December 14th, 2012

Pipeline Lessons



Iraq has launched its latest oil export infrastructure expansion project; a new pipeline that would carry crude from southern Iraq across Jordan to the port of Aqaba on the Red Sea. When completed, the pipeline would carry crude from the southern oil fields in Basrah and Missan, as well as the Midland fields such as Nassiriya, Gharaf and Badra to be exported through a new terminal, primarily to markets in Asia.

The pipeline will be built in two sections, under two separate contracts. The first will consist of a new 2.25 million barrels per day south-north pipeline, parallel to the old strategic pipeline, from PS1 gathering station in Basrah to the Haditha pumping station in north-western Iraq. It will be financed by the Iraqi government under an engineering, procurement and construction (EPC) contract. The second, at 1 mbd capacity from Haditha to the port of Aqaba, with a spur to feed the Zarqa refinery in Jordan, is offered to investors under a build, own, operate and transfer (BOOT) contract. There is a potential to add another extension from Haditha to the Syrian port of Banias when – and if – political circumstances in that country permits it.

This is the first time Iraq builds cross-border pipelines since the Iraq Pipeline across Saudi Arabia (IPSA) was built in the late 1980’s. That pipeline system which included pumping stations, onshore storage and an export platform on the Red Sea, fully financed by the Iraqi government, had hardly been operational when it was shut down by the first Gulf War and was later confiscated by Saudi Arabia.

This time, Baghdad has drawn up the lessons and would only finance pipelines on its own territory where they are under its sole control. By inviting investors to establish an operating company which will engineer and design, finance, construct, own and operate the pipeline across Jordan for a period of 20 years, it hopes that the stakes held by foreign entities would dissuade its neighbor from shutting it or going to the extreme of confiscating it altogether in the eventuality that relations between the two states deteriorates.

The BOOT model is a first, and as such is a test case for Iraq and its ability to attract financing for such project. The commercial model presented to contractors and investors at a road show in London stipulates that the operating company would collect a service charge made up of a take or pay fee for the duration of the BOOT contract and a throughput fee for the volumes transported. Furthermore, the Iraqi government, represented by its ministry of finance, will offer payment guarantees to support the minimum throughput commitment the ministry of oil undertakes with the investors and operators, including under the form of crude offtake.

The oil ministry intends to issue an expression of interest invitation next month and will prequalify interested companies by February ahead of launching the tender in April. A preferred bidder would be selected by September in order to enter into negotiations on the final BOOT contract. If the financial closure is completed by the end of 2013 as scheduled, construction would be launched in early 2014 and first Iraqi crude would be pumped through Jordan to the Asian markets by 2016.

The View from Baghdad