Baghdad Officials Reassure Basra IOCs, As IMF Warns Of Missed Output Targets #oilservicesequipment #onshore #engineering

By 25th August 2015 Industry News No Comments

Senior figures from the Iraqi government descended on the southern oilfields in mid-August to congratulate and reassure the international oil companies (IOCs) operating them, as local protests threatened to add to delayed payments and security fears in potentially weakening foreign firms’ commitment and deterring investment.

Meanwhile, publishing the results of its latest Article IV consultation with Baghdad on August 18, the International Monetary Fund (IMF) highlighted gradually rising oil production as among the few current bright spots in a generally bleak short-term economic outlook for Iraq, while deeming even revised medium-term output targets unrealistic and warning the government about the same bureaucratic and infrastructure bottlenecks frequently bemoaned by IOCs.

Protests in the Basra area by local residents angered at the deficiencies in central government services to the region providing the bulk of its revenues have intensified in recent weeks as soaring summer temperatures have heightened anger over infrequent power supplies and poor quality water, in addition to longstanding complaints about a lack of local employment.

Caught in the middle, IOCs’ operations offer a natural target. Russia’s LUKoil, operator of the 13 billion-barrel West Qurna-2 acreage, has been the most vocal of the southern IOCs in stressing continued commitment to the asset since the oil price slump in 2014, while demonstrating the sentiment on the ground by raising output – which recently reached 450,000 barrels per day – and tendering contracts for a third phase of development to raise output to the planned 1.2 million bpd plateau.

West Qurna-2 is the northern half of the supergiant West Qurna field, the lower portion of which is under the operatorship of ExxonMobil and Royal Dutch Shell. The entire deposit has estimated total recoverable reserves of around 43 billion barrels.

However, following unrest at West Qurna-2’s facilities in early August, LUKoil officials apparently sent a warning to Baghdad that output would be affected should such disruption be allowed to persist. The response demonstrated the absolute necessity for the government of ensuring that southern production, source of more than 90% of state income, is maintained – with Prime Minister Haider al-Abadi visiting West Qurna-2 on August 19 to offer reassurance.

“The situation is under control and the companies must not fear any threat,” he asserted. “Some people stand against the progress of Iraq and place obstacles in its way, but we won’t allow them and will use all our capabilities to stop them and [we shall] continue producing oil.”

Baghdad strengthened the state security presence at the southern fields in the wake of the invasion by the militant Islamic state group in the north last year by deploying 100,000 security personnel. It informed delegates at a recent OPEC meeting that a further 27,000 would be sent to protect oil facilities – presumably as much from localised unrest as from any Islamic threat, which has been notable in the south by its absence.

Super-major BP, operator of the nearby 17 billion-barrel Rumaila field, has also restated commitment to Iraq despite the challenges of the past year – though the company acknowledged in May being owed considerable arrears and acceded to a government request to cut the development budget for this year from US$3.5 billion to US$2.5 billion. Facilities have been similarly targeted by recent protests.

The field is by far the most immediately vital to Baghdad by dint of the 1.3 million bpd already being produced there – equivalent to around 40% of the southern region’s total and thus the biggest single contributor to Iraq’s budget. In recognition of such importance, deputy oil minister Fayadh Al-Nema visited the field on August 16 to attend a celebration of five years of operations by the BP-led developer consortium and restated the revised output target of 2.1 million bpd agreed in September 2014.

Exports hit a new record high in July of 3.1 million bpd, the vast majority coming from the south after the Kurdistan Regional Government (KRG) largely ceased sales through the federal State Oil Marketing Organization (SOMO).
The IMF report notes that Baghdad now appears highly unlikely to meet the 3.3 million bpd average for the full year envisioned in the 2015 budget – and thus Iraq is expected to record a far wider than expected deficit, equivalent to around 18.4% of GDP. Further ahead, the Washington-based body foresees production reaching 4.7 million bpd in 2018 and exports climbing to 3.84 million bpd.

Baghdad recently revised downwards its own 2020 production and export targets to 7 million bpd and 6 million bpd respectively. But NewsBase Research does not see sufficient progress being made to infrastructure and export projects in the interim to support these levels, and still believes the targets are ambitious. Crude production of 5.6 million bpd and exports of 4.6 million bpd seem more realistic.

The IMF cited insufficient storage and pipeline capacity, delays to the crucial Common Seawater Supply Facility (CSSF) to facilitate the requisite water injection, and “inefficient and slow procedures for approval of field development plans and signing off on contracts to advance projects” as avoidable factors slowing output growth – aside from the unwillingness of IOCs to invest under such uncertain global and local conditions.