Tuesday, November 27, 2012

Problems With Iraq’s Southern Oil Fields’ Common Seawater Supply Project


Iraq wants to become the largest oil producer in the world surpassing the current leader Saudi Arabia. In 2009, it opened up its oil and gas market to major oil corporations, and has seen steady growth in its petroleum production and exports since then. Slowly it is also building up the necessary infrastructure to support these plans. There are still some major barriers however, that could derail all of these hopes. One is the Common Seawater Supply Facility. It’s supposed to pump water into the southern fields to produce the necessary pressure to extract oil. The project is years behind schedule, and may be a major impediment to Baghdad’s ambitions.

The lack of water in Iraq could be a major cause of Iraq failing to achieve its oil production goals. The International Energy Agency (IEA) predicted that Iraq’s petroleum output would grow from its current 3 million barrels a day to 6 million by 2020, and 8 million by 2035. The Oil Ministry is hoping for even more at 6 million barrels by 2015 and 10 million by 2020. Without water being injected into its fields in southern Iraq, which has responsibility for most of this growth, there will not be enough pressure to maintain or even increase production. The south needs an estimated 8 million barrels of water per day today to reach its short-term goals. The IEA believes that amount will increase to 12 million barrels by 2035. For every one barrel of oil extracted in Iraq, it needs 1.5 barrels of water. Baghdad therefore needs huge investments in its water pipelines and pumping stations. Adding to this issue is the fact that Iraq lacks fresh water. The country relies upon its two major rivers the Euphrates and Tigris, but Syria, Iran, and Turkey, all of which are building dams up river, are cutting Iraq’s supply. The Common Seawater Supply Facility is supposed to be the solution to this problem. It’s supposed to pump 12-15 million barrels a day of seawater from the Persian Gulf into the southern oil fields when it is fully operating. The project has run into many difficulties however.

The Common Seawater Facility is behind schedule, and has been caught up in Iraq’s domestic politics. Originally, it was supposed to start operation in 2013, but now 2017 might be the earliest it will begin pumping water. First, Baghdad is behind in its contracting. The project was ready for bidding two years ago, but nothing happened. It wasn’t until May 2012 that the Oil Ministry asked 10 companies to submit proposals for the facility. It then took until October for a $170 million consultancy contract to be signed with CH2M Hill for the deal. Second, the government has not filed its initial design contract for the project. Third, the work got caught up in the dispute between Baghdad and the Kurds. Exxon was supposed to be in the lead on the project, but when it signed an oil and gas deal with the Kurdistan Regional Government (KRG) in October 2011, it became the focus of the central government’s ire. Baghdad kicked Exxon out of the water project in February 2012 claiming that it was failing to coordinate with the Oil Ministry, and its economics were poor, but the real reason was that it was one of the few ways the government could retaliate against the corporation. The central authorities want to control the country’s energy policy, and therefore objects to the Kurds signing their own independent deals like that with Exxon. As soon as the company signed with the KRG it began receiving threats from Baghdad, which resulted in it losing its place in the seawater project. Even before that, the Oil Ministry was arguing with Exxon and the other oil majors that were involved in the deal, British Petroleum, Eni, and Lukoil. It was claiming that their cost estimates were too high, and that they were holding up work. Iraq’s bureaucracy is notorious for acting slowly, because it lacks the capacity and experience to deal with such major contracts. That explains all the delays in the work, and partially why it is so far behind schedule. On the other hand, Maliki’s anger at Exxon deciding to work in northern Iraq added a political element to the project as well. It seemed like the Oil Ministry was having trouble with the oil corporations even before that, pushing for the lowest possible prices for the work, which might not always be the best strategy to take on something so important. The result is that the seawater facility is years behind where it needs to be, which will have a direct affect upon Iraq’s ability to increase its oil production in the south.

Iraq’s energy goals are widely questioned by analysts as being overly ambitious. The government itself has recently had to revise what it hoped to achieve. Its numbers are still audacious, and would be one of the largest sustained spurts of growth in world history. The lack of infrastructure will be a major impediment upon these plans. The Common Seawater Supply Facility is a key piece in the puzzle in boosting output in the southern fields. It is moving along, but at a slow and often times delayed pace. Red tape holding things up could have been predicted. The fact that Iraq would take out its anger on Exxon by taking away its lead role in the project was not. Either way, the project is years behind schedule. Iraq lacks the freshwater to pump into the fields, and could use the natural gas that it flares in the south, but it has not liked that process, and would require an entirely new project being planned and contracted to go that direction. It therefore needs to trudge ahead with its seawater concept, and hope that it can be finished by 2017 otherwise petroleum production could hit a massive roadblock, which would be very difficult to overcome.

SOURCES

Adal, Mirza, “ExxonMobil exits seawater supply project: further delays expected at common supply facility, which could affect Iraq’s oil production,” Middle East Economic Digest, 4/13/12

Ajrash, Kadhim and Razzouk, Nayla, “Iraq Awards CH2M Water-Injection Oil Project, Replacing Exxon,” Bloomberg, 10/10/12

Berdikeeva, Saltanat, “No Water, No Gain for Iraq’s Oil Development,” The Great Energy Challenge, 11/13/12

Al Fathi, Saadallah, “Iraq oil: Less ambition and more realism,” Gulf News, 10/7/12

Hafidh, Hassan, “Iraq, Oil Majors Agree To Build Oil Field Water Injection Plant,” Dow Jones, 10/19/11

Jacobs, Caroline and Boselli, Muriel, “UPDATE 3-Total latest oil group to shift Iraq focus to Kurdistan,” Reuters, 2/10/12

Lando, Ben, “Despite nationwide investment, Exxon has Iraq output doubts,” Iraq Oil Report, 1/3/12

Lee, John, “Will CH2M Hill Replace Exxon in Water-Injection Project?” Iraq Business News, 10/13/12

Reuters, “Iraq Invites Firms to Manage Water Injection,” Iraq Business News, 5/15/12
- “Iraq sets new condition for Exxon on Kurdistan,” 2/10/12

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 4/30/12
- “Quarterly report to the United States Congress,” 10/30/12

Van Heuvelen, Ben, “Crude Awakening,” Foreign Policy, 1/31/12

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