Former Iraqi Oil Minister,Thamir al-Ghadhban, recently gave his perspective on the latest developments in the Iraqi oil sector in an interview with Ruba Husari, founder and editor of IraqOilForum.com.
Q: How do you expect a new government following the 7 March legislative elections to deal with the signed contracts? Is there a risk that the legality of those contracts might be challenged by a future government if it’s not led by the same party that legalized them?
A: I expect any new government that will be formed in the coming months to accept the signed contracts and continue with their implementation. I don’t think there is any risk related to challenges on the basis of their legality. I say this based on a number of elements that support this view. The first is the absence of serious legal issues concerning the contracts signed by the Ministry of Oil and its companies. They were approved based on the constitutional powers entrusted with the executive. The constitution of 2005 doesn’t oblige the government to approve contracts by law, and this is the argument of the Ministry of Oil when reacting to those who challenge the legality of the deals. I personally prefer to see those contracts ratified by law but the slow legislative process makes one think several times before calling for ratification of contracts by the legislature. The second point has to do with the way those contracts were awarded, which was extremely transparent and highly competitive and provided maximum benefit to the country. Cash flow calculation showed that the government take is between 95% and 98% in the 10 service contracts awarded in the two bid rounds in 2009. Another point to consider is the fact that Iraq is in dire need of revenues and those contracts will provide huge revenues to the country. The last point has to be taken seriously by the new government. Finally and with all due respect to those who have raised the legality issue, one has to examine the current political map of the country, the most likely outcome of the coming election and look at the declared stand of each political entity regarding those contracts as well as their stand towards oil policy. I have no doubt that they would then come to the above conclusion.
Q: You were one of the authors of both the oil and gas law and INOC law. What changes would you introduce now in view of the new developments and new realities on the ground, especially in relations to the annexes in the draft law?
A: The relevance of the annexes as far as Iraq is concerned – excluding the region of Kurdistan – is related to the establishment of INOC and the fields it would control. The draft law states that once INOC is established, it will own all the operating companies, NOC, SOC, MOC, and eventually MidOC. As you know, all the contracts awarded were signed by the existing operating companies, so INOC will be in charge of the upstream. What has changed also is the definition of fields that are close to existing producing fields, since now we will have new producing fields. The question remains regarding INOC’s authority regarding the discovered and not contracted fields and any future exploration. In the draft law, this was outside of the authority of INOC, but INOC was allowed to explore within the fields it was developing. I believe that INOC’s authority, as in Law 97 of 1967, should be the whole territory of Iraq – except for the Kurdistan Regional Government (KRG) areas. It should be in charge of exploration, development of oil fields and managing production while the Ministry of Oil should be in charge of planning the oil industry as a whole such as production targets, refining and export. INOC should be the federal government’s vehicle to develop the upstream sector because it’s the one that is specialized and suited to do such job. At the moment, the draft that has been endorsed by the council of ministers put it in charge of currently producing fields only and certain fields that are close to production. I believe we should revise that in the INOC draft law.
With the new contracts, the IOCs will be contractors to INOC through its subsidiaries. As to the oil and gas law, no doubt the country requires a new and modern oil and gas law to address the new realities and more importantly to regulate the industry in a way that defines the limits to the power of the authorities on the federal and provincial levels. It is also needed in order to enforce the separation between the role of the federal ministry, which should be in charge of regulating, planning and supervising, and the operating companies whose role is development, operation and production of the oil fields. The original version of the draft, the 15 February 2007 version as it is known, has been modified several times; first the Shura Council made changes which were later re-instated on the instructions of the prime minister in order to preserve what has been initially agreed in regard to the powers of the different authorities (federal and regional) in the negotiations between the parties. That version reflected the consensus that would allow the law to pass taking into consideration the prerogatives of the constitution as well as the prevailing balance of power at the time. The KRG, which objected to the changes proposed by the Shura Council, proposed its own amendments, which would weaken the federal power even further. I personally would support any amendments that would lead to strengthening the federal powers when it comes to regulation, planning and award of contracts to ensure the maximum benefits to the whole of Iraq.
Q: Would the new facts on the ground change the position of the Kurds regarding the oil and gas law and INOC’s authorities?
