November 4th, 2010

Dhiya Jaafar



South Oil Co (SOC) Director General Dhiya Jaafar gives an update on the state of Iraqi oil production, infrastructure expansion and ongoing projects and problems in an interview with Ruba Husari Nov. 1st, 2010, in his office in Basrah.

Q: How do you explain the continued decline in production at Rumaila oil field where BP was the first to sign a development contract, precisely to arrest the decline and increase output?

A: The decline is natural and it has been going on for some time. The new contracts aim at putting a halt to this decline in production and reverse the trend to increase output. Rumaila is a big field and because it’s the first one to be developed according to this new experience (with a foreign company), there were several obstacles we had to deal with which resulted in delays in the import of equipment and material needed, and in coordination and planning including in awarding procurement contracts. The decline in production was obvious over three months up until August when BP and CNPC could not stop it but they have managed over the past two months to reverse it. Now we see production going up again and we expect them to reach the initial production rate (IPR) of 1.065 million b/d again by the middle or end of November at the latest. Output will continue to increase and we will achieve the 10% increase of production above the IPR by the end of the year.

Q: What was the lowest rate reached at Rumaila this summer?

A: It went to below 1 million b/d. In fact it was close to 960 million b/d. Today (Nov.1) it was recorded at 1.052 and we expect two wells to be tied up today so they will add another 4,000 b/d. There are several measures being taken at Rumaila, including fitting electrical submersible pumps (ESPs) and the drilling of new wells. We expect to tie-in several wells by the end of the year as well as complete the drilling of new wells in order to revamp our output so we could realize the 10% increase above the IPR or some 106,000 b/d, in line with the rehabilitation plan. I expect by end December our output in Rumaila will be at least 1.150 million b/d and at end 2011 we should hit at least 1.3 million b/d.

Q: Production is declining at West Qurna-1 as well. Why is that?

A: You are right. Decline is continuing at West Qurna-1 naturally and we haven’t been able to achieve any increase there. ExxonMobil has not been able to stop it with the current measures being taken, let alone reverse the trend and start increasing production. There are several procedures being taken now including a revamping of workovers at drilled wells as well as tie in to wells that are ready to produce once connected to flow lines. We expect some positive development by the end of November. So far output dropped some 20,000 b/d below the IPR. We at SOC are doing our utmost to support them. The delays are normal because it’s a whole new experience. For example, there is some matching to do between their management and ours, there are some hiccups in the sequences of preparing procurement orders and awarding them as well as differences in vision sometimes. Bear in mind that SOC’s Rumaila division started work at end 2009 and almost a year later we are starting to see a more homogenous operation. Many of the obstacles that we have witnessed earlier have been already sorted which explains the more speedy achievements there on the ground in recent months. The same process is taking place now in West Qurna-1 with ExxonMobil. I expect output will start increasing by early 2011. This month (November) we will witness further decline of probably another 10,000 b/d but it should stop in December. They should achieve the 10% increase above the IPR within a year and they are keen to do that because this is when they will start recovering costs. If they continue at the same rate we see today, I expect them to reach the IPR again at the end of the first quarter of 2011 or maybe even the beginning of the first quarter if performance improves.

Q: By contrast, output increased in Zubair by more than 10% above the IPR and could reach 30% soon although we are still in the first year of the contract. How do you explain that?

A: There were several immediate measures that ENI took in Zubair oil field including reducing pressure in a degassing station (DS2) as a trial and based on studies between the reservoirs departments at SOC and the oil ministry, in a way that achieves a continuous increase without impacting the reservoir. They also removed some of the chocking by introducing an emergency measure whereby wells are now connected individually to the processing facilities instead of having several wells connected to the same flowlines. ENI also carried out other revamping operations on the wells such as additional perforation. As of today they have increased output by some 26% although this is not sustainable because they have not carried out any water injection yet. Once water injection is introduced, the results will not show right away but will take some time to stabilize the pressure in the producing reservoir. Once they do that the increase will be more stable and they will be able to push it further.

Q: Does the credit go to ENI for this or is it rather the nature of the Zubair field?

A: Zubair field is easier than the others but ENI takes credit for connecting new flowlines very quickly and removing the chocking. They “re-distributed” the production, shut down some wells and opened others, in addition to doing a workover at some wells. The reservoir management they introduced at Zubair is also different from ours. One more thing that works for the advantage of ENI is that they have speedy procedures to carry out contracting and provide financing without too much bureaucracy. The decision- making process is fast so the execution is also smooth.

