Oil sector revs up to exploit higher prices

Reuters

• OPEC quota to rise to 4.5m bpd, but sector ripe for further expansion
• Global giants interested, but concerned about security situation
• Dispute with Kurdistan over sovereignty of oil fields continues

The Iraqi oil sector is surging, with revenues hitting $11.1 billion in March – the highest monthly oil export figure since 1972. 

In April, crude oil exports (excluding the Kurdistan region) rose by 3.9 percent to 3.38 million barrels a day. Buoyed by promising increases in output and high oil prices, Baghdad is setting optimistic new targets for the sector. 

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Last month, oil minister Ihsan Abdul-Jabbar said Iraq would increase its crude oil production to eight million bpd by the end of 2028. Its OPEC quota is set to rise to 4.5 million bpd in June as the group continues to compensate for the decline in Russian energy products, but its potential is even greater.

Ripe for development

Figures from the US Energy Information Administration suggest the sector is underdeveloped – and ripe for further development. 

The US agency estimates that Iraq boasts some 145 billion barrels of proven crude oil reserves, which is nine percent of world reserves and roughly 18 percent of the Middle East’s.

The Nasiriyah and Gharraf oil fields in the Dhi Qar province are coming under the spotlight as Baghdad’s oil administrators look to boost production. 

The Nasiriyah field, boasting a potential 4.36 billion barrels, has long attracted the interest of international energy firms, but the last round of deals came to nothing because of Iraq’s precarious security situation, leading the government to order state-run firms to take charge of developments.

In the past few months, Iraqi Drilling Company has started work on the first of 20 new oil wells at Nasiriyah with support from Weatherford, a leading American drilling firm. The new wells are set to increase production by 40,000 bpd.

At Gharraf, the Iraqi oil ministry has been urging operator Petronas to double production on the 1 billion-barrel field to 230,000 bpd, a target it had hoped to reach in 2020, before the coronavirus pandemic delayed efforts.

Elsewhere, French energy giant TotalEnergies is moving forward with the $3 billion Common Seawater Supply Project – a large-scale seawater treatment unit that will increase the water injection capacity in Iraq’s southern oil fields, helping to enhance crude output.

Iraq has also made some progress in upgrading its export capacity. The country had been exporting as much as 3.7 million bpd from its southern ports in Basra until mid-2020, when crumbling infrastructure forced the government to reduce capacity while urgent repair and reform works began. 

Earlier this year, the installation of pumping stations was completed, allowing exports volume to recover in recent months. 

In May, exports averaged 3.3 million bpd. The oil ministry plans to boost southern export capacity to 6 million bpd by 2025. 

Kurdish oil dispute

The major hurdle holding back the Iraq oil sector is the long-running dispute with the semi-autonomous Kurdistan Regional Government (KRG) over the sovereignty of oil fields and its right to export crude independently of the federal government. 

The dispute has ramped up in recent months against the backdrop of political jockeying in Baghdad following inconclusive parliamentary elections.

In February, the Federal Supreme Court declared Kurdistan’s 2007 oil and gas law “unconstitutional”, opening the door for Baghdad to take control of the entire sector, including the KRG’s contracts with foreign companies.

Three months later, the Iraqi oil ministry sought to clarify its position, saying: “Allowing any region to conclude oil contracts and agreements with international companies and countries to export crude oil and gas violates the provisions of the Iraqi constitution because the federal government is responsible for formulating the oil and gas development policy and manage their activity and external trade.” 

It also criticised the financial terms of the KRG production-sharing contracts: “KRG production-sharing contracts have very high benefits and profits for foreign companies to the detriment of the government due to the absence of transparent competition and following the method of direct bilateral contracting with companies in awarding these contracts.” 

In response, the judicial council of Iraqi Kurdistan issued a ruling that the region’s 2007 oil and gas law, under which the production-sharing agreements were signed, remains in effect. 

The council added: “The actions of the Kurdistan Regional Government in relation to oil and gas operations are in accordance with the Iraqi constitution of 2005.”

A delegation from the KRG is expected to visit Baghdad in the coming weeks to defend this ruling and its right to control its oil revenues.

Sensitive time

A KRG government official, speaking on condition of anonymity, told AGBI: “The federal supreme court decided to take a decision against the oil and gas sector. We have said many times that this is unconstitutional and it is political.

“It is coming at a time that is very sensitive for Iraq, as the Iraqi government is in formation, and the presidency is still yet to be sorted.

“In the constitution, it says before 2005, any oil fields in Iraq should be under Baghdad or Iraqi federal control, but after that, this article is not even in the constitution. 

“This supreme court decision has made a constitutional claim, but there is no article in the constitution against the KRG oil and gas sector or its investments.”

The official added: “The federal court decision was based on a case in 2012, that’s why we are saying it is political. After 10 years, this is being brought back, and during this specific time, it is definitely political.”

On May 21, the federal oil ministry announced plans to establish an oil company for the Kurdistan region to be tasked with signing new service contracts with international energy firms. 

The battle for control of the KRG’s oil and gas resources is likely to cast a long shadow over a sector otherwise in rude health.