A: The two sides, the federal government and the KRG, lost interest with time in legislating the oil and gas law despite the pubic statements to the contrary. The KRG’s lack of interest in the law is that they object to a strong federal control and a strong INOC as well, of fear of going back to centralism. Their proposed changes to the 15 February 2007 draft law included one which degrades the powers of the Council of Ministers from supervision to follow-up on the implementation of policies, and they introduced a sharing in management when INOC operates in the region of Kurdistan. I of course don’t share this opinion. I don’t think their concerns are justified. First of all, the federal council of ministers is the supreme executive authority in the country and therefore its role cannot be limited to follow-up. Secondly, we don’t want to establish INOC as a centralized entity. In fact, the purpose is precisely to do without the central control by moving from a ministerial to a corporate type of management of the upstream. To do that, we wanted the board of directors and the management to be empowered, and INOC to be independent financially and administratively. Therefore a stronger INOC having more say in managing the upstream is to the benefit of the new Iraq rather than going back to central management. This approach is also in line with the current thinking within the government’s Task Force for Economic Reform, charged with the reform of state-owned enterprises, which aims to free them from the direct control of the ministries as a first step in the reform process, to finally convert them into corporate type to be listed on the Baghdad Stock Exchange. The government would own the golden share and the remaining shares would be open to the private sector. The exception is that INOC would remain fully state-owned.
Q: The decision to allow the KRG to export oil last year came at a time Iraq was desperate for revenues once the oil price started going southwards. What is the motivation now to let them export since you’re going to have more capacity than you need and at a lower cost than the KRG’s fields, where the IOCs take is much higher than in the rest of Iraq?
A: To start with I don’t think the main reason to start exports last year from the Kurdistan region was due to Iraq being desperate for revenues. I say this simply because the KRG exports were not that significant, at 40,000 b/d as compared with more than 1.9mn b/d exported from the rest of Iraq. I believe it was done because it is only normal and natural that oil produced should be exported. This is how you generate the necessary revenue for repayment of operating and capital cost as well as the anticipated surplus profit, in addition to providing hope for the IOCs operating in the region to continue with oil field development. It was also done because of the realization that such oil produced in the Iraq’s federal region of Kurdistan can only be exported through the national network. Exporting oil through Turkey is a matter of federal jurisdiction since it is regulated by international treaties between the two countries and these treaties are under federal not regional authorities. Of course, exporting oil from the KRG was beneficial to both sides and I believe it was the wrong decision to stop it. I believe there is a better atmosphere now for looking at this issue in a pragmatic manner. We have to look ahead to normalize this issue by going back to the spirit of what we agreed on; that any development of Iraq’s oil fields should be consistent throughout Iraq for the benefit of the country. Therefore we should have a plan and we should have a unified authority to oversee it – in this case it’s the council of ministers and in the future the federal oil and gas council as stipulated by the draft oil and gas law – and we should have consistent model contracts used by the whole country. No single entity or authority should be signing contracts alone without putting the national interest first.
I support the development of oil fields in Kurdistan as well as any other part of Iraq and I don’t think the personalization of the issues due to differences in opinions is the right approach. I think we should look at it carefully and in an objective way and therefore looking again into the possibility of export is the right approach and it is also a step forward in solving this issue. But at the same time, I cannot accept the two different approaches that are presented by both sides; one saying that the KRG should pay the companies out of its 17% allocation of the budget, and the other that says the ministry of oil should pay the companies who signed contracts with the KRG their dues irrespective of the content of the contracts. There is another approach that consists of taking into consideration the cost of development, the capital as well as the remuneration, and treating them in the same way it’s done in the contracts signed in the first and second bid rounds. At the same time the contracts signed by the KRG should be reviewed to see whether the terms are really in the best interest of Iraq as whole as well as of the KRG, before agreeing on measures to be taken to normalize them. Therefore I think objectivity, wisdom and a look ahead to the future to preserve and maximize the benefit to the country as a whole should, and probably will, prevail. As part of an overall solution, I wouldn’t be surprised to see a number of key points put on the table to be addressed in a joint review. These would include an assessment of all contracts signed to examine their economics and, most important of course, the Iraqi government take. It would also include a look at the nature of these contracts and the possibility of converting them into service type contracts with fair remuneration to the contractors and payment of the operating cost of produced oil and transportation and marketing of exported oil. Finally, as part of this exercise, there should be an agreement on future field development plans in the region of Kurdistan as part of the overall development plan for the whole country.
