Tuesday, March 2, 2010

Iraqi Oil: Thamir al-Ghadhban Interview

Ruba Husari at Iraq Oil Forum emails to point out that she has a new interview up with Thamir al-Ghadhban, former Iraqi Minister of Oil and Chairman of the Advisory Commission at the Prime Minister’s office. Indeed, it's a completely fascinating read for those following the Al-Shahristani plan, and its likely impact on peak oil timing.  The most significant news to me was that the signature bonuses from the new contracts went to fund a 20% budget deficit and not to help pay for the major new infrastructure the government needs to develop in order to export all the oil the IOCs have committed to produce.  I guess Iraqi budget deficits in the next few years are a risk factor to this plan that I need to understand better.

Definitely read the whole thing, but here are some of the best bits (according to me):

Q: Looking at the number of signed contracts so far, the terms which extend to 20 years at least, the potential of the fields in question and their known reserves, what is a realistic pace for the build-up of Iraq’s oil capacity over the next 10 and 20 years?

A: According to the contracts signed in the first and second bid rounds, international oil companies have a contractual obligation to reach a certain production target, and as we have seen they all aimed for high targets in their bids. To start with, in the first bid round, the southern fields of Rumaila – by the way I don’t consider Rumaila as a single field; there are two well-established fields, North Rumaila and South Rumaila – should be raised from the current capacity of 1.066mn b/d to a plateau of 2.85mn b/d. Similarly, Zubair’s capacity should be increased to 1.25mn b/d and West Qurna-1’s capacity should go up to 2.325 million b/d. If those targets are met and if you add to them the fields’ plateaus bid in the second bid round, normally you would end up with more than 11mn b/d by just summing it up, within six or seven years, or probably seven to eight years if you take into consideration the different effective dates of each contract. We have to also add current production from fields that will continue to be operated by NOC like Kirkuk, Jambur, and Bai Hasan and by SOC like Rattawi, Luhais, Tuba, Nasiriya, Bin Umar as well as the Misan fields and Nour, operated by MOC. So there’s a potential for a very high production capacity and the minister always maintained that the targeted rate is 12mn b/d. However, when you take other factors that normally influence the build-up of production capacity such as logistics, or what I call socio-political factors, as well as the abilities of the country to cater for this huge project, I don’t believe that the future total production capacity, and more importantly the actual sustainable production rates, will be equivalent to the sum of those figures. I think, realistically, the production capacity within the next six to eight years will be less than that. That’s essentially because one cannot ignore the facts that I’ve just mentioned as well as market forces. I don’t like to come with a specific figure in 10 or 20 years simply because it won’t be accurate in view of the various variables and unknowns. However, I could say that Iraq’s oil production capacity would be high, most probably around or more than 8mn b/d after some seven years from now and once it’s achieved, the country would endeavor to maintain it for many years. It’s also expected that domestic consumption could exceed 1mn b/d in seven years. Then we would be assessing supply and demand and the future call on OPEC oil and Iraq’s oil to decide whether to raise capacity further. Iraq is a member of OPEC and some say that the Gulf countries which have benefited from Iraq’s exit from the market in the last three decades will not allow Iraq to increase its production to these levels. I don’t think this should be the main factor in our decision, but I do think that Iraq should think twice before dumping excess capacity in the market or even maintaining large surplus capacity because that would exert a downward effect on the price of the barrel. It will be counterproductive and it will hurt Iraq. We will be investing so much to develop the extra capacity but we might end up with idle capacity sitting there because the price of oil would be affected. Furthermore, the contracts we signed are designed in such a way that repayment of the capital spent by the IOCs starts after a few years of the effective date, which coincides with the build up period of capacity, and repayment is very much volume driven, i.e. the IOCs are encouraged to produce more in order to get repaid in the shortest time. I must stress here that I do not agree with those who say Iraq should not raise its production capacity to high levels because other countries do not agree or will not allow it. I think Iraq should be free to increase its capacity because we need revenues and no one should dictate to us. Looking back, we’ve lost a lot of opportunities over the past decades, the country is in dire need for revenues, the people of Iraq deserve to benefit from those revenues and we need to build other sectors by utilizing excess oil revenues. We should use our oil – the huge reserves we have and the many remaining undeveloped fields – as a strategic tool to adjust the balance in the region by creating international interest in Iraq and encouraging regional integration through creating economic interests with neighboring countries. When we build our oil production capacity, there will be lots of opportunities for our neighbors as well to benefit. Increasing our export capacity through the north, for example, would result in more revenues for Turkey. Opening new export routes – and this is on the table now – through Syria or to Jordan by building new pipelines will benefit our neighbors. One can also look at the potential for exporting gas once there is excess associated gas from the fields to be developed and from developing gas fields in the future. We will become a gas exporter one day and countries like Turkey or Syria would benefit hugely if we link up to the Arab Gas Pipeline Project and we might export liquefied natural gas as well through the Gulf. So it is in the interest of the country to develop our crude oil and gas output capacity and generate revenues, and at the same time there is added value by enhancing the economic ties with our neighbors.
Q: The fact that IOCs were required to guarantee plateaus for just 6-7 years in the first bid round and 7-13 years in the second bid round means that Iraq does not take a long term perspective on these fields. Do you agree?

