Iraq's energy sector could attract $50 billion in next 5 years

As security gradually improves, EIC Consult predicts country's production could reach 8 million barrels per day end of 2017

The energy sector in Iraq is predicted to attract a minimum of US$50 billion in investment over the next five years amid a gradually improving security situation. This was one of the key findings of Iraq–An Energy Overview 2012, a comprehensive country report developed by EIC Consult, the London-based, market research, and consultancy arm of the Energy Industries Council (EIC).

Despite continued concerns over Iraqi security, political instability, and lack of a settled investment environment, the EIC Consult report found that the country's proposed plans to overhaul its infrastructure and increase oil and gas production present huge and long-term opportunities for service providers at every stage of the supply chain.

The report underscores the fact that Iraq remains the largest and most underdeveloped oil nation in the world today, with fewer than 10 wells drilled annually since 1980. Furthermore, only 25% of the country has been comprehensively explored for energy resources.

"There are few locations on a global scale that can offer the size and quality of hydrocarbon reserves as Iraq," says Dr. Phil Goddard, director of consultancy and the report's main author.

"Whereas previously such potential was held back by a lack of security, political instability, and harsh contractual terms, the prevailing trends are positive ones with our report showing significant signs of progress and opportunities for international investment.

"Tackling Iraq requires patience, endurance, and initiative, but the rewards for perseverance are potentially prolific as our $50 billion suggests."

As of 2011, Iraq had around 80 commercial oilfields and daily oil production averaged 2.65 million barrels per day (b/d).

If expected deals are signed during Iraq's Fourth Licensing Round, delayed from November 2011 and rescheduled for May 30-31 as of press time, production is estimated to increase to 12 million b/d by 2017.

However, EIC Consult predicts a more conservative minimum of around 6 million b/d and a maximum 8 million b/d by the end of 2017.

The report claims the lower estimate is due to Iraq's lack of definitive revenue sharing, federal oil investment, and national hydrocarbon laws. Even though the results of the Fourth Licensing Round are far from certain due to political wrangling between the Iraqi Executive and the Parliament, there are causes for optimism.

Chief among them is that the Iraqi government remains committed to proceeding with development in its energy sector and is taking the necessary steps to sustain and encourage investment.

The country's approved 2012 budget includes an estimated 31% increase in the ministry of energy (MOE) budget over the 2011 level, with a large proportion earmarked for capital investment. And, a number of international players have already signed agreements with the ministry.

"We look forward to seeing continued progress toward a more settled regulatory environment, more favorable contractual terms for outside investors and a successful Fourth Licensing Round," Goddard said.

View on upstream, midstream and downstream

Presently the Kurdistan region, which offers more lucrative production sharing contracts, leads the way in the upstream sector due to its more settled regulatory environment. (Details on all 53 production sharing agreements in the Kurdistan are featured in full in the report.)

In the midstream sector, despite extensive hydrocarbon reserves, Iraq's fragmented pipeline infrastructure limits its access to international markets. Furthermore, the country's oil storage capabilities are critically low, capable of covering only four days' worth of southern output. Plans to double the region's capacity, however, are underway and further expansion is set to continue throughout 2012.

At the downstream level, a growing gap between domestic demand and supply remains despite the fact that Iraq is importing significant volumes of refined petroleum products. Most of the country's production comes from three main refineries. The report stresses the importance of Iraq's need to expand capacity and that the current siutation is due to a lack of investment in the refining sector with most production coming from just three main refineries.

How secure is secure?

With regard to security, EIC Consult found that Iraq's security services' capabilities have increased significantly, although the country's energy infrastructure continues to be targeted. Despite the best efforts of Iraqi security services, including their dedicated oil police, protecting all facilities is a practical impossibility, the report stresses.

The report also concluded that Iraq still has a severely underdeveloped power sector, with infrequent supply and insufficient capacity. The report found that electricity losses during transmission and distribution only exceeded 18 billion kilowatt hours in 2009, demonstrating that Iraq's power grid has not been adequately developed to keep pace with increases in generation capacity.

The report claims that Iraq's lack of electricity and a dangerous reliance on foreign petroleum imports represent social challenges that could escalate into larger scale unrest and undermine local government in the future.

An analytical yet practical guide

The report includes more than 200 pages of critical analysis of the current political and business climate in Iraq, comprehensive coverage of the security environment, and existing investment opportunities. It aims to help energy companies understand future growth requirements within Iraq and the region.

Key sections include:

• An overview of the Iraqi political system, Iranian influences, and the regional disputes that define politics in Iraq and can influence overseas investments;
• A regional overview of the country, including all the essential information about every governorate in Iraq as well as an analysis of major regional areas of investment and security. The report delves into the unanswered questions as to whether federal government or regional government have the practical authority to sign and negotiate contracts;
• Details on existing high-profile energy projects in Iraq;
• Details of the Fourth Licensing Round rescheduled for May 30-31, including all blocks in the round as well as a listing of 46 pre-qualified companies; and
• A practical guide of do's and don'ts when conducting business in Iraq, and four suggested central elements to a successful business strategy.

The report includes a separate map drawn from the EIC's proprietary intelligence sources that highlights transport infrastructure, key projects, pipelines within the country, as well as oil and gas fields that are being produced or developed following the country's First through Third Licensing Rounds.

A comprehensive table of future and active projects in Iraq is also included, drawing on project data from EIC DataStream, the EIC's online database which tracks more than 9,000 energy projects worldwide.

About the EIC

The Energy Industries Council is a trade association for United Kingdom companies that supply goods and services to the energy industries worldwide.

Established in 1943, the EIC has more than 650 member companies for whom it provides the capability to understand, identify and pursue global business opportunities.

The EIC membership comprises contractors and suppliers from all areas of the energy sector that make a significant contribution to the UK economy, employing in aggregate around one million and generating £100 billion in revenues from their UK operations.

The EIC's head office is in London. Regional offices are located in Billingham and Aberdeen, and overseas offices are in Dubai, Singapore, Houston, Rio de Janeiro and Beijing.

For more information, visit www.eic-consult.com.