June 11th, 2011

Thamir Al-Ghadhban

 

By

11/6/2013

The Chairman of the steering committee that formulated Iraq’s first Integrated National Energy Strategy (INES) and head of the Prime Minister’s Advisory Commission (PMAC), Thamir Al-Ghadhban, explains in an interview in Baghdad with Ruba Husari, editor of Iraq Oil Forum, the formulation, the dynamics and the political risks impacting the strategy.

Q: What is the Integrated National Energy Strategy and how did it come about?

A: When we say a strategy we always think about vision and also ways and means of reaching this vision. We also always associate a strategy with long term objectives, as well as priorities and scenarios. We cannot talk strategically when we have only one fixed plan or objective. The aim of this strategy is to provide decision makers within the executive authority with scenarios that are naturally distinctive from each other in terms of volumes and rates (of oil and gas production), difficulties, cost and of course risk and benefits. It’s well known that Iraq is well endowed with hydrocarbon resources, but at the same time it has been suffering from power cuts over the past ten years. It has hydrocarbons but it is importing products and electricity. The products provided to Iraqis are not only insufficient in terms of volumes, but also of poor quality. It is also well known that Iraq has so many discovered oil fields that are not yet fully developed. For the past three decades it has been producing way below its capabilities. Now that it has moved forward after the change of regime and adoption of democracy and open market, we thought it’s about time we have a strategy instead of acting based on personal opinions or dictates by political parties or even dictates by one minister or another. We opted, like any other modern nation, for long term planning. I’m not talking about planning in the socialist sense, but rather looking ahead to the future and see how we can monetize these hydrocarbons and how we can improve the standard of living of Iraqis as well as providing Iraq with a chance to be an important strategic player in the energy sector globally.

Q: How is INES different from the 5-year plans and 10-year plans that previous governments used to produce, other than by its term?

A: The approach is different. To start with, in the past we depended heavily on our own capabilities. But it’s well known that Iraq has been cut off in the past three decades from modern approaches in terms of thinking, in terms of coining strategies, and even debating ideas. So what we did is that we opted to seek professional help from an independent international consultant – in this case Booz & Co – and we asked for financial and technical assistance from the World Bank. We adopted the position that we don’t dictate to the consultant, but rather we wanted him to work freely. Our role was to provide all the information and data needed and offer support in organizing interviews with people who influence decisions in Iraq, whether it’s the ministers, the deputy ministers, the director generals, as well as people in the field such as producing companies in oil fields, refineries, and electricity plants. So the approach is different from the past. The discussions we had during the formulation of the strategy were conducted with an open mind and without trying to please this or that person.

The content is also different from former plans. We did not want to concentrate on only oil, or only oil and gas. We wanted to take in the whole spectrum of sectors linked to energy. Furthermore, when we looked at oil and gas we examined the refining sector as well. When we dealt with natural gas, we explored the midstream and downstream gas sector, i.e the processing of gas and the industry associated with it, not just the production of natural gas. We also looked at what opportunities exist for Iraq to become a gas exporter. We carried out a thorough look into linkage between power generation and the hydrocarbon sector, i.e the production of oil, gas and refined products. We also wanted to look further ahead. For example, we know that the energy sector, especially the oil and gas sector, is capital intensive. It requires huge financial resources and admittedly produces huge rewards as well. But unfortunately the oil and gas sector does not provide job opportunities for Iraqis at a time when population in Iraq is growing at a rate of 3% per annum. With a population of 34 million, Iraq is also a young nation where 600 000 young people enter the job market every year. The government cannot continue providing jobs for them. Taking into consideration that the country’s constitution and the new political entities have accepted market economy, therefore we thought – and we firmly believe –  that it’s about time we utilize our hydrocarbon resources not in the traditional manner of exporting crude oil, but to add further activities by utilizing it in the industry sector. There are a number of industries that depend on oil, gas and other oil products as feedstock and not just as fuel. For example, Iraq could become self-sufficient in petrochemicals while at the moment it’s an importer. The strategy demonstrated that it is possible for Iraq to become a producer and exporter of petrochemicals as well as of fertilizers. Today we still import fertilizers even though we produce natural gas. So the main difference with past plans is this new approach of linking the different sectors and sub-sector of energy. That’s why we call it an integrated strategy.

