New Contract Signals Serious Development Of Iraq’s Huge Nasiriyah Oil Field
The idea of developing the 4.36 billion-barrel Nasiriyah
oilfield in southern Iraq’s Dhi Qar province has been seriously mooted by the
each of the rapid succession of governments in Iraq since it was discovered by
the Iraq National Oil Company in 1975. These plans have variously been for the
standalone development of the oil field or its development within the broader
scope of the ‘Nasiriyah Integrated Project’ (NIP) that also includes the
corollary construction of a 300,000 barrels per day (bpd) refinery. All major
plans stalled in one way or another but last week’s signing of an 18-month
contract to international oil and gas well drilling company Weatherford
International with the Iraqi Drilling Company (IDC) to provide services and
project management for the drilling and completion of 20 wells in the Nasiriyah
field signals that a sustained and substantial development of Iraq’s hidden
hydrocarbons gem may finally be underway.
The original plans to develop Nassiriya on a standalone
basis were shelved in the lead-up to the Iran-Iraq war that began in 1980 and
lasted until 1988. The field eventually came properly on-stream in 2009 and was
listed in the 2009-2010 fast-track development plan, which aimed to raise the
field’s output to at least 50,000 bpd in the first phase. At that point – in
H109 – Italy’s ENI, Japan’s Nippon Oil, the U.S.’s Chevron, and Spain’s Repsol
submitted bids to develop the field on an engineering procurement construction
(EPC) contract basis. At that point, the Japanese consortium led by Nippon Oil,
and also comprising Inpex, and JGC Corporation, looked set to win the contract
before negotiations broke down again.
In 2014, a serious push was made to resuscitate the
development of the Nasiriyah field within the broader scope of the NIP. This
followed the departure in September of that year of the divisive figure of Shia
Islamist Nouri al-Maliki as prime minister, and his replacement by Haider
al-Abadi, which, although he was also Shia, prompted optimism in the international
investor community that a more inclusive government – with a more secure
mandate – might emerge. This optimism was bolstered by al-Abadi’s announcement
of his three deputies - Hoshyar Zebari, the Kurdish outgoing foreign minister,
Saleh al-Mutlak, a secular Sunni who held the same post in the last government,
and Baha Arraji, a Shia and former MP – which prompted then-U.S. Secretary of
State John Kerry to say that the new cabinet “has the potential to unite all of
Iraq’s diverse communities.”
In terms of the bidding itself, changes to the original
widely unpopular technical service contract were made that were aimed at
addressing many of the concerns of international investors about the previous
drafts, which many saw as falling short of the type of production sharing
contracts (PSC) that they preferred. Unlike the previous contract model, the
new one offered investors a share in project revenues. However, this share
would only be paid under the new contract model when production began, and the
Oil Ministry would pay recovery costs from the date of commencement of work,
which differed to the previous contract model in which the costs were only paid
when the contractor raised production by 10 percent.
Nonetheless, investors would still have to pay 35 percent
taxes on the profit they made from the Nassiriya project, the same amount as in
previous deals. At that stage in 2014, the international engineering and
construction firm Foster Wheeler had already completed a front end engineering
and design study for the refinery, and seven of the original potential bidders
remained from the previous bidding list (India’s Reliance Industries, France’s
Total, Russia’s Lukoil, and Zarubezhneft, China’s CNPC, the U.S.’s Brown
Energy, and a Japanese joint bidding team from JGC and Tonen General). These
had also been augmented by India’s Oil and Natural Gas Corp and its Essar Oil,
Russia’s Rosneft, France’s Maurel & Prom, and South Korea’s GS Engineering
& Construction.
Predictably enough, however, given Iraq’s history of endemic
political corruption and deeply ingrained sectarianism, this optimism proved
ill-founded. As summarised by the independent international non-governmental
organization, Transparency International (TI), in its ‘Corruption Perceptions
Index’, Iraq demonstrates: “Massive embezzlement, procurement scams, money
laundering, oil smuggling and widespread bureaucratic bribery that have led the
country to the bottom of international corruption rankings, fuelled political
violence and hampered effective state-building and service delivery.” Although
acknowledging that the country’s anti-corruption initiatives and framework have
expanded since 2005, TI added that these initiatives still fail to provide a
strong and comprehensive integrity system. “Political interference in
anti-corruption bodies and politicization of corruption issues, weak civil
society, insecurity, lack of resources and incomplete legal provisions severely
limit the government’s capacity to efficiently curb soaring corruption,” it
concluded.
