IRAQ CHALLENGES SANCTIONS, OFFERS 4.5 MILLION B/D DEVELOPABLE CAPACITY

Iraqi oil fields for development (12527 bytes)Production Potential of 33 Iraqi Fields (31246 bytes)

The prospective oil deal of the century were unveiled last month in Baghdad at the unlikely venue of the first international oil conference in Iraq in decades.

In a dramatic twist Iraq detailed 33 oil fields that are now open for joint development with foreign partners. The productive capacity of the listed fields totals some 4.5 million b/d, and the underlying proved reserves exceed 50 million bbl-equal to more than U.S. and Canadian reserves combined.

Reversing its prior compulsive secretiveness concerning oil affairs, the government cleared at the highest level the proposal to publicize the available resources and to offer corroborative detail.

"Four and a half million b/d is an awful lot of oil," noted one foreign oilman who was loath to be quoted because his company feared possible reprisals in the U.S. The economic bait was both clear and enticing. Iraq chose the public forum to signal to the world the gains that could accrue to the first countries that break with the U.S. over continuing the sanctions.

TRIPLE SIGNIFICANCE

The proposals have triple significance for the world oil industry. First, they are a new and explicit challenge to the sanctions against Iraq, now supported only by the U.S., the U.K., and Israel. The lure of those oil fields, plus the possibility of renewed trade with Iraq, is an added incentive for the other states to break with the U.S. Their compliance is increasingly reluctant and coerced, distrust of U.S. motives has grown, and Iraq, it is argued, has opened the 'oil bazaar' to accelerate that process by making clear the stakes: First come, first served, stated a key presidential advisor.

Second, collapse or relaxation of the sanctions threatens market stability. Competition for access to Iraq's newly announced oil treasures could accelerate the return of Iraq's existing production capacity onto market, thereby putting pressure on OPEC to accommodate. OPEC would have to respond - with revised quotas - or find itself once again embroiled in an expensive internecine price war.

Third, the scale of the proposed developments-4.5 million over and above prewar production capacity of 3.5 million b/d-implies a reordering of ranking amongst producers as well as a possible reposition of the European firms in the world industry if they do indeed get "first dibs" on the better fields as is now hinted by Iraqi officials.

SUBSTANTIAL OFFERINGS

The fields being offered are neither speculative acreage nor paper reserves. All are proven, and some of the fields and reservoirs have actually been test produced. In an interview with the Christian Science Monitor, Faiz al-Shahin, undersecretary in the Ministry of Oil, explained at length that the reserve figures are backed up by extensive seismic studies (2D), comprehensive logging, and considerable test production. In two cases, he added, foreign companies (unnamed) had verified the data, as part of their own negotiations, and produced reserve and production figures still higher than the ministry's.

The claimed figures are consistent with other data. Indeed some of the fields were known more than 20 years ago, before the nationalization of the foreign-owned consortium. The then operator, Iraq Petroleum Co., had found far more oil than it wanted to market, so that "smaller" fields, i.e. those less than 1 billion bbl, were simply left fallow. That chagrined the Iraq government, and IPC's laggard development plan was a factor leading to its nationalization.

Other fields on the list had been discovered and delineated later, including as a striking, especially important example, supergiant Majnoon field with 20+ billion bbl. Majnoon had been found by Braspetro in the late 1970s just before the Iran-Iraq war under a service contract, and some 20 development wells had been drilled. Located in the marshes of southern Iraq almost astraddle the border with Iran, Majnoon's development program was interrupted by the Iran-Iraq war in 1980, and Iraq National Oil Co. plugged the wells to protect them from destruction by Iranian forces - akin to what happened 10 years later in Kuwait. The field's billions of barrels of delineated reserves have been lying dormant.

The most prolific of the fields now being offered for development lie in the South - Majnoon as mentioned, West Qurna, which the Russians had partly developed, Halfaya, and Nahr Umr. The ministry's engineering studies project the medium term capacity of the four together to be 2.1 million b/d.

