14 July 2000
Preparing for the day when UN sanctions are finally lifted, Iraq went touting its oil wares to an international audience in Paris last week. The audience – which included supergiants Exxon Mobil, Royal Dutch/Shell, BP Amoco, and Total Fina Elf, as well as a host of slightly smaller fry – also got to hear about some ambitious post-sanctions marketing plans, including moves to recapture more of the Asian market, and add more export outlets and more grades of crude oil to the export list.
If sanctions were lifted today, Iraqi officials say it would take five to eight years to boost oil export capacity to 5 million-5.4 million barrels per day. Even without a lifting, it aims to boost output to 3.4 million b/d by year-end. Developing major oil fields that have been discovered but not developed because of sanctions would raise production capacity to 6 million b/d. Latest UN statistics put Iraqi oil exports in the week ended Jul. 7 at an average of 1.61 million b/d. But just five weeks earlier, it managed to export 2.8 million b/d, with exports averaging 2.5 million b/d every four weeks, with the fluctuations largely attributed to logistical and technical factors.
Market realities permitting, state-owned Somo wants to add two new types of crude to its current Basrah Light – which is becoming heavier, traders say – and Kirkuk. There would be one heavy grade with an API of 24-25 degrees, and an extra-light grade of 38-39 degrees, according to Ali Hasan, a senior Somo official. In 1980, just before the Iran-Iraq war broke out, Iraq’s 2.49 million b/d of exports were made up of five grades – Kirkuk, Kirkuk blend, Basrah Light, Basrah Medium, and Basrah Heavy. Of the country’s proven reserves, 48% have an API of 26 degrees or less, and 43% of 27-37 degrees.
According to Hasan, a more diverse export mix “would give Iraq marketing flexibility in pricing and the ability to cover wider segments of the international oil market on the one hand and give long-haul customers cost-saving advantages by loading full VLCCs with more than one crude type.”
All this would require huge investments in repairing the export outlet network and adding new pipelines, after many terminals and pipelines were destroyed during the bombardments in 1991 that followed the invasion of Kuwait.
According to Faleh al-Khayat, a senior oil ministry official, the ports of Cehyan in Turkey and Mina al-Bakr in the Gulf can at a stretch export 1.2 million b/d and 1.5 million b/d, respectively. In six to nine months, the capacity of the Iraq-Turkey pipeline running to Ceyhan should be expanded to 1.6 million b/d, once equipment sanctioned under the UN oil-for-food program arrives for a crucial pumping station on the Iraqi side.
Longer term, other outlets could include the Khor al-Amya terminal on the Gulf, with a design capacity of 1.6 million b/d. Its capacity now is around 700,000 b/d, but it’s officially not in use, though unconfirmed reports suggest it has been used for smuggling in the past.
A pipeline across Saudi Arabia, closed since 1990, would provide a further 1.6 million b/d of capacity post-rehabilitation, assuming the Saudis agreed to a reopening. Baghdad could also pump up to 300,000 b/d through the Iraq-Syria pipeline, part of which Syria now uses to export its own oil, “once the Syrians are ready to accept Iraqi oil,” Al-Khayat said.
Somo would direct much of the new oil toward Asia, trying to reconquer a market where it has lost ground in recent years. Iraqi oil exports to Asia and the Far East dropped from 23% of the total in the first half of 1990 to about 15% in the first half of 2000. According to Ali Hasan, this has to change. “As a major exporter, all the markets are important for us now and in the future, and it is in our interest to have a more balanced destination distribution,” he says. Asian demand is growing, regional refineries are being upgraded, and most of the extra Iraqi oil will come from the south, making Asia a natural destination for exports out of the Gulf.
First, of course, Iraq needs to lure in foreign companies to produce all this extra oil. It has been threatening not to sign any new exploration and development deals unless companies are willing to start work immediately – which they’re not allowed to do under the sanctions regime. Aware that it has to compete with neighboring Iran, Kuwait, and Saudi Arabia to attract multibillion-dollar investments, it is also offering competitive terms.
At last week’s Paris conference, Iraqi officials unveiled the country’s new development-production contracts (DPC), which are half-way between the production-sharing agreements still in use in countries like Libya and the buyback models introduced in Iran. Earlier this year, it was revealed that Malaysia’s Petronas was among the first to start negotiating such a contract.
The new upstream terms won’t apply to contracts already signed but not implemented, despite Baghdad’s frustration. Al-Khayat says “the consensus in the oil ministry is that what is signed is signed, and whatever we are going to sign will be negotiated according to the new terms.” Iraq has already awarded a contract for West Qurna to a consortium led by Russia’s Lukoil; the Al-Ahdab field to a Chinese grouping of China National Petroleum Corp. and Norinco; and the Majnoon and Bin Umar fields to Total Fina Elf, which enjoys exclusive negotiating rights for both. Baghdad still has 15 more fields on offer, as well as nine blocks in the Western desert to be offered on the basis of five to seven-year exploration risk contracts.
Oil companies at the conference – who also included US firms Enron, Conoco, Chevron, Texaco, and Marathon Oil – describe the marketing prospects and new contract terms as a “big fish – but in the sea.” Only when and if the sanctions are lifted will they really start moving to grab themselves a lucrative slice. Ahead of D-Day, they tell Energy Compass, they are positioning themselves, building alliances with companies who already know the country.
By Ruba Husari, Paris
(Published in Energy Compass, 14 July 2000)