Iraq Oil and Gas Industry: An Overview
Iraq Oil and Gas Industry: An Overview
Iraq holds abundant oil and gas resources, yet its petroleum industry declined almost to a standstill after the Iran-Iraq war, the Gulf War, international sanctions and the Iraq War. Since 2003 the country's economy has been rebuilding from a very low base.
1. Iraq's Oil and Gas at a Glance
Iraq is OPEC's second-largest crude producer after Saudi Arabia and holds the world's fifth-largest crude reserves, behind Venezuela, Saudi Arabia, Canada and Iran. Many of Iraq's best-known fields remain underdeveloped, although a large number are already producing or under development. The well-known Iraqi fields are almost all onshore. The giant fields of the south lie in flat, sparsely populated terrain close to the coast with simple geology, which keeps development costs relatively low.
After years of war and sanctions, Iraq set out to revive upstream development. Over the past five years crude output has risen by nearly 1.5 million barrels per day, from 2.6 million barrels per day in 2011 to 4.1 million barrels per day in 2015. These figures include production from the semi-autonomous Kurdistan Regional Government (KRG) area in north-eastern Iraq.
Over the past decade output growth has been slower than the government expected, held back by bottlenecks in southern infrastructure, interruptions to northern supply and delays in awarding contracts. Even so, 2015 was the peak year: output rose by 700,000 barrels per day year on year, the largest annual increase since the post-2003 recovery.
Although output reached near-record levels in 2015, the government plans to lower production targets and cut investment in the years ahead. Iraq has been trying to protect its share of the value created by international oil companies (IOCs) developing its fields. Falling crude prices, compounded by the conflict with ISIL in northern Iraq from mid-2014, deepened the fiscal deficit in 2015.
The Iraqi economy depends heavily on oil revenue. According to IMF data, crude export revenue accounted for 93% of all government revenue in 2014. In 2015, despite a large rise in export volumes, crude export revenue outside the Kurdistan region was USD 49 billion, USD 35 billion less than in 2014.
2. Oil and Other Liquid Fuels
Iraq holds 18% of the Middle East's proven crude reserves and 9% of the global total. Even though the best-known resources are far from fully developed, most of Iraq's recognized fields are already producing or under development.
2.1 Proven crude reserves
According to Oil & Gas Journal, at the end of 2015 Iraq's proven crude reserves stood at 143 billion barrels, equal to 18% of the Middle East total and 9% of the world total, the fifth largest in the world. The distribution of these resources does not match the country's religious and demographic map. Most fields lie in the Shia south and the Kurdish north, with smaller volumes in the hands of the Sunni minority in the centre and west.
Five giant fields in southern Iraq each hold more than 5 billion barrels and together account for 60% of national proven reserves. Northern Iraq, near Kirkuk, Mosul and Khanaqin, is estimated to hold 17% of the total. Control over these resources has long been a source of dispute between the Kurdistan region and the rest of the country. The International Energy Agency estimates proven reserves in the Kurdistan region at 4 billion barrels. The KRG quotes a higher figure because it includes unproven resources: its estimate of 45 billion barrels cannot be independently verified and includes reserves in disputed areas, notably Kirkuk.
2.2 Block management
The Ministry of Oil in Baghdad supervises all oil and gas development and production. In the Kurdistan region, development is jointly managed by operating companies: the North Oil Company (NOC), the Midland Oil Company (MDOC) for the northern and central regions, the South Oil Company (SOC) and the Missan Oil Company (MOC) in the south. In Kurdistan, the KRG and its Ministry of Natural Resources jointly supervise development and production. IOCs are highly active across Iraq, including in the Kurdistan region.
In federal Iraq, IOCs sign technical service contracts (TSCs) with the Ministry of Oil; in the Kurdistan region they sign production sharing agreements (PSAs) with the KRG. Over the years the KRG's promotion of PSAs has aggravated tensions with Baghdad and put IOCs in an awkward position, in many cases forcing them to scale back investment in Kurdistan.
2.3 Crude production
Iraqi crude output averaged 4.1 million barrels per day in 2015, some 700,000 barrels per day more than in 2014. Of that total, 3.6 million barrels per day came from southern Iraq under the Baghdad government and 450,000 barrels per day from the north, where fields are mainly managed by the KRG while others are operated by the state-owned North Oil Company.
The south produced 85% of national output in 2015, supported by upgrades to midstream pumping and storage infrastructure and by improved crude quality. In June 2015 Iraq opened a Basra Heavy crude stream alongside the traditional Basra Light stream. Previously, fields had to blend heavy crude to keep Basra Light within specification; with a separate heavy stream, fields can raise heavy output while improving the quality of Basra Light. Northern Iraq contributed only about 10% of 2015 output, with KRG pipeline exports rising as production increased.