Q: How much is total production at the moment from the southern fields?

A: As of today (Nov.1), our production stands at 1.680 million b/d. I expect a 150,000 b/d increase by end 2010 or something in the range of 1.82 -1.85 million b/d. In 2011 we expect an increase in production in Tuba oil field and we have plans to drill 32 wells, part of which will be in Nassiriya oil field to increase production there from 10,000 b/d this year to at least 60,000 b/d. We also expect to add more output from Bin Umar field next year. So by combining the planned increase by the national effort from those fields and that of the three producing fields awarded to international oil companies in the first bid round, our production will definitely exceed 2.5 million b/d by the end of 2011.

Q: What is the status of the high coordination committee set up at ministry level to deal with the problems faced by IOCs in carrying out the 1st and 2nd bid rounds contracts?

A: The ministerial order to establish this committee has already been issued. It will be chaired by the deputy minister for upstream (Abdul Karim al-Luaybi) and made up of the directors of the different Iraqi oil companies and the director general of the contracts and licensing department at the ministry (Abdul Mahdi al-Ameedi). It should hold its first meeting in the coming days and it should be quite efficient in dealing with the problems surrounding the contracts.

Q: IOCs have been complaining of delays in approving tenders and contracts that are referred by the JMCs (joint management committees) to the oil ministry to decide on while ministry officials complain that costs associated with these contracts are exaggerated. How do you move forward from this situation?

A: This is true. There are sometimes disagreements between the Iraqi and the foreign managers in the JMCs and it’s essentially due to the fact that it’s a new experience. IOCs are mostly concerned most of the time with a quick execution but they don’t pay much attention to costs because Iraq will pay back all costs associated with the development of the fields. On the other hand, Iraqi officials express reservations sometimes because even though we do want a speedy development, but we are also concerned about the costs and we scrutinize these very closely. It is our right and it’s also our responsibility to do that.

Q: ExxonMobil was supposed to conclude the initial plan for the common seawater supply facility (CSSF) by late September. Has it been completed?

A: The initial plan is ready and we are almost done with the choice of the water intake. There were initially 9 potential intake points proposed in the early meetings which have now been reduced to two possible points following the studies carried out with SOC, the ports authority and the ministry of water resources. We have a meeting planned in Istanbul in the coming weeks during which we will decide on the final intake source as well as on the companies to be invited to bid for the front-end engineering (FEED) contract for the CSSF project. It’s a sophisticated project but SOC is working with Exxon to finalize the initial plan on time by early January and any possible delay beyond that would not be significant. We hope that early construction work would start in the first half of 2011, and failing that then definitely in the second half of next year. There are a lot of challenges that need to be taken into consideration in the FEED such as the actual need for water which will decrease as the water cut in the crude produced will increase with time and we need to be able to exploit this water produced. This is particularly true in Rumaila because it’s a mature field and will increasingly produce water that will need to be recycled. As a result the plan should take into consideration that the project will supply a big amount of water in the early years but that this need will decrease after seven or eight years. We need to have a clear concept as to how we will dispose of this treated water, when would the project end and how do we dispose of the facilities that we have invested in. The FEED needs to be very precise and comprehensive and offer more than one scenario.

Q: Where are the intake points being proposed?

A: They are both in the area of the Um Qasr port. It’s the ports authority which has to determine which of the two is more suitable. What we require is an intake source that is not affected by tides and at the same time one that does not impact the operations of the ports authority so that we are not affected either for conducting normal operations or for maintenance. We also had to take into consideration that the intake point is not affected by the dredging that is carried out by the ports authorities from time to time. I think we have reached the final stages of agreeing that with the ports authority and the ministry of transport.

Q: It is obvious to everyone that Iraq will not be producing the 12 million b/d it had made the IOCs commit to in the first two bid rounds and will not need to. Is there any sense why IOCs should invest in building this capacity when it’s not certain they will produce at the committed plateaus?

A: It was clear from the beginning to the companies who bid (that Iraq might not be required to produce all the volumes) and they built their economic models accordingly. Besides, no one knows how the markets might evolve over the coming 10 years and whether there might indeed be a need to export all the volumes. All companies have read the article in the contracts that states that we might not export all the volumes produced but only what is allowed under our international commitments. The Iraqi government had vision in including this article and they have accepted it when they signed on the dotted line. We assume they have taken this into consideration when they bid and signed.

