Iraq building E&D project list for post-U.N. sanctions period

David Knott
Senior Editor

• Iraq's major oil and gas fields, exploration blocks [146341 bytes]

During the Persian Gulf War, the United Nations imposed an embargo on trade with Iraq, but in the 6 years since the war ended, Baghdad has been negotiating with many countries over oil development projects.

In December 1996, Iraq was allowed to begin exporting $2 billion worth of oil for 6 months under a U.N. scheme to use income from oil to pay for food and medical supplies badly needed by Iraqi civilians.

Baghdad is angling for the oil-for-aid deal to be expanded into a removal of the U.N. sanctions. Meanwhile, Iraqi officials have been lining up a number of oil field developments for when the embargo ends.

Though it is reckoned to have potential oil reserves almost on a par with Saudi Arabia, Iraq is one of the least-explored countries in the Middle East, with enormous potential (OGJ, July 29, 1996, p. 108).

Until the Persian Gulf War, Iraq's oil development was dominated by state firms, but since then Baghdad has decided on an ambitious production capacity expansion plan that requires increased involvement of foreign partners.

Middle East Economic Survey (MEES) said recently that Iraqi oil authorities have given priority to rehabilitation of existing production facilities, followed by development of discovered giant fields, then the smaller ones, and, finally, the exploration of new acreage in the western desert.

Negotiations

Baghdad has promised production-sharing agreements (PSAs) for giant West Qurna, Majnoun, Nahr Umr, Al Halfaya, and Ahdab fields to foreign companies and has been negotiating with about 40 firms from 25 countries for other projects.

Manouchehr Takin, senior petroleum upstream analyst, Centre for Global Energy Studies, London, said some of the fields offered by the Iraqis have been partly developed, although they have been neglected and shut in since the imposition of U.N. sanctions.

"The Iraqi authorities would like to encourage companies to come in," said Takin, "and they are pulling all the strings they can in international political circles.

"There are lots of political games going on. The Russians, for example, said recently they would push ahead with development despite sanctions but later they said they would not break ranks with the international community.

"The companies that have lined up contracts are all government-backed. Iraqi authorities have other fields they would like to line up, too, and all are candidates for PSAs."

Takin said many companies have been negotiating for PSAs with Iraqi authorities for the past 6 years: "Some of the fields on offer have estimated reserves of 2 billion bbl of oil.

"Although some may question the reserves estimates, any revisions are generally on the upside. Fields of this magnitude, near the Persian Gulf for easy exports, are an ideal place for investment."

Companies negotiating to develop fields or discoveries are being told by the Iraqi government they should also take on pure exploration ventures in the western desert, said Takin.

This way, companies may have to spend, say, $100 million on exploration of virtually uncharted territory and bear the risk themselves in the same package as a relatively low-risk development.

Capacity target

Before the gulf war, Iraq had capacity to produce 3.5 million b/d of oil.

Under the U.N. oil-for-aid deal, Iraq is currently exporting almost 1.2 million b/d of oil, its current quota within Organization of Petroleum Exporting Countries.

Baghdad has released target production capacity figures of 2.6 million b/d in 1 year after U.N. sanctions are lifted and 2.9 million b/d 2 years after sanctions are lifted.

Through new developments, Iraq aims to boost total sustainable oil production capacity to 4 million b/d in 2000, 6 million b/d in 2010, and 7 million b/d in 2020.

Iraq's total proved reserves have recently been estimated at 120 billion bbl of oil. Of 400 prospects delineated so far, more than half have been commercial discoveries, mainly oil.

Iraq's Ministry of Oil claims the country has crude oil reserves totaling 112 billion bbl, with potential to reach 214 billion bbl. The country's gas reserves are estimated at 3.36 trillion cu m.

One estimate predicts that the remaining 250 undrilled structural prospects in Iraq could yield at least as much oil as has been discovered to date (OGJ, June 24, 1996, p. 53).

At a seminar in Baghdad in March 1995, Iraq's oil ministry said 33 discovered and appraised oil fields, with combined production capacity of 4.65 million b/d, have been earmarked for development.

Among these, the plums-projects involving West Qurna, Majnoun, Nahr Umr, and Al Halfaya-have combined capacity to produce 2.1 million b/d of oil.

