,000 bpd first commercial production target, which was also the threshold for cost-recovery payments for Shell. By the end of the first quarter of 2014, the field was churning out an average of 210,000 bpd and the first shipment of crude oil to Shell Trading occurred on 8 April that year. The original oil production targets for the Shell-led consortium on Majnoon were first production target of 175,000 bpd and plateau production of 1.8 million bpd. The new plan announced last week is to raise output from Majnoon from the current 130,000 bpd to 450,000 bpd within three years after investment of US$1.15 billion.Related: The World Still Needs Hundreds Of Billions Of Barrels Of Oil
Shell, though, left Majnoon in 2018 and West Qurna 1 shortly after that. The official reason given by Shell was that its withdrawal was in line with its stated plan to restructure its global business, following its takeover of BG Group, involving a US$30 billion asset disposal programme and a focussing on currently more profitable gas developments. According to sources close both to Shell and to the Iraq government exclusively spoken to at the time by OilPrice.com, however, a major contributory factor to Shell’s departure were tied into the endemic corruption that pervades Iraq’s economy. “The maximum compensation fee per barrel of oil produced, payable by the Iraqi government to Shell, of a headline figure of a maximum US$1.39 for Majnoon and US$1.90 for West Qurna 1, was an increasing problem after oil prices fell from the beginning of 2014,” a senior oil and gas industry figure who works closely with Iraq’s Oil Ministry told OilPrice.com at the time. “The nominal figures were among the lowest offered to IOCs [international oil companies] but the real figures, after deductions for graft were taken out before they even got to Shell – and Shell had no culpability in this – left the company with actual payments of around US$1.25 per barrel for Majnoon and US$1.70 per barrel for West Qurna 1,” he said. “When you’re working on such thin margins anyway, even a few cents make a big difference,” the source told OilPrice.com.
Following Shell’s departure and the floods in Majnoon in 2019, the Iraq government approached China to help it rebuild and bolster up the Majnoon site. Given that Majnoon is a shared oil reservoir with Iran, that the Iranian reservoir is Azadegan and that the China National Petroleum Corporation (CNPC) was still actively developing North Azadegan at the time, China was offered very favourable terms to effectively takeover the lead developer role at Majnoon. These included at least a 10 per cent discount to China for at least five years on the value of the oil it recovered, with the sale price to China to be based on the lower of either the mean average of the 18 month spot price for crude oil produced, or the past six months’ mean average price, with China having the option to choose the specific metric. “With the terms of the deal on the table, China would have made between eight and nine billion dollars profit every year from Majnoon alone,” the Iraq source told OilPrice.com.
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Despite the China National Offshore Oil Corporation nearing the final stage of negotiations on formalising this arrangement, pressure at the time from the ongoing U.S.-China Trade War meant that Beijing decided to take a more low-key approach to development, favouring involving itself on such sensitive sites via standalone fixed contracts for specific work rather than headline-grabbing lead developer roles. This occurred on Majnoon with the announcement that two major new drilling contracts had been signed: one with China’s Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million and the other with the Iraq Drilling Company to drill 43 wells at a cost of US$255 million. A very similar announcement of Chinese ‘contract-only’ work was made at around the same time for West Qurna 1. This was the awarding of a US$121 million engineering contract to the China Petroleum Engineering & Construction Corp to upgrade the facilities that are used to extract gas during crude oil production at West Qurna 1. This award compounded the already vice-like grip that China had over the West Qurna 1 site built initially on the 32.7 per cent stake in the field held by PetroChina, the listed arm of CNPC. It also means that whichever company buys ExxonMobil’s stake, China will still be running the field in all but name.
The current level of oil reserves at West Qurna 1 is just under nine billion barrels but, crucially, the site is part of the overall massive West Qurna reservoir that comprises at least 43 billion barrels of crude oil reserves. West Qurna 1 alone is also currently producing around 465,000 bpd with some ease according to Iraq oil industry sources, although its original plateau target of 2.825 million bpd has been re-negotiated down to 1.6 million bpd by 2035. The only major constraint to this plateau production level being reached is falling pressure in the wells and ExxonMobil was brought in to the field, and to Iraq in general, to rectify this through the build-out of the Common Seawater Supply Project (CSSP). This involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities to be used for water injection to boost pressure at Iraq’s key oil reservoirs. “Despite CNPC saying that it can do the CSSP it can’t, it hasn’t got the right technology or expertise, only Exxon [Mobil] was ready and able to do it,” said the Iraq source. “Unfortunately, the risk for Exxon [Mobil] was just too high,” he added.
For ExxonMobil, as with many other IOCs looking at doing business in Iraq, the risk/reward matrix involved in the CSSP negotiations were of particular concern. In particular – as was again recently highlighted in Iraq in the case of industrial-scale corruption at the vital fighter jet base at Balad – no matter how vital a project is to Iraq’s prosperity in the future, short-term personal considerations (that is, graft) will jeopardise it. As highlighted by the independent risk analysis firm, Transparency International in its ‘Corruption Perceptions Index’, Iraq demonstrates: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery have led the country to the bottom of international corruption rankings…and political interference in anti-corruption bodies and politicisation of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.” The lack of a meaningful legal structure relating to the origination, monitoring, and administration of business agreements would open up ExxonMobil up to a plethora of problems in the future, said the Iraq source. “If ExxonMobil had taken part in the CSSP and any part of it was shown to have been corrupt then the fallout for Exxon – and for the U.S. government – would have been disastrous,” the Iraq source concluded.