EIA expects Iraqi output growth to slow in 2016, as budget constraints force the government to ask IOCs to cut spending in the south. The KRG faces similar budget pressure, which has delayed payments to IOCs and slowed the pace of production growth.
2.4 Impact of ISIL activity on Iraqi blocks
ISIL moved into Iraq in June 2014, seizing Mosul, the largest city in the north, and then several surrounding towns. The conflict affected crude production and refining in northern Iraq outside the Kurdistan region, but did not affect southern production and exports, which accounted for 95% of national exports in 2014.
The conflict did not seriously affect the Kurdistan region, although two KRG-managed fields, Khurmala Dome and Shaikan, lie close to the fighting. Some fields had to abandon exploration programmes, which will affect future development.
In the second half of 2014 ISIL attacked Baiji, Iraq's largest refinery, forcing it to shut down. The closure cut off petroleum trade from northern Iraq outside Kurdistan. The Iraqi section of the Kirkuk-Ceyhan pipeline to Turkey was severely damaged by militants and only returned to service in March 2014; with Baiji and this pipeline out of action, output from the Kirkuk and Bai Hassan fields could not be exported for months.
ISIL initially seized several smaller northern fields, including Ajeel, Hamrin, Qayara, Balad, Ain Zalah, Batma and Najma, but lost control of some after US air strikes in August 2014. Ajeel, one of the more significant fields, produced up to 28,000 barrels per day before it was bombed in August 2014 and its control room severely damaged. ISIL also siphoned oil from storage tanks, pipelines and pump stations, with losses estimated at 3 million barrels. Today ISIL produces small volumes from the Qayara field in northern Iraq.
2.5 Field development plans
Iraq is preparing further field development to raise output. After two licensing rounds in 2008 and 2009, the Ministry of Oil signed twelve long-term technical contracts with IOCs to develop or redevelop major fields, most of which are already producing. Sharp falls in oil prices and the war with ISIL, which pushed the country into an economic crisis, have repeatedly disrupted these plans.
Iraq continues to lower its production targets. Under the TSCs, the twelve fields were to be held at plateau, adding a combined 1.2 million barrels per day by 2017. Because the contracts are not fully settled under current conditions, Iraq may cut targets further: the 2015 target was reduced to 9 million barrels per day, and could fall to 6 million barrels per day if prices keep falling.
The KRG has also lowered its targets. It had planned to raise production and pipeline throughput to 1 million barrels per day by late 2015 or early 2016, but postponed that goal to the end of 2016; ISIL attacks and unpaid IOC invoices have delayed the programme further.
3. Infrastructure Constraints
3.1 Southern export capacity
In 2015 Iraq substantially expanded onshore pumping and storage in the south, and further midstream capacity is needed to accommodate production growth. In recent years Iraq has added three single point moorings (SPMs) at the Basra and Khor al-Amaya terminals to raise southern export capacity, and plans to add more.
Three SPMs off Basra are in service; a fourth was installed in early 2015 but is not yet operating, and a fifth is expected to be installed in 2016. Each SPM is designed for 900,000 barrels per day, although actual throughput is usually much lower. The additional moorings also improved shipping capacity while the Basra and Khor al-Amaya terminals operated through conflict and with limited maintenance.
3.2 Water supply programme
Higher output requires much larger volumes of injected gas or water to maintain reservoir pressure and support recovery. Iraqi fields contain associated gas that can be reinjected, but most of it is flared: according to Cedigaz, Iraq was the world's fourth-largest gas flarer in 2014 after Russia, Iran and Venezuela. Iraq is working with international organizations and the World Bank to reduce flaring, typically by using the gas for power generation.
Iraq plans to use less gas and more water to support higher crude output. The South Oil Company is implementing the Common Seawater Supply Project (CSSP), which will pipe seawater from the Persian Gulf to fields to sustain production, at an estimated cost of USD 4–6 billion. Although water demand shifts with production targets, the first phase is currently designed to supply 7.5 million barrels per day and the second phase 1.2 million barrels per day. The water will reach at least five fields in southern Basra and one in Missan. Major southern fields typically need 1.5 barrels of injected water for each barrel of oil produced.
It is still unclear when the first phase of CSSP will start; 2018 now looks unlikely, and some observers expect 2020. Launched in 2009 and originally due to begin in 2013, the project was to deliver 1.2 million barrels per day of water to the giant southern fields. Management changes, permitting delays and financing problems have repeatedly pushed back the start date. ExxonMobil was originally selected as lead contractor but was replaced in December 2012 by CH2M Hill after failing to agree with the government on investment in the Kurdistan region.