Q: You are going to produce 4.5mn b/d in three years and 6mn b/d in seven years in theory, so why do you need 100,000 b/d from Kurdistan, which costs more to produce, while anyway the KRG gets its share of the new revenues generated in Iraq?
A: We have to look at new realities. Every province or governorate in Iraq now would like to see its natural resources developed to benefit from the new budget legislation which gives each producing governorate $1 for each barrel produced or refined and for each 150 cu ms of gas produced, on top of its provincial development budget. The other issue is employment. Although Iraqis are allowed to work anywhere in Iraq, in reality the locals will provide the manpower to any oil field development in their area and therefore any new development will supply work opportunities to the people, be it in Suleimaniah, Basra, Irbil or anywhere else. So the issue is not limited to the economics of developing the fields. Don’t forget that the cost of the development of these fields is not coming from the treasury so those fields are not competing for resources from the budget. They are competing for resources coming from the IOCs. And since they are ready to develop them, I don’t think the economic factor should be the only consideration. Another strategic factor which we (inthe oil ministry) were working on in the past is the need to create new oil and gas producing regions beyond Kirkuk and Basra.
Q: It has now been established that the KRG has given away too much to the companies they signed production sharing contracts with compared to what the rate is going within the rest of Iraq. This means the burden to Iraq is bigger.
A: I agree with you on this. The first time I looked at the early contracts which were signed before the fall of the regime and after it, andafter we assessed these in the ministry of oil, we found those oil contracts to be inferior even to the old production sharing contracts that the previous regime had signed. The ones that followed later were also inferior in terms of preserving the interests of Iraq as has been shown recently by independent oil analysts. At the time, we in the oil ministry had said that we will not sign any contracts until a democratically elected government takes over, and we refrained from doing it. I said this in a press release at the time when I was minister.
Q: Looking at the number of signed contracts so far, the terms which extend to 20 years at least, the potential of the fields in question and their known reserves, what is a realistic pace for the build-up of Iraq’s oil capacity over the next 10 and 20 years?
A: According to the contracts signed in the first and second bid rounds, international oil companies have a contractual obligation to reach a certain production target, and as we have seen they all aimed for high targets in their bids. To start with, in the first bid round,the southern fields of Rumaila – by the way I don’t consider Rumaila as a single field; there are two well-established fields, North Rumaila and South Rumaila – should be raised from the current capacity of 1.066mn b/d to a plateau of 2.85mn b/d. Similarly, Zubair’s capacity should be increased to 1.25mn b/d and West Qurna-1’s capacity should go up to 2.325 million b/d. If those targets are metand if you add to them the fields’ plateaus bid in the second bid round, normally you would end up with more than 11mn b/d by just summing it up, within six or seven years, or probably seven to eight years if you take into consideration the different effective dates of each contract. We have to also add current production from fields that will continue to be operated by NOC like Kirkuk, Jambur, and Bai Hasan and by SOC like Rattawi, Luhais, Tuba, Nasiriya, Bin ‘Umar as well as the Misan fields and Nour, operated by MOC. So there’s a potential for a very high production capacity and the minister always maintained that the targeted rate is 12mn b/d. However, when you take other factors that normally influence the build-up of production capacity such as logistics, or what I call socio-political factors, as well as the abilities of the country to cater for this huge project, I don’t believe that the future total production capacity, and more importantly the actual sustainable production rates, will be equivalent to the sum of those figures. I think, realistically, the production capacity within the next six to eight years will be less than that. That’s essentially because one cannot ignore the facts that I’ve just mentioned as well as market forces. I don’t like to come with a specific figure in 10 or 20 years simply because it won’t be accurate in view of the various variables and unknowns. However, I could say that Iraq’s oil production capacity would be high, most probably around or more than 8mn b/d after some seven years from now and once it’s achieved, the country would endeavor to maintain it for many years. It’s also expected that domestic consumption could exceed 1mn b/d in seven years. Then we would be assessing supply and demand and the future call on OPEC oil and Iraq’s oil to decide whether to raise capacity further. Iraq is a member of OPEC and some say that the Gulf countries which have benefited from Iraq’s exit from the market in the last three decades will not allow Iraq to increase its production to these levels. I don’t think this should be the main factor in our decision, but I do think that Iraq should think twice before dumping excess capacity in the market or even maintaining large surplus capacity because that would exert a downward effect on the price of the barrel. It will be counterproductive and it will hurt Iraq. We will be investing so much to develop the extra capacity but we might end up with idle capacity sitting there because the price of oil would be affected.
