Iraq lures investors to
boost its oil output as OPEC debates cuts
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[October 27, 2016]
By Dmitry Zhdannikov, Ahmed Rasheed and Ahmad Ghaddar
LONDON/BEIRUT
(Reuters) - As OPEC gathers in Vienna next month to consider cutting its
oil output, a lower profile event in Baghdad on the same day will signal
Iraq's longer term ambition to do precisely the opposite.
Nov. 30 is both the date when OPEC ministers meet in the Austrian
capital and the deadline set by Iraqi oil minister Jabar Ali al-Luaibi
for international firms to submit bids to help it develop 12 "small and
medium-sized" oil fields.
Crude output in Iraq, OPEC's second largest producer, is already rising
dramatically despite corruption, poor infrastructure and the fight
against Islamic State. This is complicating OPEC's efforts to revive
prices by making its first output cut since the 2008 global financial
crisis.
Ministers from the Organization of the Petroleum Exporting Countries are
supposed to decide in Vienna which member states will make the cuts
under an outline agreement struck last month.
Iraq says it will not reduce output because it needs oil money to combat
Islamic State, and Prime Minister Haider al-Abadi offered strictly
limited support on Tuesday. "We are prepared to cooperate on the correct
basis," he said. "We want oil prices to increase."
At around $50 a barrel, crude prices are less than half their levels in
mid-2014 and OPEC is seeking a production deal that will last at least
six months.
Developing the 12 Iraqi oil fields, which lie in southern and central
areas away from Islamic State strongholds, will take longer than that.
Nevertheless, fellow OPEC members and rivals need read no further than
the terms of the new tender to understand Baghdad's intentions.
The tender document sets quick output gains as the main requirement to
win the contracts. Baghdad also wants maximum revenue, including from
selling gas produced as a by-product of the crude extraction, rather
than simply burning it off.
After achieving commercial production in the first phase of development,
the Oil Ministry's document says, "in the second phase, the sustainable
high production level will be achieved, along with complete utilization
of associated gas".
With oil reserves of 143 billion barrels, Iraq controls almost every
tenth barrel of oil in the ground in the world.
Aside from security problems, its crude is as cheap and easy to extract
as in Saudi Arabia or Iran, but its energy industry suffered decades of
under-investment under Saddam Hussein who was overthrown by a U.S.-led
invasion in 2003.
Since then Iraq has signed deals with majors such as Exxon Mobil, BP and
Royal Dutch Shell to develop its giant fields. Production has almost
doubled to 4.7 million barrels per day this year from 2.4 million bpd at
the start of the decade.
But the growth has lagged the initial forecasts of production at 9
million bpd by 2018, equal to Saudi Arabia's. Held back by red tape,
infrastructure constraints and difficult contract terms, Iraq is now
targeting a more modest 5.5 million to 6 million bpd by 2020.
The oil ministry is in a hurry. "Luaibi's plan is to boost production as
quickly as possible to mitigate damage from lower prices, generate more
revenues and have additional crude to repay contractors. This is the
best way to keep everybody happy," a senior official with state-run
South Oil Co said.
Another reason for the push to develop smaller fields is that talks with
the majors on revising their contracts for operating the giant fields in
southern Iraq have stalled. "We can't just waste time and run round in
circles with these tough talks," said the official, who declined to be
named.
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Flames emerge from a pipeline at the oil fields in Basra, southeast
of Baghdad, Iraq October 14, 2016. REUTERS/Essam Al-Sudani/File
Photo
Under service contracts awarded since 2003, the oil ministry pays the
operators a fixed dollar-denominated fee for every barrel of oil
produced. While the model worked well for Baghdad when prices were high,
it is now paying the same fees while its revenue from oil sales is
significantly lower.
NEW
CONTRACT MODEL
An executive from a company bidding for one of the new contracts said that
Luaibi wants to leave his mark "by ramping up production quickly".
Iraq has already pre-qualified 19 companies for the round including giants such
as Glencore <GLEN.L>, Russia's Rosneft <ROSN.MM> and the UAE's Mubadala Oil.
The fields might be small or midsize by Iraqi standards, but they are
significant by anybody else's. Nine of the fields together hold 2.3 billion
barrels, equal to the entire reserves of Britain, which currently produces
around 1 million bpd.
The new tenders also signal a departure from existing technical service
contracts (TSCs), under which some oil producers complained of late payments by
Baghdad.
"Luaibi
wants to tear apart old contracts and make them work better for Iraq and oil
firms. He is telling oil firms: keep investing - we will find a way to pay you,"
one of the executives involved in bidding said.
New deals will be awarded based on bilateral and direct negotiations between the
oil ministry and oil companies, moving closer to production sharing contracts (PSCs),
when companies get a percentage of the oil output instead of being paid a fee
for their work.
Their structures are likely to vary, reflecting the differing geologies of the
various fields and consequently differing methods of extracting the crude.
"In a country like Iraq with so much diversity in the oil fields, it's
impossible to have one contract system. This is an evolution towards a hybrid
Iraqi contract model combining elements of TSC and PSC," managing director of
UAE-based Manaar Energy Group Jaafar Altaie said.
CLAWING BACK MARKET SHARE
Iraq has long said it believes it was cut out of the market in the 1990s, when
the government of Saddam Hussein was under international sanctions, and hence it
has lost its market share to rival OPEC producer Saudi Arabia.
Officials say that as Iraq tries to retake its second city of Mosul from Islamic
State, it should get the same exemptions from OPEC output restrictions as Iran,
Nigeria and Libya, whose crude production has been hit by conflict and
sanctions.
"We are fighting a vicious war," Luaibi said this week.
Veteran oil watcher and founder of Petromatrix consultancy, Oliver Jakob, says a
third of OPEC's member states are now pleading special circumstances for why
they should not accept output caps. As a result, Jakob has come up with a new
way of spelling out the OPEC acronym: the Organisation of Producers Exempt from
Cuts.
(Writing by Dmitry Zhdannikov and Ahmad Ghaddar; editing by David Stamp)
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