January 24, 2011 / 2:06 PM / 9 years ago

Tougher times ahead for oil firms in Iraq

BAGHDAD (Reuters) - The real challenge for foreign oil firms in Iraq is all before them as they face poor infrastructure and depleted reservoirs, which will make it hard to maintain a pace that has put them ahead of schedule so far.

Oil major BP and Italy’s ENI took less time than expected to increase output above the 10 percent level that triggers cost recovery.

But at the same time, Iraq has toned down its capacity ambitions.

Officials have begun to speak of 8 million barrels per day (bpd) as the implied target of a series of deals awarded to international oil firms in 2009, down from the 12 million bpd of capacity previously flagged, which would have set Iraq level with top exporter Saudi Arabia.

“The easy part is always the first initial quick raising of production, which actually did not have much to do with anything,” said Samuel Ciszuk of IHS Energy.

“Now we have started moving towards the second phase with a proper production capacity increase that is hard to be constructed. The tough work begins now to a certain extent.”

To reach the 10 percent initial production target set in the development contracts signed by Baghdad, oil companies drilled a few wells, overhauled existing ones, built small pipelines and repaired old infrastructure.

Progress so far has taken production to 2.7 million bpd, Iraq has said, the highest level in two decades for the war-ravaged nation.

Increased output has come mainly from Rumaila and Zubair fields, developed by BP and ENI, respectively.

To get to the next level of lofty output levels to be sustained over years, the firms and Iraq will need to invest billions of dollars on improvements to infrastructure — building storage tanks, export terminals and pipelines.

WATER INJECTION

One vital project is a water injection scheme to help increase the amount that can be pumped from the southern oilfields and overcome rapid production decline rates.

The project will be led by U.S. oil major ExxonMobil and could cost above $10 billion.

It would initially be funded by oil firms, and Iraq would need to repay the cost from its oil revenue at a later stage.

In addition, Iraq needs a way to export the extra oil. Its offshore terminals are already stretched to capacity and dilapidated. Its export pipeline to Turkey suffers frequent maintenance problems and is often bombed.

At the same time, the government, which forecasts a 2011 budget deficit of $11.99 billion, is in desperate need of billions of dollars to rebuild after years of war and underinvestment.

The current oil price rally, which has taken the market above $90 a barrel, should help.

“But the problem is not necessarily money ... The bigger question is will you be able to make the infrastructure more efficient,” said Raad Alkadiri of PFC Energy.

“At the end of the day, it’s a question of governance and policy.”

OPEC member Iraq, which sits on some of the world’s largest oil reserves, last managed to push oil output to 3 million bpd in the late 1980s, before it invaded Kuwait, which led to a U.S. military retaliation and crippling sanctions.

A Reuters poll in October found analysts expected Iraq’s crude oil output to rise to 2.8 million bpd by the end of 2011 and only 4.6 million bpd by 2015.

BACKING AWAY FROM TARGET

That rate of progress would make the previously stated level of 12 million bpd in six to seven years not feasible.

In November, Thamir Ghadhban, a senior oil adviser to Prime Minister Nuri al-Maliki, said Iraq could raise oil output potential to 8 million bpd by 2017.

Since then, others have echoed Ghadhban. Analysts said the adoption of a more realistic target could be in part political and could serve to calm any tensions with other members of the Organisation of the Petroleum Exporting Countries.

“I think the initial numbers being thrown around, 12 million bpd within seven years time, was politically motivated. Elections were coming up,” said Ciszuk of IHS.

The war-damaged country is the only member exempt from supply curbs under OPEC’s system of managing output.

Eventually it will be set a target, and Iraq’s output ambitions have been viewed in part as positioning for a high limit, as opposed to achievable targets.

Former oil minister Hussain al-Shahristani said last year he expected an OPEC output limit of no less than that of the group’s most influential member, Saudi Arabia.

“OPEC members are convinced Iraq is over-exaggerating with its future production targets, and I think Iraq will succumb to reality at the end of the day and admit such a target is impossible to achieve,” said Esam al-Chalabi, a former Iraqi oil minister.

“Reaching 12 million bpd is an impossible target. Where are the water injection projects? Where are the huge storage facilities? Where are the export pipelines? Iraq should answer these issues and only then can it set a high production target.”

Additional reporting by Barbara Lewis in London and Rania El Gamal in Baghdad; Editing by Rania El Gamal, Barbara Lewis and Jane Baird

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