EXPLORATION COSTS

Investment requirements were described as "large" but are large only in the Middle East perspective. First phase development will cost some $4,000/b/d, rising to $5,0007,000/b/d over the lifetime of the fields. They project the need to drill 200-300 wells/year to realize the target, which is a "huge volume" of work compared with current drilling levels but easily manageable.

The cost per barrel produced is still lower than these figures suggest if extrapolated to North American practice. Reservoir decline rates are 2-3%/year because the ministry expects that the fields will be developed and produced with R/P ratios of 25 or more, i.e. at less than one-third of the rate for most newer major fields in the North Sea or North America. Thus the discounted cash flow cost of production is commensurately less.

Investments for pipelines and infrastructure are also minor - once the sanctions are either lifted or bypassed. The four supergiant fields are within 100-150 km of Iraq's two marine terminals. Moreover, they are close to the junction of the export pipeline running through Saudi Arabia to the Red Sea at Yanbu, pending Saudi agreement, and that of the strategic pipeline that connects Iraq's southern producing areas with pumping stations in the north and the other export pipeline through Turkey to the Mediterranean port of Ceyhan.

The Iraqis dangled a second economic advantage. Total upstream investments are estimated at $20-25 billion during the next 5-6 years following the lifting or disintegration of the sanctions, an attractive market for the currently depressed drilling and oilfield services industries. Jean Alliot of Elf noted proudly that "France is self-sufficient in oilfield equipment even though it has no domestic oil," reflective of the risk to U.S. contractors if or when competing countries capture the first prizes. "Flag oil means flag business" - U.S. companies tend to buy U.S. products, and similarly when Elf or Total or ENI develop fields they also tend to buy equipment and services at home.

BYPASSING SANCTIONS

"Are you fransi?" - Are you French? - was among the first questions put to foreigners arriving for the Baghdad oil seminar. That question reflected the advantage of the French companies French negotiators have been conspicuously present for months, working out details of contracts while the technical staffs inspect the fields and sketch preliminary development plans. The minister announced that several of the deals are "ready for signature," and one at least is so far advanced that the final arguments focus on minor insurance clauses.

The challenge to the sanctions has intensified. The growing potential advantages from breaking the sanctions compound the pervasive distrust of the U.S.'s motives in continuing them. Dr. abd ur-Razzaq al Hashemi, a trained geophysicist and former ambassador who is now a senior political advisor to the ruling party, spoke of a "West-West competition" for control of Iraqi oil.

The French and Italians espouse such an interpretation. They worry that the U.S. intends to keep them out o Iraq in order to negotiate privilege for U.S. firms at the last minute. In their view, one shared by the Iraqis, the U.S. benefits from sanctions because Saudi Arabia and Kuwait make up most of Iraq's unused OPEC production quota and spend the revenues in the U.S. on arms and gulf war compensations.

Americans downplay that dimension, questioning the assumption that the U.S. government deliberately promotes the interests of U.S. companies abroad. But the recurrent theme that the U.S. gains economically from the sanctions at the expense of other countries is a sign of growing resistance and the rising likelihood that one or more of those countries will break from the sanctions and go it alone.

The rivals for access were many and didn't include any U.S. companies. The ranks of suitors for the fields were wide-Irish, Australians, Malaysians, Canadians Brazilians, and Russians over and above the ubiquitous and large Italian and French contingents. Koreans present were looking for investments and hardware sales, not operating agreements.

Iraqi officials indicated that the net would be cast widely. The more countries get a piece of the action, the greater will be the pressure to bypass the sanctions. The technocrats openly indicate an interest in seeing U.S. firms - Shell and BP were not particularly favored - but politics will dictate maximum diversity.

The financial terms of the imminent French deals were not revealed. Officials said that service contracts or production sharing deals are "discussable," but the fees or splits will be field or project specific, reflecting different economics.

Both systems were used prior to the Iran-Iraq war. Total for one is openly enthusiastic and announced it soon hoped to return to the "country where the company was born," referring to its early role in the creation of the former Iraq Petroleum Co.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.