The Future of the Energy Sector in Iraq - Center for Strategic and

The Future of the Energy Sector in Iraq: Opportunities & Challenges Ahead Dr. Ibrahim Bahr Alolom

Oil Production Before the Wars

• Iraq determined to increase oil production from 2.8 million BPD to 3.6 million BPD by end of 2013

• Jump in production still only puts it on par with 1979 levels

Chronology Of Key Events

• 1972-1975: Oil industry in Iraq is completely nationalized

• Only towards the end of 2008 was the oil sector opened to

foreign investors followed by 3 bidding rounds that led to 15

deals with IOC’s

0

500

1000

1500

2000

2500

3000

3500

4000

0

500

1000

1500

2000

2500

3000

3500

4000

Th

ou

sa

nd

Bp

d

Th

ou

sa

nd

Bp

d

IRAQ PRODUCTION & EXPORT HISTORY

PRODUCTION

EXPORT

1979

Iraq

Iran

War

1989

1st

Gulf

War

2002

2nd

Gulf

War

????

Wars & Sanction vs. Iraq Oil Production 1979 - 2003

• 1979: Iraq production was the highest ever seen ( 3.6 m bpd) followed by Iran-Iraq war (1980-1988).

• 1987: Abolishment of INOC greatly reduced efficiency of the upstream sector

• 1989: Iraq production was stood 3 m bpd then followed by Kuwait invasion and 1st Gulf war.

• 2002: Iraq production reached 2.6 m bpd then followed by 2nd Gulf war.

2003 Onwards • Iraq’s oil sector had a monumental task after April 2003.

• Oil production reached 1.9 million bpd during 2003 to 2007.

• From 2008 – 2010 production increased by some 400,000 bpd - due to the security improvement

• As of this month, Iraq’s oil production is approximately 2.8 million bpd, as an effect of foreign investment.

Improved Security

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011

Mil

lio

n B

bl/

Yr

Iraq Oil Export 2003- 9/2011

SOC NOC

Foreign Investment 2009-2010

• Iraq’s presented one of the largest investment opportunities in history of the petroleum industry at the time.

• Iraq auctioned more than 80 billion barrels of oil and over 6 trillion cubic meters of its gas reserves to foreign investors.

Foreign Investment 2009-2010 Central Government -

• 40 companies are prequalified to participant in the bidding rounds 1 & 2.

• 11 development contracts have been awarded in two petroleum licensing rounds 1 & 2 in June 2009 & December 2009.

• 3 development contracts for gas fields March 2010.

• All 15 development contracts signed by the central government were service contracts for long term with 25% state participation.

Overview of Oil Fields Already in Development

10

15 development contracts have been awarded (including 3 contracts for gas fields)

• 14 contracts have been awarded in two petroleum licensing rounds in June 2009 and December 2009

• Al-Ahdab contract awarded to CNOOC in 2008 (first post-sanctions contract awarded)

Oil Fields

Proven reserves: 7.8 Billion barrels

Production plateau: 1,200,000 BPD

Current production: 205,000 BPD

Estimated recovery factor: 35.1%


Production plateau: 110,000 BPD

Current production: None








Current production: 1,200,000 BPD


























Najmah Badra Halfaya

al-Ahdab

Missan

Majnoon

West Qurna 2

West Qurna 1 Zubair

Rumaila

Gharraf

Qayarah

Mansuriya

Winners: TPAO, Kuwait Energy, Kogas

Fee of $7.0/ppt of 320 MMcf per day





Winners:, Kuwait Energy, TPAO


Siba

Winners: KazMunai Gas and Kogas


Losers: Total, TPAO

Akkas





Gas Fields

Foreign Investment 2009-2010

Region Of Kurdistan -

• Kurdistan region has signed 37 contracts with 27 companies.

• Kurdistan preferred to sign production sharing agreements

(PSAs) because the work in that region called for exploration

and drilling.

2011 Indicators

• Actual investments began to flow in the second half of 2010.

• Iraq was able export an additional 300,000 bpd in the world market

this year.

• 17% increase in exports came as a result of foreign investments both

in Kurdistan region and from the increase in production in Ahdab,

Rumilah and West Qurna – 1.

• Early October 2011 production rose to 2.9 million bpd and expected

to hit 3million bdp by the EOY including 200,000 bbls for Kurdistan.

• Most likely Iraq at the end of 2011 is able to present production

levels similar to that before the invasion of Kuwait.

2011 Indicators

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2010-4 2011-4 2011-10

TH

OU

SA

ND

BP

D

SCHEMATIC COMPARISON OF IRAQ REGIONAL PRODUCTION

SOC

MidOC

MisOC

NOC

KRG

APRIL 2010 APRIL 2011 OCT 2011-1st Week

Expected Oil Production

• Expected Production capacity :

• Expected 2011: 3 million BPD

• Expected 2012: 3.4 million BPD

• Expected 2013: 4 million BPD

• Iraq at the EOY able to present production levels similar to

that before 1990.

• Iraq may witness in the next two years levels similar to that

before Iraq-Iran War.

Exploration Blocs For Round 4- 2012

• March 2012, 46 companies from 27 countries are expected to

participant in the 4th bidding round.

• Expected to sign exploration and development contracts for 12 blocs

in the country – total 80,000 km2

• This will add 40 trillion cubic feet to the gas reserves and 10 billion

barrels to the oil reserves to compensate for depleting reserves

during 2011 – 2020.

Oil & Gas Blocks for Potential Exploration to be Open for Bidding in 4th Round

The Ministry of Oil has defined the following 12 blocks for the 4th bidding round, of which 7 are gas fields and the remaining 5 are oil fields.