Q: What are the milestones in the road map set by INES for the next two decades?

A: There are a number of milestones for each sector we examined. The strategy covers a period from 2012 to 2030, divided into several phases with each phase having certain objectives. For example, in the oil and gas sector, the first phase is the oil boom where we reach the peak production between 2016 and 2020 when we achieve a sustained level of production at 9 million b/d. As far as gas is concerned, the main milestone from now to 2015 is to stop flaring. This means from now till that date, there has to be a continuous addition in gas processing capacity. Once we get to that, then we have other issues to deal with. One is to supply sufficient gas for domestic requirements, especially power, and the other is to provide feedstock for petrochemicals. By 2019-2020 there should be enough capacity to separate ethane from methane because Iraqi gas, especially in the south, is rich in ethane and this is a major feedstock for petrochemicals.

In terms of power generation, there should be sufficient electricity supply by 2015-2016. However, there are other major issues regarding electricity. One is to improve on transmission and distribution in order to minimize the technical loss. Today we lose 42% of power generated due to old technology, poor transmission, interruption and illegal loss.

The last milestone in the final phase post 2025, is when Iraq not only becomes self sufficient in terms of oil products, electricity, and attaining a security of supply but becomes a major player in the field of oil, gas, refined products, petrochemicals and fertilizers exports.

Q: The strategy proposes three production scenarios for oil and gas based on supply uncertainties and opts to use the medium scenario of 9 million b/d crude capacity by 2020 as reference. What is the logic behind choosing that scenario? Is it because it’s more realistic from investment and infrastructure point of view, or is it based on revenues needed to finance government expenditures?

A: The two factors you mention are important. However, during our formulation of the strategy we used five criteria to assess the three different scenarios. These are: security of supply, maximization of government revenue, diversification of economy, job creation and environmental impact. We found that the second or medium scenario of production capacity of about 9 million b/d is the best in passing the test using those five criteria. On the other hand, we have also to take into consideration the supply and demand in international markets and the developments in North American oil. If we opt for the high level production scenario of around 13 million b/d, it will be very expensive. If there will be, as being forecasted now, lots of supply from North America, then there is a possibility that Iraq will not only have a surplus capacity but idle capacity. Based on our calculation, each additional 1 million of new capacity will cost us $15 billion. It is expensive and therefore Iraq should not have idle capacity, which will equally have a negative impact on prices. Choosing a lower scenario of 6 million b/d means we end up with 4.5 million b/d for export after subtracting 1.5 million b/d for domestic refining, which is not enough. The Iraqi people have lived in deprivation for decades and our needs are huge in terms of infrastructure and providing better services. So the 9 million b/d scenario is the optimum taking into consideration domestic demand.

Q: Do these scenarios for production targets take into consideration future possible Opec constraints?

A: Yes of course. Iraq is a member of Opec and even a founding member of the organization and it has – and always will – act in a responsible manner. I think there’s a long way to go until we get to a decision on what level Iraq should produce at. But we have seen cases of a number of Opec members who could not meet their quotas when those existed. We believe, taking into consideration Iraq’s resources, its needs for revenues and being deprived of its share of market in past decades, that an output of 9 million b/d is adequate by the end of this decade. We also have to bear in mind the future potential of our domestic use and the fact that we expect an economic boom in the country where the call on oil products and usage of oil inside the country will be large in the coming years.

Q: Do you find the current ministry of oil plans fit into the strategy, including not just oil and gas production but also refineries, pipelines and export infrastructure expansion, or does the ministry need to modify those plans to make them in line with the recommendations of the strategy?