Furthermore, the contracts we signed are designed in such a way that repayment of the capital spent by the IOCs starts after a few years of the effective date, which coincides with the build up period of capacity, and repayment is very much volume driven, ie the IOCs are encouraged to produce more in order to get repaid in the shortest time. I must stress here that I do not agree with those who say Iraq should not raise its production capacity to high levels because other countries do not agree or will not allow it. I think Iraq should be free to increase its capacity because we need revenues and no one should dictate to us. Looking back, we’ve lost a lot of opportunities over the past decades, the country is in dire need for revenues, the people of Iraq deserve to benefit from those revenues and we need to build other sectors by utilizing excess oil revenues. We should use our oil – the huge reserves we have and the many remaining undeveloped fields – as a strategic tool to adjust the balance in the region by creating international interest in Iraq and encouraging regional integration through creating economic interests with neighboring countries. When we build our oil production capacity, there will be lots of opportunities for our neighbors as well to benefit. Increasing our export capacity through the north, for example, would result in more revenues for Turkey. Opening new export routes – and this is on the table now – through Syria or to Jordan by building new pipelines will benefit our neighbors. One can also look at the potential for exporting gas once there is excess associated gas from the fields to be developed and from developing gas fields in the future. We will become a gas exporter one day and countries like Turkey or Syria would benefit hugely if we link up to the Arab Gas Pipeline (AGP) project and we might export liquefied natural gas as well through the Gulf. So it is in the interest of the country to develop our crude oil and gas output capacity and generate revenues, and at the same time there is added value by enhancing the economic ties with our neighbors.
Q: What about decline rates – shouldn’t some of the capacity you build compensate for the natural decline in certain fields once you start production at high rates?
A: Iraq has different fields that are at different stages of development or maturity. Looking at certain fields, we could witness a build-up towards the plateau then a decline. However, when we stagger the fields according to their different maturities, we end up with a net result of a sustained plateau that extends for a long period of time. This is essential for a country like Iraq in order to have stable revenues and increasing revenue for a long duration, rather than higher revenues followed by a sharp decline. You are right, we have to look at the decline rates and we should not always look at producing all those fields at the maximum rate, but rather at the optimum rate. The development of those fields should be staggered in such a way as to achieve a sustained plateau for a long duration of more than 20 years.
Q: But the way the bid rounds were organized and the contracts are built does not allow for this staggered production.
A: True. So far we have signed 10 field contracts with international oil companies but we have a lot more discovered fields and there are those yet to be discovered in the future. We should plan for the development of those additional fields that are not contracted in such a way to arrive at a staggered development and time the development – in particular the ramping of production to reach each field’s plateau – so that they either come on stream or reach their plateau when other fields start declining. We should not go for the development of all fields at the same time. The 10 fields awarded are a done deal. What we should do now is look at a master plan forthe overall development of oil fields in Iraq, including fields being developed in the region of Kurdistan. I believe it’s time now to refocus on the national effort as I mentioned earlier, and build up our national capabilities in fields we develop ourselves.
Q: When do you see that time coming when additional fields, beyond the 10 contracted in the two bid rounds, will be needed?
A: To start with, there are other fields beyond the 10 we are talking about that will continue to be developed, including all the fields that were tendered but not awarded in the bid rounds, such as Kirkuk, Bai Hasan, the Eastern fields and the Misan fields. If development there continues at the current rate, I don’t see a substantial increase in production, but rather maintaining a marginal expansion in some of those fields. On the other hand, a committee I chaired established by the Council of Ministers to look into proposals submitted by IOCs in the first bid round recommended – and its recommendations were adopted by the COM – that we work on enhancing thecapacity of those fields by giving the national operating companies flexibility in contracting and in calling on service companies andconsultants as well as giving more freedom and authority to their management and board of directors, and not relying on IOCs alone. We called this “enhancement” of the national effort. So there is a good possibility that in coming years, though not immediately, we could see new production from those fields higher than the existing rates from NOC and MOC, and of course there will be new production from discovered oil fields like the middle Euphrates (Kifl, West Kifl etc), East Baghdad and so on.
Q: The fact that IOCs were required to guarantee plateaus for just six-seven years in the first bid round and seven-thirteen years in thesecond bid round means that Iraq does not take a long-term perspective on these fields. Do you agree?
