LONDON: Iraq signed deals with international oil companies following auctions last year that could in theory take its oil capacity to 12 million barrels per day (bpd) in seven years’ time.
But security problems, inadequate infrastructure and political deadlock, which has left the country without a new government nearly eight months after an election, have made most analysts skeptical that target can be achieved.
Gas auctions this month attracted little interest from international oil companies. Deals were nevertheless awarded — although not signed yet — to develop three gas fields with combined reserves of 11.23 trillion cubic feet of gas.
The following addresses some of the questions overshadowing Iraq’s hydrocarbon production.
How Much Progress?
More than seven years after the US-led invasion, production levels are still below the peak of around 3 million bpd hit before the 1991 Gulf war.
Following last year’s oil auctions, the winning companies have issued tenders and agreed contracts for new wells, renewing old ones, de-gasification plants, de-mining oilfields and building new export terminals.
The companies have pressed ahead even in the absence of a formal legal framework, laying the foundations for increased production, although output figures have yet to respond.
Most analysts see only a gradual increase in Iraq’s oil production over the next four years, and predicted in a Reuters poll it would reach around 4.5 million bpd by the end of 2015 [ID:nLDE69L15M]. That would still leave the country far off the 12 million bpd capacity goal.
When Will Iraq Get a Government and a Hydrocarbons Law?
Following an inconclusive March 7 election, Iraq’s political leaders have failed to form a coalition and the new parliament has not met since June.
Talks could speed up after Iraq’s highest court on Sunday ordered the assembly to resume sessions immediately.
There is no guarantee Oil Minister Hussain al-Shahristani will remain in office once a new government is in place, adding a further element of uncertainty to the oil and gas sector.
Even before the impasse following the election, rows between majority Arabs and minority Kurds over revenue-sharing and control of some fields held up laws to establish a modern legal framework for Iraq’s oil and gas sector.
Work began on the legislation after the Iraqi constitution was passed in 2005. The draft which garnered the most consensuses in parliament appeared in 2007, but the Kurds objected and the proposed legislation has been stymied ever since.
There are actually four draft laws: one providing a general framework for the energy sector, a revenue-sharing law, a law related to a new national oil company and a final law reorganizing the Oil Ministry.
What’s the Logic of this Year’s Gas Auctions?
The prime purpose of this year’s gas auctions is to get gas for power generation to help tackle Iraq’s electricity blackouts and meet pent-up demand.
But given challenging economics for gas extraction at a time of global oversupply, some question the logic of auctioning off acreage.
There is plenty of gas associated with Iraqi oil to be captured and Royal Dutch Shell and Japan’s Mitsubishi had already agreed to a deal to capture gas being flared at southern oilfields.
Analysts ask whether the domestic market will provide enough demand to absorb additional supplies and for now there is a lack of infrastructure, meaning the potentially high-demand wider Middle Eastern market and other customers are off-limits for now.
OPEC output targets could at some point constrain associated gas output, but the Organization of the Petroleum Exporting Countries is not expected to impose curbs on Iraqi crude production for several years.
Is There Any Risk of Contracts being Repealed?
Although the lack of a formal legal framework is a worry, many analysts still say a future government would be unlikely to repeal the contracts awarded this year and last year because the terms were so favorable for Iraq.
The oil contracts were service contracts and remuneration fees were in most cases only $2 per barrel or less.
For gas exploration — which, more than more profitable oil, requires a stable environment and high incentives — remuneration fees ranged between $5.50 and $7.50 per barrel of oil equivalent.
Another disincentive for renegotiation would be reluctance to halt progress.
Iraq has realized, however, it might not have enough money for the enormous expansion of oil infrastructure needed and has asked international oil firms whether they would be interested in becoming involved.
What about the Contracts Signed with Kurdistan?
The Kurdistan Regional Government (KRG), which runs northern Iraq, has signed around 40 production and exploration deals with international oil companies.
Baghdad has declared the deals unconstitutional and refuses to pay firms involved, such as Norway’s DNO and Turkey’s Genel Enerji. That has halted exports from Kurdish oilfields since last year.
"All the signed contracts should be sent to the central government and oil ministry to study and make sure they agree with Iraqi laws, otherwise we still consider them illegal and void," Shahristani told a news conference last week.
The dispute stems from different interpretations by Baghdad and the Kurds of current laws on the ownership of oil and gas resources.
The oil ministry says only the central government has the right to develop national energy resources under laws that date back to the nationalization of the oil industry, while the Kurds say their own regional hydrocarbon law passed in 2007 gives them the right to sign oilfield deals with companies.
The Kurds say the deals they have signed could lead to the rapid development of fields in a largely peaceful region the KRG says has 45 billion barrels of oil reserves.
The Kurds also claim the oil-rich region of Kirkuk and other areas, but a national census that would determine the ethnic mix of the region has been postponed because of tension until Dec. 5.
If it shows the Kurds are in a majority around Kirkuk, it would strengthen their case for bringing it under their rule.
Additional reporting by Rania El Gamal, Ahmed Rasheed and Michael Christie
