Despite having grown oil production since 2009, water constraints, midstream infrastructure woes, contract terms and other aboveground factors have hindered Iraq’s ability to hit production targets, according to a report released May 31.

“Collectively, Iraq’s southern technical service contracts (TSCs) have added 2.3 million [barrels per day] of oil production since 2009—a remarkable achievement given the challenges,” Ian Thom, principal analyst of upstream MENA for Wood Mackenzie, wrote in the report. He noted that 70% of the added barrels are growth, while the rest are offsetting baseline decline.

But Iraq is producing 4.7 MMbbl/d below its 8 MMbbl/d plateau production target (PPT), Thom said, adding it has “only achieved one-third of the incremental production required to meet the PPT,” excluding baseline production.

Data from OPEC’s latest monthly oil market report showed Iraq produced about 4.37 MMbbl/d in April, down from about 4.41 MMbbl/d in March.

Efforts to grow production come as the global oil and gas industry continues to rebound from a prolonged downturn. About eight years after the oil-rich republic, which generates 90% of its revenue from oil, awarded development rights to some of the world’s biggest oil companies, it has been challenged by commercial, technical, political and security issues.

In line with most fellow OPEC members, Iraq agreed to curtail its production in an effort to improve global oil market conditions, consenting to lower production by 210 Mbbl/d to 4.3 MMbbl/d during the first half of 2017. Last week, the country also agreed to participate in a nine-month extension of the cuts, with a Russia-led non-OPEC delegation, which will lower production of participating countries by a total of 1.8 MMbbl/d through March 2018.

Also like some of its Middle Eastern neighbors, Iraq continues to cope with security risks posed by militants. “The cost of fighting [Islamic State] militants has been a major reason why the government has struggled to meet scheduled oil payments and has called for investment to be slowed down,” the report said.

But Wood Mackenzie placed Iraq’s technical service contract terms, oil transportation and water supply for reservoir pressure support as the top concerns affecting the country’s production growth potential. Expectations in 2009 of reaching 12.5 MMbbl/d by 2017 have proven unrealistic, given the country’s challenges coupled with changing market conditions.

Technical Service Contract: A low per-barrel fee may have triggered hopes of steady income and internal rates of return worthy of pursuit for oil companies, but the report said “shortcomings are apparent” with bureaucracy delaying projects and payments following the late 2014 oil price plunge. As part of the 20-year service contracts awarded in 2009, companies get a fee for each barrel produced above a baseline set by the government.

Yet, Iraq, struggling financially due to political instability and market conditions in recent years, has been late making payments to operators.

“The late payments [to operators] have eroded project returns, and demands to reduce capital expenditure [paid by the government through cost recovery] have disrupted the schedule for investment projects, which in turn further erodes project returns,” the report said.

However, the government improved the terms in 2013 and 2014, “with an increased net profit fee due to a reduced state interest and lower PPT.”

Oil Transportation: Production gains have led to midstream woes. Upstream operators such as BP Plc (NYSE: BP) and Lukoil at the Rumaila West Qurna fields, respectively—the countries’ biggest oil fields—are responsible for field development work. Still, Iraqi state enterprises have not kept up pace in providing midstream capacity to accommodate two blends, according to the report.

Although additional storage tank capacity is needed, Wood Mackenzie said, progress has been made in some areas including:

  • Offshore loading with capacity doubling to 4.5 MMbbl/d thanks to single-point moorings;
  • Additional storage tank capacity at the Zubair, Tuba and Fao tank farms;
  • Pump station upgrades with new capacity at Fao forthcoming; and
  • New tie-in pipelines and pipelines direct to Fao for the West Qurna 2, Majnoon, Halfaya, Missan, Gharraf and Badra fields.

Water Supply: Meanwhile, “progress has stalled” on Iraqi’s proposed Common Seawater Supply Project. Wood Mackenzie explained that Iraq’s oil fields need water injection to improve recovery rates, something the report noted was critical for fields such as Mishrif which have heavy oil, poor aquifer support and fast decline rates.

The project would make up to 12.5 MMbbl/d of desalinated water available to southern oil fields, but money could be an issue for the Iraqi government. The report, however, pointed out a scaled-down plan to supply seawater in 2.5 MMbbl/d stages is in the works.

Despite the challenges, Iraq “undoubtedly has the large-scale low-cost oil resources in its southern fields to underpin production of over 10 MMbbl/d. And with companies actively repositioning lower down the cost curve there is a fundamental (e.g. pre-tax and excluding country risk) advantage for Iraqi assets to attract capital,” the report said.

Iraq is also considering other ways to better cope with changing market conditions. Reuters reported May 31 that Iraq’s State Oil Marketing Organization, known as SOMO, is considering hedging.

During a visit to Houston in March for CERAWeek by IHS Markit, Iraq Energy Minister Jabbar Ali al-Luiebi said, “There are a lot of great opportunities in Iraq for investment.”

Though Iraq, OPEC’s second-largest oil producer, has more than 70 oil fields, only 30% of these are developed or partially developed, he said, after mentioning how international oil companies have been invited to submit new contract models to develop fields. In Iraq, fields considered small are capable of producing 100 Mbbl/d, with giants at more than 1 MMbbl/d.

Velda Addison can be reached at vaddison@hartenergy.com.

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