A: The six and seven years are required for the already producing fields and this is based on the fact that those fields have already been in production for a long period of time and that it won’t be possible to maintain a plateau for long with such high rates. The IOCs came up with even higher rates than those of the oil ministry. So there is of course a question mark: would the higher plateau be really maintained for seven years? If I go back to my argument that those plateaus were inflated, and that the overall factors that will affect them may not let such plateaus be attained, it is possible that we end up with rates that are lower than what has been bid for. So there is a possibility that they could maintain lower rates for the periods stated or even longer, depending on actual production in the future. But this largely depends on each field and what happens in the future. The seven-thirteen years applied to the non-producing fields is a matter of reserves and is based on actual studies done in the 1990s by IOCs and by the ministry of oil. In the 1990s we opted for 14 years for all fields when we were in negotiations with IOCs. At the time we asked for a plateau for at least 14 years but we did not define that plateau. Almost all the companies which were in negotiations at the time came back and said they can do it. But of course therates that were proposed at the time were much lower. For Majnoun, for example, for which Total was negotiating a PSA, the plateau suggested was 600,000 b/d for 14 years.
Q: Where does Iraq stand on peak oil theory and do you see it changing the world production map drastically?
A: It’s too early to talk about peak oil in Iraq, because as you have seen, a field like South Rumaila, which started production in 1954and its production capacity was increased to the then optimum capacity during the second half of the 1970s, is now going to witness a new peak. The reason for that is very simple. Those giant fields were not really developed to reach their maximum production rates. They are also fields with multiple reservoirs and at the time when certain reservoirs are being developed to reach the maximum production rates, there are other reservoirs that are partially developed or undeveloped. So when we talk about the fields we talk aboutthe total potential and therefore all of them – except Kirkuk – could have a new peak and a new plateau. I don’t want to get into thedebate going on internationally on whether we will reach a peak in 10 or 15 years and the possibility of a double peak and so on. But if world oil is going to peak, then it’s good for Iraq because it means more markets for us and more call on Iraqi oil. This would weakenthe argument of those who say we should not develop our fields to a higher capacity.
Q: Looking back at the December bid round, were you surprised to see the plateaus bid? Do you consider them realistic?
A: Let’s start with the first bid round in June 2009. I believe that the scoring formula in the first bid round encouraged IOCs to seek very high plateaus in order to win the bids and beat their competitors. That formula was not balanced. It gave more weight to the plateau bid rather than the remuneration fee. In the second bid round, the formula was very well balanced and gave more influence to theremuneration fee than the plateau. And yet, I believe that at least in one field, Majnoun, we have seen a huge difference between the1.8mn b/d and 1.2mn b/d plateaus bid by two competitors. I think this is on the high side. When I look at Halfaya or Garraf, I actually don’t think they were exaggerated even though they were much higher than the ministry’s minimum plateau target. I believe it’s possible to reach those rates with intensive drilling, good reservoir management, but whether they could maintain them to the said plateau period is yet to be seen. However, IOCs are going to prepare development plans based on more data and studies and they are obliged contractually to meet and maintain the bid plateaus.
Q: Even for a field like West Qurna-1, taking into consideration the oil in place and the recovery factors, do you believe 2.325mn b/d is achievable – assuming of course those volumes are needed?
A: I looked at this and at our reserves and recovery factor. Traditionally, we used very conservative recovery factors. For example, theproduction profile of the two Rumaila fields – taking our recovery factors into consideration – shows the plateau will not be maintained beyond a few years because it will decline and they will run out of reserves. But if we analyze carefully what the IOCs are thinking of, which is adding reserves by increasing the recovery factors and employing better technologies, intensive drilling, artificial lifts, andflooding, then the picture changes. In my calculations, they have to add about 10-15 units to the recovery factor. So instead of 35% we talk about 50% recovery factor for the Mishrif and Main Pay, and instead of 45% we talk about 55-60% or even more of the oil in place to be recovered in the Main Pay. Then it would be possible to maintain the plateau for seven years and add about 1.8mn b/d. It’s a challenge to the oil companies but it’s not unheard of. We have seen and know about multilateral wells, where they can drill four-five horizontal wells from each vertical well, coming from the same conduit and running for a long distance away from the well bore. This will lead to more production and therefore more depletion or extraction of oil within the reservoirs. Most of our reservoirs are thick with good horizontal continuity and therefore drilling such wells, especially in the tight carbonate reservoirs, could yield more than vertical isolated wells.