The ministry estimated that investment required to restore and expand production capacity would total $25 billion in the 5-8 years after sanctions are lifted, while a further $5 billion would be needed for downstream projects, including gas processing.

OPEC Bulletin reported that Iraq intends to expand its export pipeline network in anticipation of a complete lifting of the U.N. embargo.

Iraq currently exports to Ceyhan, Turkey, through a 1.2 million b/d capacity pipeline. Another pipeline, crossing Saudi Arabia to the Red Sea port of Yanbu, was closed in August 1990.

Additional current exports are from Mina al-Bakr tanker terminal, which can receive vessels as large as 350,000 dwt. The terminal was readied for exports in mid-1996.

Iraq's plans to increase oil export capacity once U.N. sanctions are lifted are seen as a potential threat both by OPEC and non-OPEC oil producers.

Rilwanu Lukman, secretary general of OPEC, told a conference in February that Iraq is currently producing around 1.3 million b/d of oil but has capacity to produce substantially higher volumes at short notice.

"Of course," said Lukman, "the actual impact of Iraq's production level will be addressed, and therefore minimized, by the decisions and actions of the other OPEC member countries.

"OPEC will continue to monitor the market closely and take whatever actions are necessary to maintain stability."

The last time OPEC adjusted its members' production quotas, in June 1996, Iraq's quota was raised to 1.2 million b/d in anticipation of exports under the oil-for-aid deal (OGJ, June 17, 1996, p. 19). OPEC ministers next plan to discuss production quotas in Vienna on June 25.

West Qurna

In January, Russia's Lukoil and Russian partners Zarubezhneft and Machinoimport disclosed they would sign a PSA with Iraq in February.

Lukoil aims to redevelop part of West Qurna field in southern Iraq, the country's largest field, with estimated reserves of 19 billion bbl of oil. The field's production infrastructure was badly damaged early in 1991 as Iraqi forces were chased out of Kuwait.

Development work had begun on West Qurna field before the gulf war by Russian companies. Lukoil is believed to have surveyed the condition of surface facilities since then.

The deal came to fruition Mar. 21, when Iraqi and Russian government officials signed a contract for a $3.5 billion development of reserves totaling 7-8 billion bbl of oil in West Qurna oil field.

Iraqi Oil Minister Amir Moham- med Rasheed told reporters development of West Qurna, 500 km south of Baghdad, would take place during 23 years.

"Production will be 600,000 b/d," said Rasheed, "and the total revenue for Iraq over 23 years will be approximately $70 billion. Development work will start soon after approval of both governments and parliaments."

MEES said the area allocated to the Russian group is in the northern part of the field, while first-phase development by the Iraqis was in the southern portion, close to North Rumaila field.

MEES added the agreement is understood to include development of both the Mishrif and Yamamah formations. Two thirds of output is expected to be 26-28° gravity crude from Mishrif and the rest 37° gravity Yamamah crude.

West Qurna development interests are expected to be Lukoil 52.5%, Zarubezhneft 11.25%, Machinoimport 11.25%, and an Iraqi state company, still to be nominated, 25%.

"Like the other production-sharing accords currently under negotiation between Iraqi government and foreign companies," said MEES, "the Iraqi-Russian agreement on West Qurna is understood to provide that all appraisal and development costs are borne by the contractor, to be recovered from an agreed share of production, with remaining output to be split between government and the contractor in agreed proportions. However, no detailed information has yet surfaced regarding the production-sharing terms of the Iraqi-Russian deal."

The Russian government is one of several countries that have been pressing for lifting of U.N. sanctions. The U.S. and U.K. governments have rejected all pleas.

Russia, France, and China are all pushing for Iraqi oil field development, and Russia's former Fuel and Energy Minister Pyotr Rodionov-who resigned Apr. 4-took the opportunity of the signing ceremony for a gesture of defiance.

"Execution of the contract will start regardless of the lifting of economic sanctions," said Rodionov. "We came to the conclusion that we need several weeks to resolve obstacles."

On Mar. 25, Viktor Posuvaliuk, Russia's deputy foreign minister, disclosed Russia and Iraq would take preparatory steps for development of West Qurna oil field, ahead of the lifting of U.N. sanctions.