 A: As far as the level of production is concerned, the current thinking and planning within the ministry of oil fits very well with the scenario advocated by the strategy, i.e the middle scenario. As far as the requirements to meet that target in terms of oil field development, the pace is good except in a few cases. Most fields have either enhanced their production or are in the process of starting production very soon. On the other hand, as far as pipelines are concerned, there is a little time lag but I think it’s possible for this to be abridged, especially the south to north pipeline with a capacity of 2.25 million b/d and the pipeline to Aqaba via Jordan. As far as the offshore loading terminals in the south are concerned, I think progress is good though there is a slight delay but it’s generally in line. I’m not happy about the progress in the refining sector. We are still importing lots of oil products, especially gasoline and gasoil every day and the progress on building new refineries is not impressive. The tender for the Nassiriya refinery project is advancing but it will take time. I don’t see a refinery there before maybe 2018 or 2019. This means that Iraq will continue importing products for some time to come, especially gasoline and gasoil. In terms of the specifications of the refineries, the strategy looked into the ministry of oil’s plans and found that the plan can meet the requirements till say 2025 but there will be insufficient gasoil and gasoline after that date. That’s why it called for a revision of the refining plans of the ministry and called for deep conversion in new refineries, especially in Nassiriya. It also advised dedicating the new refineries to refine the heavy oil and free lighter oil for export to maximize our revenues.

Q: In order to achieve the production targets recommended by the national strategy, two requirements need to be met: one is a new water injection project and the other is the expanded evacuation network. Would the fact that plans are already behind on those affect achieving the strategy’s goals?

A: Based on historical fields’ record and the performance of the reservoirs, most of the fields requiring water injection have pressures above what we call the bubble point. This means that we have a good number of years to produce without the need for water injection. But some of the fields already in production have some type of water injection like in North and South Rumaila and Zubair. However, what exists is not enough for the high plateau planned and will definitely affect the achievement of the targets set in the strategy. The operators in the southern fields have already introduced some alternatives – such as the usage of pumps in North and South Rumaila – but these alternatives are not for the long term, especially for the Mishrif reservoir which requires big amounts of water. The impact on achieving the strategy goals depends on the level of production planned in the future. Frankly speaking, I cannot say we have a large window. We have perhaps a few years but enhancement of the current water injection system and building a new system is a must.

Q: Is there a role for IOCs in implementing the strategy?

A: Of course there is a role. First of all by understanding the objectives of the country they will be able to plan better and in a way that fits the overall plans of the country. Iraq is very serious in developing its energy sector and there will be lots of opportunities for IOCs and service companies to work with Iraq in this expansion period.

Q: Where does oil and gas produced by the KRG fit into this strategy? Did the region contribute to the formulation of the strategy and do the recommended policies cover the region as well?

A: In the beginning we were very keen on involving the KRG and I personally advised the consultant to do so and made contacts with the KRG’s ministry of natural resources. Eventually, the consultant visited Erbil and gathered info and conducted interviews. But unfortunately the overall circumstances and conditions were not conducive to carry out the strategy so that KRG is fully on board. It has given estimates and forecasts of how much oil and gas could be produced there, which was taken into account, but the data provided was not as detailed as what we got for the main fields in southern Iraq. But the region is an integral part of Iraq.

Q: Is there a way of making the regional planning by KRG in terms of energy in line with the national priorities of the strategy?

A: One cannot isolate this issue from the overall political conditions and the relationship between the federal government and the regional government in Erbil. There are recent signs of improvement but it will take some time. However, it is in the interest of the KRG to be part of the national energy strategy and under the national umbrella.

Q: The strategy recommended allocating light crude for export and heavy for refining. What does it take to implement this and what is the timeframe for this to happen?

A: First of all what has prevented this in the past was the limitation on storage and pumping capacity including to the offshore terminals. In order to be able to segregate oil and export more than one type from the south, we need ample capacity in terms of storage, pipelines and offshore loading capacity. The ministry of oil is currently increasing the export capacity but this option will not become feasible with real flexibility until the Fao terminal is fully operational and can dedicate certain storage tanks to different types of oil. This is still a few years down the road.

Q: By allocating 50% of exports to Asia, 25% to Europe and 25% to USA, isn’t there a risk of this split being overtaken by the shale revolution?

A: What INES dealt with is not physical export but providing the capacity and infrastructure so that when the time comes, and if for one reason or another, there is shortage of supply, or geopolitical problems in the supply chain, Iraq can have opportunities to provide supplies. It also recognized the shift and that major markets will be in Asia. But diversification is important and is worth it.

