Iraq's central government in Baghdad wants to add 10 billion barrels of oil and 29 trillion cubic feet (Tcf) of natural gas to its reserves from the 12 blocks that will be in the fourth round of bidding in January 2012.
Iraq's central government in Baghdad wants to add 10 billion barrels of oil and 29 trillion cubic feet (Tcf) of natural gas to its reserves from the 12 blocks that will be in the fourth round of bidding in January 2012. Forty-one companies have pre-qualified to bid on the blocks.
"The country is preparing to hold its fourth bidding round, which will take place even in the absence of a hydrocarbons law," said Teymur Huseynov, global head of energy consulting, Exclusive Analysis.
The government also wants to boost production. Exclusive Analysis estimates the country could be producing 6.0 million barrels per day (b/d) by 2016-17. The government wants to be producing 12 million b/d by then. That would likely be more difficult to achieve than the government thinks.
Currently, OPEC does not have a limit on Iraq's production. That could change as the situation in the country stabilizes. "When production reaches 4.0 to 4.5 million b/d, there will be agreements negotiated with Saudi Arabia and Iran to cap production," he stated.
The Oil Ministry will remain the most influential body in the energy sector despite attempts by parliament to dilute its influence. Former oil minister Hussein al-Shahristani, who is now deputy prime minister for energy affairs as the key individual, according to a report on "Iraq's Oil and Gas Sector: Risks to Contracts in the Year Ahead" by Exclusive Analysis.
Huseynov was in Houston presenting the company's perspective on the situation in Iraq to companies interested in doing business in the Middle Eastern country.
The situation in Iraq is quite unstable, Huseynov emphasized. Not only are there sectarian disagreements but there are conflicts within each sect. Perhaps the biggest schism is between the central government in Baghdad and the regional governments.
"There is a division ideologically as well as with other key issues," he noted. "The coalition government is quite unstable. In terms of risk, Iraq doesn't have an oil and gas law. They don’t have a revenue sharing agreement between the government and the Kurds in the north. If all contracts need to be ratified by parliament, the risk of modification remains quite high. And, terms will change in favor of the government."
The Iraqi government is more likely to revise contracts than cancel them, the company explained. The government needs the investment in exploration and production to boost output significantly.
The Oil Ministry's strategy for oil and gas is likely to differ increasingly in the next five years. Plans to increase oil production are with a view to exports, while the priority for natural gas will be to satisfy the domestic demand for power generation.
However, with its large gas reserves in the south, the country is likely to go ahead with the construction of a liquefaction plant by Shell and the export of liquefied natural gas. The developers want to tap the Asian market, but have a major competitor in the region with Qatar.
The central government is not a majority government, and key ministries effectively represent the largely sectarian interests of different parties. An on-going split between Iraqi parties advocating strong central government and those seeking maximum power for the regions is likely to mean limited progress on unresolved legislative issues like the Hydrocarbons Law and Revenue Sharing Law.
The Kurds are seeking more concessions from Baghdad over the region's own oil contracts. The central government does not recognize the deals between oil companies and the Kurdistan Regional Government (KRG). The current sticking point is over which government entity should pay the production costs of the companies operating in Kurdistan. Baghdad expects the KRG to pay these expenses.
The government of Prime Minister Nouri al-Maliki has used nationalization as an issue to build strength within his party. "Nationalization has helped Maliki and his platform retain power as prime minister," Huseynov explained. "There is a rising trend in nationalization against the oil companies."
Surprisingly, "the major reason for the difference in approval of the oil and gas strategy is mostly based on money," he said. "They haven't got enough of the take."
Even though production is fairly steady in the north region, the Kurds have their own problems. "In the north, the types of contracts are basically based on production-sharing agreements. For the time being, these are in favor of foreign investors," he explained.
The major problem in the north is access to exports, he noted. Another problem is the lack of an agreement between the KRG and Baghdad on revenues. To be able to increase production, the KRG needs to provide the companies some operational cash flow to continue operations. The two companies are only being paid for the costs and are not making any profits.
There are also problems within the Kurdish government. "There could be a change of government in Kurdistan. There is a very viable opposition in Kurdistan," he added.
The overall direction of the oil and gas industry could come down to personalities. Further concessions or set-backs are likely to depend on the balance of power in Baghdad at any given time, noted the report. For example, Maliki, who currently relies on the Kurds for his premiership, has the potential to undermine either them or their enemies in Baghdad, namely Shahristani, the Sunni Arab blocs, and, to a lesser extent, the Shia Sadr movement.
The key judgement in the Exclusive Analysis report is that "the major fault line in Iraqi politics for the foreseeable future is that of central versus federal powers. This is the backdrop to disagreements over oil and gas legislation, which have held up a legal framework for oil contracts and prevented the forging of an oil and gas strategy."
Contact the author, Scott Weeden, at sweeden@hartenergy.com.
