Tuesday, April 8, 2014

Russia’s Lukoil Finally Begins Production At Iraq’s West Qurna 2 Oil Field

At the end of March 2014 it was announced that Russia’s Lukoil began producing oil at its West Qurna 2 field. The company originally won a contract for the field in 2009, but ran into a series of delays, which set back its work for two years. Those problems included having to demine the area it was operating in, disputes with local tribes, late contracts, and its partner Norway’s Statoil pulling out of the deal. Lukoil eventually overcame those situations, but its difficulties may not be over as Iraq’s oil export infrastructure may provide more hold-ups.
(Le Blog Finance)

Last month West Qurna 2 finally began pumping oil. By the end of March 2014 it was up to 120,000 barrels a day. Oil Minister Abdul Karim Luaibi told the press that he was hoping that it would reach 400,000 barrels by the end of the year. The field is run by Russia’s Lukoil, and has a final target of 1.2 million barrels a day. West Qurna 2 is a crucial part in Baghdad’s plan to reach 4 million barrels in total production in 2014. Iraq pumped 3.5 million barrels in February. One barrier standing in the way of achieving that goal is the fact that Iraq is behind in renovating and expanding its export infrastructure. The result is that any time there is a reduction in exports the Oil Ministry often has to cut back production because there is not enough capacity to store the excess. That is one reason why Iraq has never met its goals with regards to its petroleum industry, because it simply doesn’t have the equipment to pump as much as it wants. It also means the Ministry may not be able to handle West Qurna's output when it really gets up and running.

West Qurna 2 has already faced its own share of problems. Lukoil won the contract for the field in December 2009. It was originally partnered with Norway’s Statoil Hydro that held 15% of the contract. The two agreed to a final production level of 1.8 million barrels a day and remuneration fee of $1.15 per barrel. Drilling at the field was supposed to start in 2011 and production in 2012. Those goals were continuously pushed back. In April 2011 Lukoil announced that it had fallen behind schedule. By January 2012 Lukoil said that production would not start until January 2013. Then when that year rolled around the company revised its timeline again to the end of the year, then to the start of 2014, before aiming for the spring. These constant changes did not make Baghdad happy, and by December 2013, the Oil Ministry went to the company to demand that it speed up its work and get the field on line sooner rather than later. At the same time, Lukoil was able to renegotiate its contract to reduce its ultimate production goal down from 1.8 million barrels to 1.2 million in December 2012.

The cause of the delays was not all under Lukoil’s control. First, the area around the field had to be extensively de-mined. Most of this ordinance dated back to the Iran-Iraq War of the 1980s. Removing the mines started in 2010, and was still an issue by the end of the following year causing the first of many hold-ups for Lukoil and Statoil. Second, local tribes complained, protested, and attacked the oil companies demanding compensation for their land that was being taken for the development of the field and jobs for their followers. In May 2011 Reuters reported that the Imara tribe had stopped work at West Qurna 2, but it didn’t say how. Then in March 2013 there was a demonstration, which got out of control with tribesmen breaking into the field and smashing offices. Third, service contracts to start drilling wells and other work at West Qurna 2 were signed very late. In December 2011 Baker Hughes International signed one deal, followed by Samsung in March 2012. Drilling didn’t start until April 2012 as a result, a full year behind schedule. Finally, Statoil pulled out of the deal. In February 2012 it said that it thought Iraq was too risky and that it wanted to invest in other markets instead. The sale of its share was approved in March. Companies like Lukoil and Statoil were originally attracted to Iraq because of its huge untapped potential. It had large oil fields that had not been developed for decades because of wars and sanctions. Businesses also knew there were risks because Baghdad was unfamiliar with dealing with large international corporations and its bureaucracy was infamous for being slow. Those problems could account for the long time it took for the service contracts with Baker Hughes and Samsung to be approved. The issue with mines should have been known before hand as well, but the difficulties with local tribes and its business partner Statoil pulling out could not be foreseen.

West Qurna 2 can be seen as a case study for why Iraq’s lofty goals for its energy sector have always been behind schedule. Oil firms rushed into Iraq because of its untapped potential, and agreed to production goals that have proven to be unrealistic. There is still the issue of whether the Oil Ministry will be able to install all of the infrastructure necessary to export Lukoil’s production. That doesn’t mean Lukoil wont have West Qurna 2 eventually pumping large amounts of oil, but it is already two years behind its original timeline, and it hasn’t overcome all of its difficulties. These are the pros and cons of having to work in a developing country like Iraq.


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