Tuesday, April 20, 2010

Iraq Runs Into First Problems In Meeting Ambitious Oil Production Goals

After Iraq opened its oil and natural gas fields to international companies in two bidding rounds in 2009 its Oil Minister said that it would increase production by 10 million barrels a day for an average of 12 million barrels a day within 6 years. That would make it the largest oil producer in the world. There have been a variety of questions about whether that amount is possible, but Iraq has already run into two early problems achieving its production goals.

The first was of Iraq’s own making when Oil Minister Hussein al-Shahristani said that Iraq might follow OPEC quotas. Iraq has been exempt from the international organization’s limits since the Gulf War in the 1990s. In the middle of March 2010 OPEC held a meeting in Vienna, Austria where Shahristani said that Iraq might follow OPEC quotas when it reached 4 million barrels a day. The Oil Ministry didn’t even debate or argue over the issue, and seemingly agreed to follow the group’s strategy without a fight. An energy adviser to Prime Minister Nouri al-Maliki said that Iraq could achieve 4 million barrels within 2 ½ to 3 years. That would obviously stop the country from achieving its much larger 12 million barrels a day mark, but would also mean that oil companies that signed deals with Iraq in 2009 would not meet the requirements of their contracts. While government set limits aren’t grounds for penalties, it could limit the corporations’ abilities to cover their costs, and make a profit. Following OPEC quotas may never happen however as there’s no guarantee that Shahristani will remain Oil Minister after a new government is eventually formed, so his comments may be nothing but words.

A much more pressing barrier to Iraq reaching its production goals is the state of its oil fields. In April 2010, Shell and Malaysia’s Petronas went to the Majnoon oil field in Basra that they successfully bid on in December 2009. They were surprised at how neglected it was. The field currently produces 45,000 barrels a day, and the Shell-Petronas contract calls for them to boost that to 1.8 million barrels a day, but after looking at it, an expert said they would only be able to pump around 175,000 barrels a day because of its sad state. Iraq’s oil industry has been deprived of investment and innovation for twenty years now due to wars and sanctions. Pipelines are old and aging, maintenance is bad, and the country is producing about just as much oil as it can currently handle at an average of 2.45 million barrels a day over the last ten months. All of the ten fields that Iraq signed contracts for last year were un- or underdeveloped like Majnoon, and are probably in the same situation operationally. That would be the largest damper to Iraq reaching its production goals within the six-year timeframe.

Iraq set ambitious goals for itself in 2009. Ten new petroleum deals were signed, and the country opened up to international companies. Its announcement of boosting oil production by 10 million barrels a day was more political than anything, as the government wanted to return to its once leading position in the world oil market. Technical problems like the state of Majnoon and other fields, are likely to delay reaching that mark, and require larger investments than were originally planned. The Iraqi government may also agree to OPEC quotas that would obviously limit its production. As a result, Iraq may never reach its potential because of all the problems it will run into.

SOURCES

AK News, “Economist: neglected oil fields surprise investment companies,” 4/3/10

BBC, “Iraq oil capacity ‘to reach 12m barrels per day,’” 12/12/09

Reuters, “Iraq Muddies Oil Plans with OPEC Quota Talk,” 3/29/10

3 comments:

|3run0 said...

Petronas is from Malaysia, isn't it?

Joel Wing said...

It is! I caught that proof reading the article today at work as well but didn't have time to fix it until now. Thanks for catching it.

Anonymous said...

The whole history of oil has been of overcapacity, and attempts to control prices with quotas,& regulation.The long era of overcapacity may soon be over,and "quotas" made history.
mit

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