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Troubled Baghdad scales back oil strategy

Feb. 20, 2013 at 4:28 PM   |   Comments

BAGHDAD, Feb. 20 (UPI) -- The brewing oil war between Iraq's central government and a defiant Kurdistan, and wider security concerns, are forcing Baghdad to downsize its ambitious plans to quadruple oil output by 2017 and challenge Saudi Arabia as the world's top producer.

The growing dismay of international oil companies about a bumbling and corrupt bureaucracy, infrastructural blockages and the poor terms in drilling contracts signed since 2009 also have a lot to do with the Oil Ministry's realization that a scale back is necessary.

"Baghdad's energy strategists have reason for caution ... as they survey longer-term prospects for the country's critical economic sector," the Middle East Economic Digest observed.

"The move to downgrade its targets reflects widespread industry recognition that the original targets are neither achievable nor desirable."

When Baghdad threw open Iraq's rich oil and natural gas fields for exploration and development by international companies four years ago, it had visions of boosting production from 1.5 million barrels a day to 12 million bpd by 2017.

In recent months, with production averaging 2.9 million bpd, it became clear that massive infrastructural shortfalls and other problems made that target unachievable. Baghdad quietly reduced its goal to 8 million-9 million bpd by 2020.

Iraq has reserves of 143.1 billion barrels but industry analysts say as much again lies in unexplored regions.

Saudi Arabia, by comparison, has reserves of 296.5 billion barrels and a production capacity of 10 million bpd.

The most explosive issue is the migration of major international oil companies from the rich oil fields of southern Iraq, where Baghdad had concentrated its drive to boost production, to semiautonomous Kurdistan in the north.

The defections were led by Exxon Mobil, the world's biggest oil company.

In October 2011, Exxon signed a deal with the Kurdistan Regional Government for six exploration blocks on far more beneficial terms than the tight-fisted, 20-year production deals Baghdad had offered to allow the majors back into Iraq three decades after the oil industry was nationalized.

Exxon, which sacrificed its hefty stake in the huge West Qurna 1 field in the south, was followed by Chevron, Total of France and Gazprom Neft of Russia, lured by the more attractive terms offered by the KRG, which has oil reserves totaling 45 billion barrels.

Baghdad issued dire threats against these companies but hasn't taken legal or punitive action against them, possibly for fear of driving away future investors.

But neither has it made any great effort to resolve the shortcomings of the Oil Ministry in upgrading and expanding long-neglected infrastructure -- rusting pipelines, inadequate export terminals, storage and electrical power -- that the companies require if the industry is to be modernized and production/export targets achieved.

"More significantly," MEED reported, "oil majors are seeking changes to the terms of their contracts."

This centers on reducing the overly ambitious production targets set by the Oil Ministry in 2009 and here at least the government is going along to get along.

Lukoil of Russia was the first to secure significant changes in its contract for the West Qurna 2 megafield in southern Iraq, where two-thirds of the country's known oil reserves lie.

On Jan. 17, it signed a revised contract cutting back its production target from 1.8 million bpd to 1.2 million bpd by 2017.

BP may be next. It's been negotiating to reduce its target of boosting output from Rumaila, another giant southern field, to 1.8 million bpd-2.2 million bpd from the 2.85 million bpd it signed up for.

But BP may also find itself in the crosshairs of the Baghdad-KRG split because the government wants it to restore declining production at the Kirkuk field, the biggest in the north -- and also the center of a territorial dispute.

The Kurds claim Kirkuk was historically part of the Kurdish provinces under the Ottomans who ruled Iraq for 400 years until 1922.

The border between Kurdistan and the rest of Arab Iraq has become a powder keg.

Both sides have heavy military forces deployed in a highly volatile standoff. If BP agrees to move in to restore the fields, it could find itself caught in a shooting war.

"The outcome of the wave of contract negotiations will go a long way to shaping Iraq's chances of realizing its potential as the world's fastest-growing oil producer," MEED observed.

Topics: Gazprom Neft
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