In 2017, though – again, predictably enough, given what the
country is doing across all Middle Eastern countries (and elsewhere) that are
essential in its ‘One Belt, One Road’ mega-project – China stepped forward with
a handy solution to Iraq’s problems. At that point, China’s need to safeguard
its energy security had become all the more acute, with domestic oil production
for mature Chinese fields falling eight percent year-on-year in the previous
year. This prompted Beijing in 2017 to relax its directive to all state-owned hydrocarbons
companies of the last two years to cut budgets. From the Iraqi side, there was
a new-found impetus for expediting as much production from the south of the
country ahead of the chaos in oil supplies from the north that was likely to
result (and did) from Kurdistan’s independence referendum to be held in
September. Additionally, achieving the 5.4-6.0 million bpd output target by the
end of 2018 that was still in play – although it had been recently revised down
from 8.4-9.0 million bpd - and to at least 9 million bpd by the end of 2020,
remained a core component of Iraq’s overall economic recovery strategy.
At the beginning of August of that year, then, China’s
Sinopec and PetroChina proposed a deal that would see the NIP being rolled out
as part of the broader ‘Integrated South Project’ (ISP). The ISP (later
rebranded as the ‘South Iraq Integrated Project’) aimed to boost output across
Iraq’s southern oilfields, and also to build out related infrastructure,
including pipelines, transport routes, and the construction of the Common
Seawater Supply Project (CSSP), that was to have been led by ExxonMobil. “The
Chinese said that they would spend US$9 billion on the refinery and the first
phase of their developing Nasiriyah but as, under the terms of Iraqi oil
contracts, the Iraqis would have to pay back this cost to the Chinese from the
value of oil recovered, so the initial reaction from the Oil Ministry was to
decline the offer, and say that the development should only cost around US$4
billion, which the Chinese in turn flatly turned down,” a source who works
closely with Iraq’s Oil Ministry told OilPrice.com last week.
The Chinese had other demands that grated on Iraq at that
time as well. “In line with the US$9 billion figure, the Chinese said that it
wanted its firms to receive their costs back in a much shorter timeframe than
most other similar projects, which meant that they were effectively asking for
a per barrel remuneration fee at a 15 percent premium to the highest maximum
fee being paid to any company in Iraq for a regular crude oil producing field,
which was US$6 per barrel to PetroChina for al-Ahdab,” said the source. “This
would mean that the Chinese would get around US$6.90 per barrel, more than
[Angola’s] Sonangol for its heavy oil extraction at Najmah [US$6 per barrel]
and Qairayah [US$5 per barrel] and would dwarf the US$1.49 per barrel that
[Malaysia’s] Petronas was getting for the same type of field of Gharraf,” he
added. “Additionally, the Chinese were demanding that it was given [Iraqi]
dinar-denominated government-backed bonds for the entire amount [US$9 billion]
that could be cashed in if the development did not start to generate large
amounts of oil quickly,” the source told OilPrice.com.
Given the new contract for Weatherford International,
working alongside the IDC, it may be that new Iraq Prime Minister, Mustafa
al-Kadhimi, is continuing to try to walk a tightrope between appeasing the U.S.
and Iran. “The U.S. has been a major financial backer for Iraq since the
removal of Saddam Hussein from power in 2003 and some of its companies are the
most able to complete certain key projects properly, particularly ExxonMobil
with the CSSP,” the source said. “On the other side, though, [al-] Kadhimi
needed the support of the Fateh Coalition to be made prime minister, and Fateh
has very close links to [Iran’s] IRGC [Islamic Revolutionary Guard Corps], and
Iran wields huge power in southern Iraq through its political and military
proxies.” With this new contract, then, he concluded, Iraq appears to be
signaling to the U.S. that Nasiriya is up for grabs again – along with the
other stalled oil projects – and that, if necessary, China is already lined up
to step in, adding another Middle Eastern country to the power bloc that it is
gradually accumulating together with firm ally Russia.
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