By an OGJ correspondent
PARIS, Feb. 14 -- While Iraqi's large proven oil reserves and its low production costs are an attraction for oil companies worldwide, the huge development costs required plus the country's transportation bottlenecks will prevent any substantial hike in oil exports in the near and even medium term, in the event of a successful outcome of the war.
Developing this point at Institut Français du Pétrole's annual Panorama symposium in Paris Feb. 6 and in Lyon today was Jean-François Giannesini, advisor to the IFP chairman. He said that the prevailing view that Iraq, under US control, would be able to pour millions of barrels per day of production onto oil markets "is a mindless view".
Giannesini added that "reserves are only promises. They must be materialized through production capacities and, especially, favor export means—pipelines and sea terminals."
Reserves,production
Iraqi's oil reserves are the second largest in the world after Saudi Arabia, Giannesini noted. Proven reserves amount to 113 billion bbl, of which 35 billion can immediately be developed, while potential reserves—along the Iraqi border with Saudi Arabia and Jordan—are pegged at 60-200 billion bbl , most likely closer to 200 billion bbl, he said.
But both Iraqi's production and transport infrastructures are in poor shape 13 years after an embargo that has cut off the country from the latest technologies and from spare parts. In the mid-1990s, Iraq estimated it would cost $30 billion just to rehabilitate producing oil wells. It would require at least 2 years at a cost of $10-15 billion to just stabilize oil production at its current level of 1.5-2 million b/d.
"It would be possible to increase production to the 3.5 million b/d it had reached before the invasion of Kuwait," Giannesini claimed. "This would mainly involve low-cost drilling."
The investment in this effort would hover around $4,000/b/d of production, or a total of $4 billion.
Giannesini also did not discount the possibility that Iraq eventually could bring its production to 6 million b/d: "But that would involve money as well as tax incentives for (foreign) oil companies. In any case, it would not depend on manpower problems, for Iraq has the necessary skills".
Bottlenecks
The biggest obstacle to increasing Iraqi production is the country's inadequate transportation and export bottlenecks.
Iraq has three pipelines and one oil terminal (at Mina al-Bakr), together theoretucally capable of exporting 3.5 million b/d.
But the Kirkuk-Yanbu pipeline, which has a design capacity of 1.65 million b/d, is restricted by Saudi Arabia from exporting more than 500,000 b/d. The Kirkuk-Ceyhan pipeline to Turkey has an average throughput of 1 million b/d vs. its design capacity of 1.5 million b/d.
The third pipeline, from Kirkuk to Banias in Syria, "is officially in very bad shape," Giannesini pointed out, adding that "it seems the Iraqis export through it 200,000 b/d in the form of 'tests,' so that one wonders what are the real quantities lifted."
Finally, the Mina al-Bakr sea terminal, which would be difficult to expand, can export 1 million b/ vs. a design capacity of 1.5 million b/d.
All told, Iraq's current export facilities have an operable capacity of 2.5 million b/d. Any increase in that volume would require political agreements with prickly neighbors, especially those who are oil export competitors such as Saudi Arabia and Syria.
"To develop its access to the market," remarked Giannesini, "Iraq depends to a large extent on its neighbors, except for the sea outlet. Moreover, to find a legal and tax framework that would both respect national feelings and open wide the door to international investments will be a tough task. It is clear that Iraq opens up many petroleum promises, but a good many obstacles prevent this country from rivaling. . .(Saudi Arabia)."
This view was bolstered by International Energy Agency Executive Director Claude Mandil, who said, "Those who think it will be easy and rapid to produce enormous quantities of oil in Iraq after a war are mistaken. There will be a whole industry to be rebuilt."
Companies waiting
Whatever these views, there is much speculation in French economic circles as to what will become of the 20—some say 40—oil companies that have approached the Iraqi government since 1998 to develope the country's huge resources. It would seem that the Russians are greatest in number with six companies, followed by companies from Indonesia, Malaysia, Algeria, Turkey, China, Viet Nam, Japan, Australia, Italy, Spain, the UK, and France.
TotalFinaElf SA has negotiated—but signed no contract for—to develop Bin-Umar and Majnoun fields, in the Basra region, with reserves estimated conservatively at, respectively, 5 billion bbl and 7-8 billion bbl. Development of these fields after the lifting of international sanctions against Iraq would cost $4 billion each, for a total combined production of 1.5 million b/d.
One big question worrying some French companies is whether a victorious US in Iraq will favor its own companies to the detriment of the other candidates.
TotalFinaElf E&P Vice-Pres. Christophe de Margerie said he wants to remain optimistic: "We have respected the embargo and the international laws; we do not want to be penalized," he said. Total—then Cie Française des Pétroles—was among the first shareholders, in 1927, of Turkish Petroleum Co. later renamed Iraq Petroleum Co. And CFP's first oil asset was Kirkuk field.
Giannesini pointed out, however, that "Companies are linked to one another the whole world over to explore large fields. I cannot imagine that TotalFinaElf would be totally ousted from Iraq."
IFP price scenarios
Meanwhile, Giannesini outlined IFP's three oil price scenarios for the Panorama delegates.
The first is the "status quo," under which war is avoided and prices fall rapidly to $22/bbl in September.
The second scenario involves a short war with the fall of the Iraqi regime, its replacement by a democratic regime with no extension of the conflict to Saudi Arabia or oil wells set on fire. Oil prices would go up to $40/bbl during the attack, but fall very fast as early as July to their fundamental level of $22/bbl. If the new Iraqi authorities decide to increase oil production this year to 3 million b/d from 2 million b/d, ". . .this might lead to an implosion of (the Organization of Petroleum Exporting Countries), and the. . .(oil price) might well fall under $15/bbl,"
IFP's "black scenario," entails a protracted war, oil wells on fire, terrorist attacks, and Saudi Arabia threatened. Oil prices could exceed $50/bbl, bringing about a world recession.