Block # Governate Prospectivity Area (km2)

1 Ninawa Gas 7,300

2 Ninawa & Al-Anbar Gas 8,000

3 Al-Anbar Gas 7,000



6 Al-Anbar & An-Najaf Gas 9,000

7 Al-qadisyah, Babil, An-

Najaf, Al-Muthanna &

Wasit

Oil 6,000

8 Diyala & Wasit Gas 6,000

9 Al-Basrah Oil 900

10 Al-muthanna & Thi Qar Oil 5,500

11 An-Najaf & Al-Muthanna Oil 8,000

12 An-Najaf & Al-Muthanna Oil 8,000

Oil Fields

Gas Fields 12

Estimated Capacities

• Expected and estimated production capacity EOY 2020: 10 mm BPD, broken down as:

• Export: 6.5 mm BPD

• Spare Production Capacity: 2.0 mm BPD

• Domestic Refining: 1.5 mm BPD

• Total: 10 mm BPD

17

Crucial Phase

• Next few years represent critical phase in country’s petroleum industry and requires great effort to improve energy sector’s infrastructure

• Limited export network is factor of inability to reach projected export levels; current capacity does not exceed 2.3-2.4 million BPD

• Despite outlets in Syria, Turkey, and Saudi Arabia, only Turkish port is actively being used for Northern field exports; more attention needs to be focused on Mediterranean Sea ports

• Water injection is considered to be limiting factor in achieving increased production

• Technical challenges are extremely important and need to be reconciled with development plan to avoid delays

Political Challenges: Management of Iraqi Oil Sector • Legal framework and efficient management are required to

keep up with the dynamic political and social changes that Iraq is going through

• Iraqi constitution put forth general framework regarding management of oil wealth and guidance on addressing policies (Article 112)

• Four important laws put in effect to ensure country prospers from oil wealth

Four Laws

• Laws aim to:

• Reorganize relationship between federal and regional governments in regards to managing oil wealth

• Form independent body to manage upstream operation aspects

• Restructure Ministry of Oil to have greater role in defining policies and strategic role in energy sector

• Fair distribution of oil revenue

Four Laws

• Four draft laws:

• Oil and gas law to manage upstream sector

• INOC law that details operational aspects in upstream sector

• Restructuring Ministry of Oil

• Revenue sharing law

• In general, politicians agree that developing oil is key to prospering economy

• Disagree on specifics of how to go about it

INOC Law

• Separates Ministry of Oil from being both regulatory and regulated body

• Leaves Ministry of Oil free to concentrate on policy, supervision, and monitoring

• Improves transparency

• Draft law was submitted to the parliament by the government in 2009

• There has been good, productive debate and discussion around the formation of INOC law

Federal Oil and Gas Law

• Last August, Parliamentary Committee proposed first reading of Oil and Gas Law

• However, reading blocked by United Alliance Bloc for not taking in the view of federal government

• Ministry of Oil active in submitting draft law that was approved by Council of Ministers on 27th Sept 2011

FOGL Different Philosophies

• Reading between draft and proposed laws highlights that differences arise over role of federal government, Ministry of Oil, and producing provinces

• Three options open:

• Maintain status quo

• Political consensus

• Federal court ruling

• Time has been wasted; important for consensus to be reached

Building Capacity

• Skills, technique, and management that were lacking are being renewed

• Need for Institute of Energy Studies to look at large strategic issues facing the country and sector and to help formulate policy

• Great need for training of personnel

• Considering rising demand for labor, increasing skill and education of personnel should be top priority

Infrastructure Funds

• Infrastructure in oil producing provinces are now being addressed

• IOC’s participating in next licensing rounds now obliged to allocate 10% of budget for exploration and development into infrastructure funds

• This initiative directly uses oil revenues for construction under supervision of companies involved

• This aides construction activity and potentially decreases financial corruption

Private Energy Sector

• Lack of private domestic oil and gas companies or service companies is a big challenge facing Iraq

• Wholly nationally industries cannot be as efficient as private companies

• Domestic private companies do not replace IOC’s or major state bodies; rather, they compliment them

• Both government and IOC’s must encourage and work with a budding Iraqi private sector

• Private service companies will be asked to perform infrastructure rehabilitation, engineering , design, and construction necessary to restore infrastructure to safe operating conditions.

Iraq Needs to Increase Revenue

• Iraq is rebuilding, but still much work to be done

• Combination of oil and gas reserves should ensure excellent economic foundation

• Important that Iraq’s leaders nurture growth and work to fight corruption and bureaucracy

Dealing With Corruption

• Corruption must be met head-on

• Widespread admiration for lack of corruption surrounding the bidding process

• Every dollar lost to corruption is a dollar lost for rebuilding Iraq

• Modern management and sale practices must be implemented

• Improved technical capabilities fro metering and reporting should be mandatory for all future projects

Will Arab Spring Effect Iraq?

• Iraq cannot be isolated from events that have occurred in the region

• Iraq still lacks political agreement on managing its resources

• Security situation still considered unsatisfactory

• Iraqi challenges are different from others in the region; others deal with issues of governmental legitimacy, Iraq deals with issues of reform

• Still, Iraq is able to have peaceful elections and public and personal freedom; great improvement from a decade ago

• Ethnic and sectarian disputes have to be settled

• Iraq has to agree on political reconciliation between various sections of Iraqi ethnic and sectarian factions

Conclusion

• Iraq energy sector has had very active last years

• But more to come; Iraq will be one of world’s leading suppliers of energy in 21st century

• Onus on Iraq’s leaders to ensure country lives up to its potential

• It is up to the Iraqi citizens to watch their leaders carefully to ensure that this takes place

• Opportunities for international companies are unparalleled

• Pace of investment will only accelerate

Documents

The Future of the Energy Sector in Iraq - Center for Strategic and