According to the French wire service Agence France Presse, Posuvaliuk told correspondents an agreement to develop West Qurna, under a $3.5 billion program, would "be applied independently of the lifting of economic sanctions."

He reportedly amended his position later to: "All Russian/Iraqi projects are based on a long-term perspective, which will start with the lifting of sanctions. Some preliminary work on documents will be carried out now."

Posuvaliuk said preliminary work would include the financing scheme, list of suppliers, and preparations for equipment deliveries. No delivery of equipment or transfer of funds would occur, he said.

French deals

France has been negotiating for two giant field developments for the time when U.N. sanctions are lifted.

Baghdad has promised development of Majnoun discovery to Elf Aquitaine SA and Nahr Umr field to Total.

Development work had not been started in Majnoon field when U.N. sanctions were applied, but the field had been appraised with a total of about 20 wells.

The field was discovered by Petroleo Brasileiro SA in 1976 and is estimated to have proven reserves of 7-10 billion bbl of oil.

An Elf official said the company is ready to sign a PSA for Majnoun field development as soon as sanctions are lifted. The company has completed initial technical studies and is prepared to begin further work immediately.

The Iraqis had partially developed Nahr Umr field, which was discovered in 1949, but the field has been shut in.

A Total official said production capacity of Nahr Umr field is expected to be 400,000 b/d of oil. Reserves are said to be very well identified, and estimates put total reserves at 6 billion bbl of oil.

The official said negotiations for a PSA are not yet complete, and the company has not yet signed anything: "The Iraqi oil ministry said in January that the field is more or less reserved for Total. We were very happy and surprised."

Al Halfaya

In January, India's Oil and Natural Gas Commission (ONGC) and Indian private firm Reliance Industries Ltd. gained approval from Baghdad to develop a 14,000-sq km block that includes Al Halfaya field and is estimated to have reserves of 4 billion bbl of oil.

Al Halfaya, in southeastern Iraq, is said to have capacity to produce 220,000 b/d of 28° gravity oil. The field was discovered in 1977, with development interrupted by the Iraq/Iran war.

Centre for Global Energy Studies' Takin said ONGC was active in Iraq before the gulf war and may have been preparing to develop Al Halfayah: "It could be the Indians will go back in again-they may have a natural priority."

Ahdab

Earlier this year, Iraq initialed a PSA with China National Petroleum Corp. (CNPC) for further development of Ahdab field, which has estimated reserves of 1.4 billion bbl of oil and production capacity of 80,000 b/d.

The PSA is understood to be for 26 years, with field development expected to take 4 years. CNPC is expected to analyze seismic data already collected by the Iraqis while waiting for U.N. sanctions to be lifted.

Iraqi firms are then expected to begin construction work and drilling on behalf of CNPC, with payment by CNPC to the Iraqi firms after sanctions are lifted.

Iraq National Oil Co. drilled four wells in Ahdab field in the late 1970s and early 1980s.

Press reports late in March about the China-Iraq relationship have hinted at a shady oil-for-arms deal between the two. These reports were denied by Chinese government officials.

London's Sunday Times newspaper claimed to have seen papers "which proved Sinochem, the state-owned oil trading enterprise, had agreed to swap food and other humanitarian aid for $3 billion of oil, equivalent to 100,000 b/d of oil for 4 years."

The newspaper linked the deal to a $5 billion transaction under which China would recoup the cost of weapons supplied to Iraq. British middlemen who brokered the deal were said to have pulled out when weapons became involved. The U.N. is investigating the deal.

On Apr. 1, Iraq's Rasheed disclosed Baghdad hopes to sign a deal with China "very shortly, hopefully" for development of an Iraqi oil field.

A delegation of high-level Chinese government officials is expected to visit Baghdad soon, with development of Ahdab field topping its agenda.

Other oil projects

In January, officials of Malaysia's Petroliam Nasional Bhd. (Petronas) were in discussion with Iraq over development of Ratawi field in southern Iraq, which has estimated reserves of 4 billion bbl of oil.

Petronas is also thought to have initialed an exploration agreement for Block 1 in the western desert, which is unexplored.

