Iraq's Oil Expansion Plans Face Major Challenges

January 14, 2011 - 5:19 AM

Iraq oil

Iraq’s Rumaila oil refinery, near the city of Basra, 340 miles southeast of Baghdad. (AP File Photo/Nabil al-Jurani)

Basra, Iraq (AP) - Hundreds of miles of mostly rusty pipelines cut across the bleak desert landscape near this southern port city under a smog-filled sky, as foreign crews in flak jackets, guarded by armed security, work nearby to extract the crude oil on which Iraq has pinned its future.

They are among the hundreds tasked with boosting Iraq's oil after the country awarded foreign firms access to its fields. But as they begin their work, the scope of their challenge is becoming painfully clear. Pipelines are old and their capacity is too low. Storage terminals are needed. Ports must be upgraded after decades of neglect.

Iraq is hoping to rake in tens of billions of dollars from its oil sector. But it's not a matter of simply ramping up production from the fields -- Iraq's infrastructure is barely enough to move the amount of crude it's already producing to markets. Iraq's perennial security woes and a government still struggling to get its footing and direction all contribute to the uncertainty of how to these projects will move forward.

Samuel Ciszuk, Mideast energy analyst with IHS Global Insight in London, said Iraq's colossal projects will require a tremendous effort by the companies and more crucially by the Oil Ministry.

"Foreign investors will struggle to find enough skilled workers, equipment and material while controlling project costs," Ciszuk said in a recent analysis report.

"The Iraqi side, however, will struggle to muster enough financial resources to resolve the infrastructure bottlenecks for which it is responsible," he added.

Few expected that revamping Iraq's oil sector would be easy.

The country, a founding member of the Organization of the Petroleum Exporting Countries, sits atop the world's fourth largest proven reserves of conventional crude. But decades of sanctions, neglect and, most recently, sabotage following the U.S.-led 2003 invasion have left Iraq barely approaching the 3 million barrels per day it produced in the late 1980s.

Iraq's target, with the awarding of 12 oil fields to foreign companies since 2008, is 12 million barrels per day by 2017 from slightly over 2.7 million barrels a day now.

Iraqi oil officials say they recognize the problems that are surfacing as work progress. An oil and gas expo was held in late November in Basra, with most of the participants oil service companies.

The country's new oil minister, Abdul-Karim Elaibi, said he will make the expansion of infrastructure a top priority in order to ease the bottlenecks that now threaten to slow down or halt the projects.

"We have urgent plans to meet the expected increase," Elaibi told reporters at a recent press conference. "We already started some of them, and we will focus on starting the others."

A master plan adopted by the ministry in mid-2010 says Iraq is planning to add an additional 4 million barrel per day export capacity by 2013 from the south -- the main export hub -- up from current levels of 1.6 million barrels per day.

It also plans to increase the export capacity from the northern pipeline to Turkey's Ceyhan Mediterranean port to 1.6 million barrels per day from about 500,000 barrels a day now. A third planned project is a 2.5 million barrel-per-day pipeline network to transfer crude from the southern oil fields north to west to the Syrian port of Banias on the Mediterranean.

Baghdad late last year signed two deals with U.S. engineering firm Foster Wheeler and Singapore-based Leighton Offshore Private Ltd. to build new pipelines and four floating oil export terminals in the Gulf, near Basra, which handles about 75 percent of Iraq's total oil exports.

Each terminal will handle 900,000 barrels a day. The first of the four is slated for completion by September or October.

Elaibi said recently that Iraqi will soon hire an international consultant to advise on planned pipelines and storage projects before issuing tenders.

Other hurdles have also emerged on top of the security concerns that have persisted despite an overall drop in the level of violence since the violent, postwar days of 2004 through 2006.

As companies began to move workers and equipment in, complaints also surfaced about the bureaucratic red tape. Visas were delayed and getting the equipment to the fields was difficult because of poor roads.

To overcome the delays at Iraqi ports, Iraq agreed with Royal Dutch Shell PLC to build its own dock in Basra's Shatt al-Arab waterway, according to Anmar al-Safi, the spokesman of state-run Iraqi Ports Co.

Shell and partner Malaysia's Petronas are developing the 12.5 billion-barrel Majnoon field.

Another obstacle was the shortage of water that must be injected to boost pressure in the reservoirs. Many of Iraq's fields have experienced declining output largely because well pressure has not been sustained.

Among those affected is the West Qurna Stage 1 fields, said Madhi Abdul-Razak Swadi, the head of the joint management commission that runs the field. The 8.6 billion barrel field -- one of Iraq's largest -- is being developed by Exxon Mobil and royal Dutch Shell PLC.

Production in the field began in 1999 and reached 480,000 barrels per day in 2003. But because of insufficient well pressure, output had fallen to half that by the time the Exxon Mobil-led consortium signed the deal in March.

To deal with this problem, Exxon and other companies in the area are working on a water injection project that will feed sea water into all the fields in the Basra region. The companies share the costs, based on their respective use of water, and will be reimbursed by Iraq when production ramps up, Swadi said.

Work on the project is slated to begin in the second half of 2011. In the meantime, Exxon and Shell are using small scale water injection projects to arrest the decline. Output is projected to climb to 270,000 barrels per day by May.

"I think the work is finally starting to progress faster," said Ronald Shane Large, Exxon Mobil's operations manager at the field. Like many of his foreign colleagues, Large wears a flak jacket and is accompanied by a security contractor -- clear signs that even as security is improving in Iraq, the risks are still huge.

It was "a little slow starting, but I think ... we are all working hard to get more well completed," said Large.