A: The six and seven years are required for the already producing fields and this is based on the fact that those fields have already been in production for a long period of time and that it won’t be possible to maintain a plateau for long with such high rates. The IOCs came up with even higher rates than those of the oil ministry. So there is of course a question mark: would the higher plateau be really maintained for seven years? If I go back to my argument that those plateaus were inflated, and that the overall factors that will affect them may not let such plateaus be attained, it is possible that we end up with rates that are lower than what has been bid for. So there is a possibility that they could maintain lower rates for the periods stated or even longer, depending on actual production in the future. But this largely depends on each field and what happens in the future. The 7-13 years applied to the non-producing fields is a matter of reserves and is based on actual studies done in the 1990s by IOCs and by the ministry of oil. In the 1990s we opted for 14 years for all fields when we were in negotiations with IOCs. At the time we asked for a plateau for at least 14 years but we did not define that plateau. Almost all the companies who were in negotiations at the time came back and said they can do it. But of course the rates that were proposed at the time were much lower. For Majnoun, for example, for which Total was negotiating a PSA, the plateau suggested was 600,000 b/d for 14 years.

Q: Where does Iraq stand on peak oil theory and do you see it changing the world production map drastically?

A: It’s too early to talk about peak oil in Iraq, because as you have seen, a field like South Rumaila, which started production in 1954 and its production capacity was increased to the then optimum capacity during the second half of the 1970s, is now going to witness a new peak. The reason for that is very simple. Those giant fields were not really developed to reach their maximum production rates. They are also fields with multiple reservoirs and at the time when certain reservoirs are being developed to reach the maximum production rates, there are other reservoirs that are partially developed or undeveloped. So when we talk about the fields we talk about the total potential and therefore all of them – except Kirkuk – could have a new peak and a new plateau. I don’t want to get into the debate going on internationally on whether we will reach a peak in 10 or 15 years and the possibility of a double peak and so on. But if world oil is going to peak, then it’s good for Iraq because it means more markets for us and more call on Iraqi oil. This would weaken the argument of those who say we should not develop our fields to a higher capacity.
Q: The expansions require financial resources and Iraq won’t have additional resources until the extra crude reaches the market. How do you deal with this lag between having the extra revenues and the need to spend huge amounts to cater for the extra capacity?

A: As far as the upstream is concerned, the need for investment has been solved through the contracts since the IOCs who signed up to develop the 10 fields are to supply the investment including the 25% carried share of the national entity. There are other requirements – one is the gas component, and the other is the surface facilities part of which can be covered through the supplementary costs. The offshore export capacity expansion is an expensive bit and is being financed by the government. There is an allocation of cash to pay for the new SPMs (Single Point Moorings) and for the pipelines from the fields down to the new floating terminal and the existing ones. For any additional requirements directly linked to the upstream, be it production or export or extra financing outside of the budget of the central government, there is a possibility for the Ministry of Oil to call on various IOCs to supply or finance big projects collectively and share the cost on a pro rata basis. A good example is the water injection system. The IOCs know well that future requirements in water injection are big and it has been now almost agreed that we have to make use of sea water. The best way is to have a sort of grand project which requires a lot of engineering and planning as well as financing and construction. I could see a sort of grand project to purify the water, treat it, and pump it to the fields, and I could see a corridor of pipelines and spur lines that go to the various fields to supply the water. Therefore it is now the duty of the ministry to start planning for this grand project and of course secure the financing for it because it’s a costly one. There is an investment budget for the Ministry of Oil provided by the federal budget, which this year is about $2.2bn. So the government will not stop financing projects and there is awareness at government level of the importance of financing oil projects. Bear in mind that since we’re not going to finance the upstream development now that IOCs will be doing that, the call on cash for investment will be less and whatever is made available will go towards financing the infrastructure.

Q: Wouldn’t it have made more sense were the signature bonuses recycled back into the sector by the oil ministry through expansion projects instead of ending with the treasury and as part of state revenue?

A: You have a point, I agree. But on the other hand the forecasted budget deficit this year is rather big and is some 20%. The government needed cash and that’s why the signature bonuses were partly used to finance that deficit. On the other hand, we have to comply with the law of financial management which dictates that all revenues should be handled by the federal government and redistributed in accordance with the law of annual federal budget legislated by the council of representatives.

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