Iraq's Ministry of Oil is also believed to have been authorized to sign a contract with Romania's Rompetrol to drill 48 wells on the Khurmal discovery under a contract valued at $26.5 million. Payment is to be made in crude oil for 2 years, after U.N. sanctions are lifted.

According to MEES, among other oil fields under discussion between Iraq and foreign firms are: Ain Zalah, where enhanced oil recovery is under consideration; Gharraf, with estimated reserves of 1 billion bbl of oil and production capacity of 100,000 b/d; Hamrin; Luhais; Nasriya, with production capacity of 220,000 b/d and estimated reserves of 2 billion bbl; North Rumaila, with remaining reserves of 3-4 billion bbl of oil and potential production capacity of 500,000 b/d; Rafidain; Suba; and Tuba, with estimated reserves of 500 million bbl.

MEES said many firms have also expressed interest in western desert exploration Blocks 1-8; an Iraqi delegation has visited Algeria to discuss a PSA for Blocks 6 and 7.

The western desert area is said to be virtually unexplored, with about 80,000 line km of 2D seismic data collected and a dozen or so wells drilled in an area of more than 100,000 sq km.

Gas plan

Late in December 1996, Iraqi and Turkish energy ministers agreed to hold discussions over exports of natural gas by pipeline from northeastern Iraq to Turkey. MEES said Amir Rasheed, Iraq's oil minister, and Recai Kutan, Turkey's energy minister, agreed to set up specialized committees to debate feasibility of building a 10 billion cu m/year gas pipeline.

The talks were the result of a memorandum of understanding signed in March 1996 by Iraq's Northern Oil Co. and Turkiye Petrol Raffinerileri.

Kutan reportedly told a Turkish news agency the pipeline project would not violate U.N. sanctions against Iraq, but pre-construction work would be completed before the embargo is lifted.

Plans call for gas to be transported to Turkey's Anatolia region through a 1,380-km pipeline with two gas compressor stations. Total cost of field development and pipeline construction is estimated at $2 billion. The contract period is for 20 years.

Gas supplies for the project are expected to come from development of six gas fields in northeastern Iraq with total non-associated gas reserves of 270 billion cu m, along with a similar volume of gas from the gas caps of oil producing fields in the area.

Gas fields and each field's proven reserves allocated to the pipeline project are: al-Anfal, 50 billion cu m; Chemchemal, 60 billion cu m; Jaria Pika, 25 billion cu m; Khashm al-Ahmar, 40 billion cu m; al-Mansuriyah, 90 billion cu m; and Tel Ghazzal, 5 billion cu m.

Limited exploration work has been carried out in these fields apart from al-Anfal. Initial plans call for development of al-Mansuriyah and al-Anfal, with a gas production center in each field.

Exports to Jordan

On Jan. 20, Iraq and Jordan signed an agreement in Baghdad under which Iraq will continue to supply oil to Jordan in 1997 in return for Jordanian goods and services.

In the latest renewal of a trade established at the start of the gulf war in 1990, this year Iraq will provide Jordan with 25 million bbl of crude oil and 7 million bbl of petroleum products, mainly liquefied petroleum gas, gas oil, and fuel oil.

MEES said the crude oil price agreed for this year's supplies is $19.10/bbl, which compares with $15.25/bbl last year: "The total value of the deal is put at around $625 million."

OPEC Bulletin reported that the latest deal marks a 7% increase in exports from 1996 and will bring in return $355 million worth of commodities to Iraq from Jordan.

Last year, Iraq exported 3.2 million metric tons of crude oil and 1.2 million metric tons of products to Jordan.

Because there is no pipeline between Iraq and Jordan, oil is moved by about 2,000 Jordanian trucks. MEES said a feasibility study has been completed for construction of a pipeline from pumping stations at Haditha, Iraq, to Zarqa refinery in Jordan. The project is not expected to progress further while U.N. sanctions are in place.

OPEC Bulletin said Iraq and Jordan have agreed in principle to build a pipeline between the two countries and have also expressed readiness to build a joint refinery at the Jordanian port of Aqaba.

The planned pipeline would be 590 km long, with capacity to export 250,000 b/d of oil. Construction cost is estimated at $1.4 billion.