CSSP is still in progress, and the South Oil Company is seeking cooperation with ExxonMobil and CNPC to help establish a dedicated fund and provide technical guidance; the three parties are negotiating their respective roles. In the meantime, work is under way on the intake works and the Basra port infrastructure that will carry seawater to the onshore fields.
3.3 Power
Iraq's power sector is the largest single consumer of the country's oil and gas, and a large increase in crude output will require more electricity. Supply already falls short of demand and outages are widespread. Major upgrades to the power sector will require additional generation. Because electricity shortages prevent the oil and gas industry from obtaining the power it needs, project targets cannot be met.
3.4 Northern export capacity
Most of Iraq's crude pipelines are in the north, and some are not in effective use. Years of conflict and war have left much of the northern pipeline system badly damaged; repairs would take years and cost heavily. Repeated attacks by militants forced the Iraq-Turkey pipeline out of service in March 2014. Given the security situation and the extent of the damage, these lines are unlikely to return to service in the foreseeable future.
Today the only major export pipelines working in northern Iraq are those built by the KRG and its international partners: the KRG main line and the DNO/Tawke line, both connected to the Turkish pipeline to Ceyhan. Smaller lines feed crude from other fields into the KRG main line.
3.5 Oil consumption and refining
Iraq consumed about 770,000 barrels per day of oil and other liquids in 2015. Consumption grew by an average of 7% a year from 2004 to 2013, but fell again in 2014 and 2015, mainly because ISIL attacks shut the country's largest refinery and caused fuel shortages in the north. Most of the oil Iraq consumes comes from domestic refineries, although the country still imports about 100,000 barrels per day of refined products. Besides gas and wind, Iraq burns crude for power generation, consuming an average of 168,000 barrels per day for electricity in 2015.
Iraqi refinery capacity is about 1 million barrels per day, although estimates vary because most plants run below design capacity. Before ISIL attacked the Baiji refinery in June 2014, effective capacity including Kurdistan was about 800,000 barrels per day; with Baiji shut, effective capacity is now about 600,000 barrels per day.
Iraqi refineries are processing more heavy crude to meet domestic product demand such as gasoline. Iraq also plans four new refineries and capacity expansions at existing plants, aimed at easing product shortages and eventually exporting refined products. These projects would add to current capacity and are likely to be completed after 2018. In the Kurdistan region, a private developer plans a 60,000 barrel per day refinery in Ninewa province.
4. The KRG-Baghdad Dispute
Sovereignty over the semi-autonomous Kurdistan region of northern Iraq has long been contested. Plans by the state-owned North Oil Company to develop the Kirkuk field across the KRG boundary have been opposed by the KRG, which insists that development requires its permission and cooperation.
More broadly, the Ministry of Oil holds that all oil and gas contracts must be signed with the federal government, and that all oil produced in the KRG area must be marketed and transported with the approval of the State Oil Marketing Organization (SOMO) and Iraq's oil export authority. The KRG nevertheless passed its own oil and gas law in 2007, disregarding the national oil investment regulations. In late 2011 the KRG signed a production sharing agreement with ExxonMobil for blocks in northern Iraq, some of them in disputed areas, challenging federal authority once again.
The KRG has since signed further agreements with producers including Chevron, Gazprom and Total. ExxonMobil withdrew from some Iraqi projects, notably CSSP, after the government required it to choose between developing West Qurna 1 and its KRG projects. Because Turkey's TPAO took part in KRG energy projects, Baghdad required it to withdraw from Block 9, which it had won in the fourth licensing round.
Earlier agreements to export Kurdish crude through Iraq's state infrastructure collapsed over payment disputes, security problems and delays in building the necessary transport capacity. Direct exports from the KRG created new difficulties: the KRG trucked crude and condensate to Turkey and Iran, and in May 2014 it began sending crude to Ceyhan through its own independent pipeline.
5. Northern Production
Northern production is a contentious subject because Baghdad and the KRG dispute control over Kirkuk's resources, and tension and disruption have escalated since ISIL's 2014 offensive. Before 2014, most crude from northern Iraq came from Kirkuk (Avana and Baba domes), Bai Hassan and nearby smaller fields. After the Iraq-Turkey pipeline and the Baiji refinery were shut in March and June 2014 respectively, northern production lost its conventional export route.
The KRG therefore took over operation of part of the Kirkuk field, the Avana dome, and of Bai Hassan in July 2014, and began exporting crude once its independent pipeline to Ceyhan was in place. During this period the NOC continued to operate some smaller northern fields, even though exports and marketing were controlled by the KRG.