Q: Would Iraq still pay the companies a fee for the idle production capacity?

A: If Iraq is allowed to export at full capacity and the companies are able to deliver that capacity and if for any reason the government fails to export it for say technical reasons, then it assumes responsibility for the deficit in production and it will pay the companies their fees. However, if the reason for the shortage is due to the companies while Iraq is ready to export increased volumes or if there are international reasons (Opec restrictions) why Iraq cannot export further, then Iraq won’t pay for what is not produced.

Q: Would the export facilities be ready for the increase in production to 2.5 million b/d that you mentioned at the end of 2011?

A: We do have a problem and we have been working quietly to solve it in order to raise our ability to evacuate and export higher volumes of crude. Our export capacity at the moment from the Basrah oil terminal and the Khor al Amaya combined stands at 1.8 million b/d. We believe we will be able to cater for the increase in exports until the end of 2011. About 400-500,000 b/d of our future production then of 2.5 million b/d will go to the domestic consumption leaving us with 2 million b/d to export. We have two projects under way to deal with the need for an increased export capacity. The first one is already in place. It consists of a flow improvement project, using chemicals to reduce friction in the pipelines, increase the ability to pump more crude, and reduce the pressure in the pipelines. We obtain two advantages from this process. On one hand, we can maintain the same export capacity at 1.8 million b/d but we reduce the pressure to preserve the pipeline. On the other hand, we can maintain the same pressure and increase the export capacity up to 2 million b/d or even 2.1 million b/d. We have carried out this process on the offshore pipelines about a month ago and decided at this stage to reduce the pressure since we don’t have additional crude for export. Once we do reach the future increases of crude production and need an increased export capacity, we will push pressure higher and obtain that increased capacity to 2 million b/d from the current 1.8 million b/d. The second project underway is the expansion of the Basrah oil terminal by adding new facilities. It’s a massive project and the execution will be huge as well, because the area has been a military battle scene during the Iran-Iraq war in the 1980’s and is swamped with wrecks and unexploded missiles which needed clearing. We have started this clearing a year ago and an area of 50 km long and 1 km large has been surveyed and the clearing is about 70% complete. A bathymetric survey is also taking place and contracts have been already awarded. We are now in the second phase after awarding the construction contract for the pipelines, the SPMs, (single point moorings), manifolds, metering,…etc. This required big financing and exceptional procedures to make it happen and we did get support from the ministry which made sure the financial allocations are available and sped up the routine procedures because the future of the country depends on this project. We signed the last and most important contract worth $733 million with Leighton Offshore last week for the laying of the pipelines and the installation of three SPMs. We are now in the process of issuing letters of credit so that construction can be kicked off. We have already been notified by the Italian company manufacturing the pipelines that the first batch is ready for delivery. If work continues at the same rate as last year, we expect to have all three SPMs ready by end of 2011 and an additional export capacity of 1.7 million b/d. I expect the first SPM to be in place in September or October of next year bringing in some 900,000 b/d additional export capacity to be added to the existing 1.8 million b/d capacity, and the other two SPMs to follow at a 40-day interval. And in case there are unexpected surprises, we already have the flow improvement system in place ready to allow us to export around 2 million b/d by the end of next year.

Q: Have you taken into consideration the fact that the existing export terminal and its pipelines are in a dire state and could collapse any time?

A: This is true. The current export facilities are very old and way beyond their operational age. To avoid having to carry out maintenance on the offshore pipelines, which is too complex and can only be done by certain companies, we have taken precautions and we are preparing to sign a contract with a fast intervention company to deal with this eventuality if we are ever to face it. We are in the final phases of discussions with the company and expect to sign soon but will not announce it until it’s signed.

Q: The oil ministry has been targeting the IOCs to convince them to finance the costs of the infrastructure expansion that is required as crude production increases. Do you think it will be successful?

A: We have a plan to construct three main pipelines to transfer the new volumes of crude and give Iraq more alternatives for export. The three will carry crude from the Basrah area via Missan to the north and from there to either Turkey or Syria. There’s also another pipeline planned that is parallel to the (south-north) strategic crude pipeline. These are huge projects that require massive financing starting from planning to engineering to construction and they need to be executed with the shortest delays. The Iraqi government does not have the capacity to deal with such projects at the moment – although it will definitely be able to in the future – within the short time frame. That’s the main reason why the oil ministry is looking at involving foreign companies to carry them out on a BOT (build-own-operate) basis. We had positive reactions so far from the companies.

The Interview