Q: The strategy defines “institutional enablers” required for its implementation, none of which exist today or is in an optimal state, be it private sector participation, sector restructuring, amendments to laws and regulations, or pricing reforms. Can implementation start without these being in place especially that it takes time to instate those?

A: One of the distinctive features of this strategy is that it is dynamic and not at all rigid. It is recognized that the first objective is to increase oil and gas production. So with the prevailing circumstances, institutions and set up of the ministries, it could be done. So far the ministry of oil has managed to increase oil production with prevailing institutions and laws and regulations. Of course this state is not optimal as you rightly said. But there are now a number of ongoing programs within the Iraqi government – I’m personally in charge of many of them – under the headline of “Reforms”. They concern the reform of the economy, of the public sector, and of legislations. It does take time to complete those of course. The strategy calls for reform not in the immediate, but in the medium to long term. It also advocates institutional reforms and shows the way how to carry them out. As an example, right now ministries carry out major activities necessary for any of those sectors; from planning to regulating, while at the same time – in the case of ministry of oil – it oversees production and the commercial arm of the industry i.e Somo. The strategy calls for the separation of those different activities. At the end of the day, the ministry of oil, or any other ministry for that purpose, should act as a federal ministry but not be in charge of production or marketing. This should be done by companies that are run in a modern way as commercial enterprises, functioning on a profit and loss basis, with an effective management, an effective board of directors, and with of course the required authorities. They should not be totally controlled by the headquarters of a ministry. So to answer your question, in the short term, yes it can be implemented. But institutional reform is one of the requirements of the strategy to be fulfilled in order to achieve its goals and objectives. Institutional reform is one of the tasks.

Q: The reforms and the restructuring of the energy sector require a legal framework. How can you move forward on those reforms when the hydrocarbon law is still paralyzed by political differences?

A: You have a point. It is now very clear to lots of politicians that although a participatory government based on consensus was required at a certain stage, it is also now recognized that democracy also means the rule of the majority. I mean by this political majority, not ethnic or religious majority. We have to wait till the next elections next year and hope that the next government takes up this mandate by implementing INES, push reform programs, push new legislation, including the oil and gas law, in a manner that serves the interest of the majority of the country.

Q: There are certain assumptions made in the strategy which might change with time as a result of changing realities on the ground, and the pace of change. Would it be updated, revised or changed in the future?

A: The major goals will always be the same. The vision will also remain the same. But how to fulfill and implement the strategy, is of course flexible. To be more specific, we are currently training a number of senior staff from the ministries of oil, industry and electricity, together with the contractor [Booz & Co.] to build their capacity so they can operate the model. In that model, there have to deal with the issue of supply and demand, whether domestic or international. Through the training, they will be able to assess the state of supply and demand, interpret changes and will be able to forecast. This is what I meant when I said the strategy is dynamic, flexible and not really fixed. The strategy also sets up priorities in terms of phases. It is clear that in the first phase we have to carry out rehabilitation plans and increase production. But in the following phases there are issues that have got to be attended to. This requires continued assessment, follow up and analysis of what has been achieved and what are the requirements for the future. It’s an ongoing exercise that is quite dynamic. The strategy also recommends that it should be owned by the highest executive power ie.  the council of ministers, that a high level supervisory committee should be formed, and that a mechanism is introduced for follow up and assessment. One of the major stipulations is that there should be synergy between the various players or various ministries who are expected to coordinate closely. Today, we still have problems between ministries over whether there is availability of fuel for power generation or not. This should stop. All projections should be carried out in full coordination and harmony between various sectors within the country.

Q: When would the Petroleum Resource Management System (PRMS) for standardized data reporting, which is a major recommendation in the strategy, be introduced?

A: I’ve been informed that the ministry of oil is working on this now and has asked one of companies to carry out a study for the requirements. At the same time, and as an extension of the strategy study, we allocated some money to train Iraqi staff from the ministries of oil, electricity and industry in order to be able to work on the petroleum model. This is an integrated model for data reporting and also for forecasting. There will be huge volumes of information generated on daily basis as a result of drilling activities, production, gas processing as well as data related to reservoir management and reservoir characterization…etc. All this should be handled under a data management system in a modern way using new technologies.