In December 2014 Baghdad and the KRG reached an agreement under which the KRG began delivering crude at Ceyhan to SOMO. The deal had three elements: the KRG would transfer 250,000 barrels per day of its own crude to SOMO at Ceyhan for export; Baghdad would send 300,000 barrels per day of Kirkuk crude through the KRG pipeline to Ceyhan; and Baghdad would resume budget payments to the KRG equal to 17% of the national budget, plus USD 1 billion for the Peshmerga forces. The aim was to restore SOMO's control over marketing of northern exports.
That agreement has since broken down. KRG deliveries to SOMO fell sharply in June 2015, with the last delivery in August 2015. Having failed to receive the full 17% budget transfer, the KRG began selling all northern crude itself. In March 2016, with Baghdad's acquiescence, the NOC sought to use its own deliveries as leverage in negotiations over the KRG's share of oil revenue. NOC-operated fields produce about 150,000–200,000 barrels per day, but because of local power shortages much of that crude is reinjected to sustain gas production.
6. Crude Exports
In 2015 India was Iraq's largest crude customer, ahead of China. Some 85% of exports left through the Persian Gulf from southern Iraq, mainly Basra Light and Basra Heavy.
According to the Ministry of Oil and APEX data, Iraqi crude exports averaged about 3.3 million barrels per day in 2015, some 700,000 barrels per day more than in 2014. Three factors drove the increase: upgrades to southern pipelines and storage; the introduction in mid-2015 of separate Basra Heavy and Basra Light streams sold as distinct grades; and higher throughput on the northern Kurdish pipeline.
Asian countries including India, China and Egypt are the main destinations, taking more than half of Iraqi exports in 2015. India imported slightly more Iraqi crude than China that year, becoming the largest single customer. Outside Asia, the United States remains a major importer despite a steady decline over the past decade: the shale revolution has sharply reduced US crude imports, and volumes from Iraq fell to about 229,000 barrels per day in 2015, 70% below the 2001 peak.
These export figures cover seaborne crude only; they exclude crude moved by truck and by pipeline from Ceyhan to the Kirikkale refinery near Ankara. That line has a capacity of 135,000 barrels per day, but actual throughput is usually lower.
7. Natural Gas in Iraq
7.1 Reserves
According to Oil & Gas Journal, Iraq's proven gas reserves were about 112 Tcf at the end of 2015, the twelfth largest in the world. Three quarters of the total is concentrated in the super-giant fields of the south.
7.2 Production and consumption
OPEC's annual statistical bulletin puts Iraqi gas production at about 771 billion cubic feet in 2014, of which roughly 454 billion cubic feet was flared. Cedigaz ranked Iraq fourth in global flaring that year after Russia, Iran and Venezuela: without pipelines and plants to move, store and sell the gas, it can only be burned. What is not flared is reinjected to support oil recovery. Iraq used 32 billion cubic feet of gas for power generation in 2012.
To reduce flaring, the South Gas Company formed the Basra Gas Company joint venture with Shell (44%) and Mitsubishi (5%) to capture associated gas from three southern giants: Rumaila, West Qurna 1 and Zubair. Over 25 years Basra Gas Company will invest about USD 17 billion in infrastructure upgrades and new facilities, lifting pipeline capacity by 2 billion cubic feet per day by 2018.
Iraq and Shell have recently made progress on associated gas processing, with Shell (45%), Petronas (30%) and Missan Oil Company (25%) at the Majnoon super-giant field in Basra. Since February 2016 associated gas from Majnoon has been sent to processing facilities in Basra to supply 300 MW of power generation.
In the longer term Basra Gas Company may export LPG, and supporting facilities are being planned. Under the agreements, part of the gas is prioritised for the South Gas Company for power generation, and surplus gas bought by Iraqi power plants would be exported from LNG terminals. The final scope depends on oil development plans, because most of the gas will still be reinjected to support recovery and raise output.
In late 2010 Iraq held a third licensing round for three non-associated gas fields — Akkas, al-Mansuriyah and Siba — with combined reserves of more than 11 Tcf. Akkas, in the troubled western desert, was attacked and has since stopped producing. In June 2014 ISIL attacked the Akkas and al-Mansuriyah fields in northern Iraq and forced them to shut down.
7.3 Export and pipeline plans
Because gas is the main fuel for Iraq's power sector, whether to export it remains contested. Gas shortages have kept the electricity system in poor condition.
Before the 1990–1991 Gulf War, Iraq exported gas to Kuwait: gas from the Rumaila field travelled 105 miles by pipeline to a processing centre at Ahmadi at 400 million cubic feet per day. The Ministry of Oil intends to reuse the standby line, but no implementation plan has been announced. Iraq has also considered a pipeline across neighbouring European countries for gas exports, again without a concrete plan.