Q: If these plateaus are realistic, what does it say about the potential of undiscovered fields?
A: Well, even before these bid rounds, we have always maintained, based on our past success ratio and extensive studies done in the1970s and updated in the 1980s and even in the 1990s, that Iraq has a huge potential for probable and undiscovered reserves. This does not apply only to the area between the two rivers, or the Mesopotamia basin, but also to the foothills of Kurdistan and the Western Desert, which occupies about one third of the area of Iraq. When we drilled the first well in the ‘Akkaz structure in 1993, we discoveredoil in the deep or old horizons – the Paleozoic – and that discovery increased the potentiality of the older horizons in the Western Desert. This explains why so many companies were interested in the exploration blocks in the 1990s. When we provided them with our vintage data, which was all based on 2D seismic, they concluded after reprocessing it that those deep horizons are promising and will possibly have great potential in oil, gas and condensate. We see today many discoveries in the region of Kurdistan because it’s a well-known oil province, with well-defined structures. Plus when you take statistical figures from previous exploration history in Iraq, thesuccess ratio is over 70%, which is at par with that of Saudi Arabia. So taking all this together, there is a possibility of discoveries of large fields, perhaps not like Rumaila and Kirkuk, but still there is a possibility of large fields with multiple reservoirs, and of course with variations of medium and light oil as well as gas condensate, especially in deeper horizons.
Q: Some analysts have put the Western Desert reserves at 100bn barrels, is that reasonable in your view?
A: It’s of course very high but it’s another example of the possible potential of our resource base. In the past there were people who ridiculed our figures, but those were not experienced reservoir engineers or reservoir geologists. The increase of Iraqi reserves in the1980s from 34bn barrels to 59bn barrels and then to 65bn barrels followed by another announced increase to 85bn barrels and 90bn barrels and so on, drew comments that we were playing with numbers to compete with others. But what they did not know is that we were not allowed to publish our discoveries and were not announcing increases in reserves when we were making them. And when we were allowed to publish in time, we did not announce all the discoveries we had made in one go. The other point is that there were other people who studied the discoveries and made statistical calculations and estimations, and arrived at large numbers for our reserves, taking them from 214bn barrels to 300bn barrels. So I’m not surprised to hear about the 100bn barrels figure for the Western Desert, but of course it’s yet to be discovered. I’m confident that there is high potential in the Western Desert. However, I would like to differentiate myself from others who make declarations and cite large numbers without knowing their significance and the various factors that surround them. I believe that any country possessing proven oil reserves of around 100bn barrels shouldn’t worry much about where it ranks worldwide, for what matters really is the ability to convert such reserves into liquid barrels on the deck of the terminal.
Q: How do you think the production plans of the two bid rounds should be integrated into an Iraq-wide plan that also integrates other sectors, such as the pipeline network across Iraq, the gas processing facilities and gas pipelines, the export routes and terminals etc?
A: We are at the moment, at the advisory commission together with the concerned ministries, at an advanced stage of reaching anagreement with an international consulting firm to carry out a national integrated energy strategy. Of course it will take into consideration all of what you mentioned, as well as power generation, industry, consumption and would also include other elements such as cost, pricing, the environment etc. The national integrated energy strategy will take some one and a half years from now to carry out. But this does not mean we have to stop and wait until the energy strategy is complete and ready. The comprehensive andintegrated planning for the upstream is of paramount importance. We have to lay down all plans per sector and integrate them together so we don’t have bottlenecks in the upstream. As far as the upstream infrastructure is concerned, we definitely have to have the various surface facilities, depots and storage, pump stations, pipelines, onshore terminals – for example the Fao terminal – and new depots that are required for new fields such as Majnoun, Halfaya and Bin ‘Umar, and of course most important are the offshore terminals. Onthe other hand, we have to focus on the linkage between south and north, which is known as the strategic pipeline. There is now work on the rehabilitation of the old one and a new one is also to be laid. There are also projects for the rehabilitation of depots and pump stations at K3 in Haditha, which is a pivot to link the two networks. This will give us the flexibility and capacity to pump oil northwards, supply the local refineries, which are going to be expanded (Daura, Nasiriya and Karbala) for domestic use, and we can go up to Baiji refinery and even export southern oil through the Turkish pipeline like we used to do in the past. Furthermore, we have a plan to revivethe western export outlet through Syria and the Mediterranean. One has also to look at the gas system, and this includes of course theprocessing facilities. We should not let the old practice of flaring gas continue. We should stop the flaring because we need the gas, besides of course the added value of the utilization of gas. This requires work on the compression system as well as the network for domestic supply and we have to look ahead at the possibility of future export either as LNG or by pipeline, as well as the export of liquids (surplus LPG and condensate). So there’s a lot of work to be done on planning and such a plan got to be comprehensive for thewhole sectors, and at the same time flexible enough to make it possible to refine it in time.
