Companies Start Recovering Costs From Iraq’s Majnoon Oil Field With Exports In April 2014

 

The Majnoon field, which stretches across Iraq’s Basra and Maysan provinces, had its first exports to Shell's trading company in April 2014. Majnoon is one of the giant fields in the south, which the Oil Ministry is hoping will eventually be the basis for a huge increase in petroleum production. Royal Dutch Shell is developing the field with Malaysia’s Petronas and the Iraqi government holding minority stakes. Like its brethren Majnoon has run into a series of problems that have delayed it reaching its marks, all signs that Iraq will likely not meet its lofty goals.

(Energy-Pedia News)

In April 2014 the first shipment of Majnoon oil was exported to Shell trading. The field was producing 210,000 barrels a day, up from 175,000, and begins the process of the foreign companies that operate the field to begin recovering their costs. Royal Dutch Shell and Petronas won the contract for the field in December 2009, and agreed to raise production from what it was producing then 46,000 barrels to 1.8 million in 2017. (1) Shell and Petronas have since entered negotiations with Baghdad to reduce that mark to 1 million and extend its contract to 2029. The initial plans were to drill 15 wells, build two new crude processing plants with a capacity of 50,000 barrels each, and upgrade the infrastructure. In late 2010 the companies started demining the field of old munitions leftover from the Iran-Iraq War. They went on to sign a deal with England’s Petrofac Ltd. to design and supply the processing plants, another with Halliburton to build an operations camp and drill wells, and one with the Iraq Drilling Company to renovate the existing 27 wells. In January 2011 it got the okay to build its own dock at Shatt al-Arab in Basra to handle the delivery of equipment for the field. That was opened in February 2012. That year it started building a pipeline to expand the export capacity, and finished two rigs and a third was under construction. Majnoon is one of the major fields in the south that the Oil Ministry is hoping will propel Iraq into being the largest petroleum producer in the world. Like the other fields in the region however it has run into a series of problems that have held up its development.

175,000 barrels a day was the initial production mark that Shell and Petronas needed to reach. That was supposed to be achieved by 2012. In April 2010 a senior economic expert questioned whether that was attainable because of the technical issues that would be encountered. Shell and Petronas themselves were shocked at the state of the field when they got there. Despite that there was some initial success. In October 2010 Shell announced that it had raised production to 70,000 barrels a day. The 175,000 goal however, turned out to be much harder. In January 2011 the date to meet that goal was set at the end of 2012. 13 months later Majnoon was only pumping 76,000 barrels. Output later dropped to 65,000 in the spring of 2012, then 54,000, and 18,600 later that year. That was one reason why Shell asked for a waiver from the Oil Ministry to push back when it would hit 175,000. In September 2012 the company said it would get there by March or April 2013, then the third quarter of that year, then the end of 2013. That led the Oil Ministry to complain about Shell’s work in August, claiming that its lack of production had cost the country $4.6 billion in lost export revenue. This is very similar to other fields in the south, such as West Qurna 2. The foreign companies that entered Iraq had high hopes for the untapped potential of Iraq’s oil wealth that had been undeveloped for decades due to wars and sanctions. They ran into a never ending series of foreseeable and unforeseeable roadblocks that slowed down their work tremendously.

Work at Majnoon has run into a series of delays (Enka)

Shell and Petronas encountered six main problems that delayed production at Majnoon. The first was red tape. Iraq’s bureaucracy is notorious for being slow and laborious. Shell complained that visa and customs offices were holding up the entry of their workers and equipment for months. Second, southern Iraq along the Iranian border is littered with mines and old munitions from the Iran-Iraq War. Those had to be removed, which took far longer than the companies expected. Third, disagreements between Shell and Petronas and the Oil Ministry held up the construction of the new pipeline that would carry the field’s increased production. In May 2011 the foreign companies wanted to sign with a Dubai firm to do the work, but Baghdad said it was too expensive. Instead it gave the deal to a state-run company that ended up contracting out to the China Petroleum Pipeline Company. Fourth, local Iraqis in Basra and Maysan demanded that they share in the oil wealth in the form of jobs. The Iraqi government created a committee to deal with these demands, but that didn’t stop protests from happening in early 2012. Shell was surprised by these demonstrations and fretted that there might be violence if concessions were not made. Most importantly, in June 2012 production at the field was shut down for repair and renovation work that was supposed to be completed by May 2013, but was dragged out to September. Afterward the field started exporting. Other companies doing business in Iraq’s oil industry have encountered these same issues. They have presented one delay after another, and held up production at other fields as well.

Iraq’s potential was a huge draw for international energy companies, but the realities have proven far more difficult than they expected. The production goals set in the 2009 auction were always far higher than could realistically be achieved especially in the short-time frame in the contracts. The companies and Baghdad have been working together to re-work these deals. Still, it took two years for Shell and Petronas to reach their initial production mark so that they could start exporting. Similar delays were experienced in other southern fields holding up the Oil Ministry’s grand plans. Iraq is already the second largest producer in OPEC, and there’s little doubt that its output will increase. It will just take a lot longer than expected, and the final amount will likely be lower than what Baghdad originally predicted.

FOOTNOTE

1. Hoyos, Carola, “Shell and Petronas with Iraq oilfield contract,” Financial Times, 12/11/09

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