Q: How would geopolitics affect the strategy on the short and medium terms, taking for example Turkey and Syria as markets or routes for gas exports?

A: Turkey and Syria are not first priorities for gas export. The strategy took a scientific approach in analyzing a number of parameters for any potential gas export project to be launched such as the cost and revenue and the ease of export or how many years are required to launch a certain export project. It actually found that countries that people thought are a priority to export gas to, may not be at the top of the list, but rather in the middle or even in the bottom in terms of benefit to Iraq. We are not going to export gas for the sake of exporting gas, but to monetize and maximize our revenues. For example, Kuwait could be one of the countries that are best situated to import gas from Iraq if it chose to. On the other hand, Syria and Turkey are important as transit routes for oil. The Iraqi government has frozen plans to export oil via Syria as a result of the current situation and opted for Jordan as an alternative. We always take into consideration the need for diversification of the routes and finding new routes for Iraqi oil and the geopolitical issues surrounding the Straits of Hormuz. The strategy is flexible and can adapt whenever there are improvements in the geopolitical conditions and improvement in relations with neighboring countries, provided there is economic viability.

Q: INES will require $600 billion to implement by 2030 vs generation of $6 trillion of accumulated revenues. Doesn’t the risk of the Dutch disease increases and the motivation to diversify dies away when we are talking about revenues of this order.

A: INES is very clear about this and has discussed it thoroughly. As I said earlier, one of the parameters for assessing which production scenario to opt for is the diversification of the economy. This means that whatever surplus we get from future revenues should be utilized to develop other sectors of the economy. This is also why we did a lot of work on the linked-in industries, ie those that use oil and gas as fuel or feedstock or both. The strategy looked at a number of industries; petrochemicals, fertilizers, steel, alumina, bricks, and cement. Bricks industry is very important for Iraq because we anticipate a big expansion in the housing and construction sector in the future but we are now importing cement and bricks. Therefore it’s very important to be conscious of this risk of making the country dependent on one natural resource that generates revenues while we sit idle and let the Dutch disease creep in.

Q: The long term achievements INES aims at, for example $2 trillion accumulative surplus, a GDP growth of 7 %, 250 000 jobs,…etc, seem too ambitious and too idealistic to achieve.

A: No it’s not idealistic. They are the result of the study. Of course it requires a will to implement the strategy. That’s why it made a number of serious recommendations for the government and it’s now left to the country to implement those recommendations. As an example, the good governance in the energy sector requires running it in full transparency, combating corruption, and keeping politics out of the management of the energy sector so people can work in a professional manner without influence or interference of politicians.

Q: All of this is too idealistic taking into consideration the current state.

A: OK, but either the country is destined to move forward, and INES showed the way forward and showed also the plan for each sector,  or… Those issues I’ve just mentioned are common talk among Iraqi people. Simple people nowadays say enough now and we need to bring efficient people and qualified people to run, not just energy sector, but even health, education, municipality,…etc. The lessons are learnt and it is left to the country to decide.

Q: You say INES has to be owned by the executive or the government. But governments change. How do you make sure it remains on track while governments come and go?

A: This is a very important point and I personally raised it during the preparation of the strategy and when we brought it to the council of ministers for discussion and vote. Our point of view is that this is a national document. That’s why we call it a national strategy. It does not belong to a political party or group or ethnic group. Any future government certainly has the right to review it and assess it. But it should not start from the zero point like what has happened with previous cabinets. This work has been done by professional people, with the help of an international independent consultant and with the assistance of the World Bank. Therefore it has no political connotations or references. It’s a national effort for the whole people of Iraq, with good objectives, regardless of who is in power.

Q: The implementation requires task forces, committees…etc, have these been set up and who will set them up?

A: They have not been set up because we are just now launching the strategy. We received the approval of the council of ministers in April and the PM has issued an order to all ministries in May to adopt the strategy and work accordingly. The next step is setting up a high level supervisory committee with all the required setup for follow up, coordination and assessment.

The Interview