Q: The expansions require financial resources and Iraq won’t have additional resources until the extra crude reaches the market. How do you deal with this lag between having the extra revenues and the need to spend huge amounts to cater for the extra capacity?
A: As far as the upstream is concerned, the need for investment has been solved through the contracts since the IOCs who signed up to develop the 10 fields are to supply the investment including the 25% carried share of the national entity. There are other requirements – one is the gas component, and the other is the surface facilities part of which can be covered through the supplementary costs. Theoffshore export capacity expansion is an expensive bit and is being financed by the government. There is an allocation of cash to pay for the new SPMs (Single Point Moorings) and for the pipelines from the fields down to the new floating terminal and the existing ones. For any additional requirements directly linked to the upstream, be it production or export or extra financing outside of the budget of thecentral government, there is a possibility for the Ministry of Oil to call on various IOCs to supply or finance big projects collectively andshare the cost on a pro rata basis. A good example is the water injection system. The IOCs know well that future requirements in water injection are big and it has been now almost agreed that we have to make use of sea water. The best way is to have a sort of grand project which requires a lot of engineering and planning as well as financing and construction. I could see a sort of grand project to purify the water, treat it, and pump it to the fields, and I could see a corridor of pipelines and spur lines that go to the various fields to supply the water. Therefore it is now the duty of the ministry to start planning for this grand project and of course secure the financing for it because it’s a costly one. There is an investment budget for the Ministry of Oil provided by the federal budget, which this year isabout $2.2bn. So the government will not stop financing projects and there is awareness at government level of the importance of financing oil projects. Bear in mind that since we’re not going to finance the upstream development now that IOCs will be doing that, thecall on cash for investment will be less and whatever is made available will go towards financing the infrastructure.
Q: Wouldn’t it have made more sense if the signature bonuses were recycled back into the sector by the oil ministry through expansion projects instead of ending with the treasury and as part of state revenue?
A: You have a point, I agree. But on the other hand the forecasted budget deficit this year is rather big. The government needed cashand that’s why the signature bonuses were partly used to finance that deficit. On the other hand, we have to comply with the law of financial management which dictates that all revenues should be handled by the federal government and redistributed in accordance with the law of annual federal budget legislated by the council of representatives.
Q: Looking at the current expansion of the Basra oil terminal, the new floating terminal will be completed by end-2012 and yet the risk of failure of the old terminal is till very high due to the old age and lack of maintenance of the pipelines. If that happens it would suppress any additional capacity you are adding to cope with the additional oil coming on stream. Shouldn’t further expansions of theBasra terminal take precedence to avoid reaching such a situation?
A: Well, what you are raising is of course a very important issue. No doubt that our main export outlet is the Arabian Gulf with our established terminals, the Basra oil terminal and Khor al-‘Amaya terminal. We can enhance the capacity of those terminals, as well as rebuilding the Fao onshore depot which would add new capacity through higher pumping rates and larger loading capacities and hence more exports. The expansion project you mention, which is underway, aims at increasing the export capacity and a number of contracts have been awarded including for the removal of UXO [unexploded ordnance], a bathymetric survey and an engineering work.The project includes laying down large diameter sea lines, floating SPMs and rebuilding the Fao depot in stages. Implementation of those contracts is at varying stages and the expansion work is progressing. However, we should also concentrate on regaining our south-north export capability and increase it with time through the strategic pipelines. We used to have some 900,000 b/d capacity inthe past and I could see that we could put a 1mn b/d pipeline northwards dedicated just for exports. This is of paramount importance to Iraq from a strategic point of view. As a priority we should have additional export capacity northwards as well as westwards, andespecially the flexibility to maneuver oil northwards.