May 14th, 2012

Unitization Dilemma



As Iraq and Kuwait forge ahead with their political rapprochement and the demarcation of their international boundaries, a major milestone will be achieved once an agreement is reached on the joint oil fields that straddle the border between the two states. That’s where Iraq needs all its resources to settle the issue in a manner that preserves its sovereignty and safeguards its interests in a way that does not lead to further claims and counter claims in the future. That’s a task that does not involve just the politicians. In fact, it requires more oil expertise than politics in order to lay the best foundations of the future unitization agreement. What you put in such an agreement would define the future relations between the two countries for decades to come.

The memorandum of understanding that was reached between the two sides stipulates, as announced previously, that an international consultant would be appointed to carry out a jointly-financed study, based on which Iraq and Kuwait would opt for a joint, coordinated development of the border oil fields.

The agreement raises several challenges, the first of which is the definition of joint oil fields. For example, is the whole of South Rumaila field a joint field whose extension on the Kuwaiti side is Ratqa field, or is it just the most southern dome – also called Ratqa sector in Iraq – that straddles the border? The same applies to the Safwan field on the Iraqi side, or Abdalli on the Kuwaiti side. For Iraq, Safwan is the fourth dome of the Zubair oil field in Iraq. Though only those two fields are mentioned in public statements, Iraqi oil experts who studied the geology of the border fields say East Abdalli on the Kuwaiti side is an extension of the Umm Qasr structure norther of the border.

Another challenge is what reservoirs does one include in the joint development? Kuwait currently produces the Fars reservoir which is not developed in Iraq, and possibly also, according to Iraqi reservoir experts, deeper reservoirs, while the Zubair reservoir is produced by both. This raises issues of equitable production, both past and future.

Most crucial of all, is perhaps the challenge of joint development under a unitization agreement at a time when the South Rumaila field is contracted to BP under a 20-year service agreement. Whatever reservoirs have not been developed in the past by Iraq, either due to their less prolific nature or to their depth, form part of the economics of the Rumaila service contract.

The development of fields through cooperative rather than competitive mechanisms has for advantage ensuring the maximum recovery of hydrocarbons from those joint fields in a most efficient manner. This makes a unitization agreement with Kuwait, as well as with other neighbors, a shared interest.

The exercise that the two states are about to embark on might not lead to the classical joint development unitization of the two segments of the field by one operator, one Iraqi reservoir engineer tells me, but rather to the establishment by the third party to be agreed on, of the current status of the field including the movement of oil across the border. The result could be an observation mechanism of wells on both sides of the border once the data is collected and each side’s share is established. This would lead to the creation of a solid foundation for cooperation between the two countries for producing joint fields to the best benefit of both, without suspicion and allegation of overproducing, irrespective of reservoir size or stage of development.

The View from Baghdad