Accenture Oil and Gas consultant Waleed Kamhieh explores an overshadowed success story
In June 2015, Iraq produced an average of 3.19 mm bbpd (million barrels per day), the highest level of production since 1980, and it has surpassed the 2.8 mm bbpd peak just before the war in 2002. This truly remarkable accomplishment is a testament to the determination and resolve of the OPEC founding nation, investing in a better future for itself.
As a strategy consultant with Accenture’s oil & gas practice in London, and a member of the Society of Petroleum Engineers, I have worked on case studies and investment projects in the Middle East, Africa, Latin America and South East Asia. I follow the latest developments in the oil industry in several countries with great interest, including Iraq.
So, how has Iraq achieved this increased level of production over the past decade? In this research based [i]article I am hoping to explore this in more depth as well as what can be done to sustain it.
Following the collapse of the Saddam regime and the 2003 US-led invasion, the oil infrastructure was one of the few parts of the country that the coalition forces actively sought to protect from vandalism and sabotage. For example, securing the Basra export terminal at the northern tip of the Persian Gulf, with an export capacity of 1.6mm bbpd , was a high priority. While not completely immune from the destruction that other parts of the country experienced in the lawlessness that ensued, this initial effort left a large part of the oil infrastructure intact. The minor damage that was done was generally reparable by the highly skilled and experienced Iraqi engineers and technicians, as well as by international contractors. While some of the more vulnerable parts of the infrastructure, such as cross country pipelines, were repeatedly attacked, overall the oil sector survived relatively unscathed, with production only declining 1 mm bbpd to 1.5 mm bbpd. This makes an interesting contrast when compared with the 1991 Gulf War when production fell by nearly 2.5 mm bbpd to just under 0.5 mm bbpd.
That being said, over a decade of sanctions following the end of the First Gulf War meant much of the preserved infrastructure and facilities were operating at suboptimal levels. Sanctions made maintenance, upgrades and capital investments near impossible; the fact that the sector was operating at all was testament to the resolve and ingenuity of the Iraqi engineers and technicians.
A key decision made by the Iraqi government, which still has major implications today, was to open up the oil sector to all major International Oil Companies (IOCs). This has led to players including BP, Shell, Total, Lukoil, Petronas, China’s CNPC operating in some of the world’s largest oilfields in the south of Iraq today. More stringent production agreements than would have been negotiated a few decades before were also put in place. These included receiving cost recovery payment in barrels of oil rather than in cash. Incidentally, this strategy has since proved valuable to the cash strapped government, as it currently funds its war against ISIS.
Meanwhile in the Kurdish north of the country, IOCs and independent producers were also encouraged to invest in the relatively underdeveloped region. Genel Energy, a Turkish player (led at the time by former BP chairman Tony Hayward) was one such producer. Taqa, the Abu Dhabi controlled explorer and producer, is another one. In fact, production in Kurdistan has grown so fast that major export infrastructure has been constructed to handle the new supplies!
Despite these successes, it seems that one of the industry’s most important assets, the Iraqi oil professionals, were not adequately protected. After 2003 the engineers who had kept the ageing infrastructure running began to leave Iraq in fear for their lives. This led to a tremendous brain drain at the time when they were most needed. Although they have begun to trickle back, more needs be done to protect them and their families. This will be crucial if the industry is to have a chance of approaching its ambitious production targets of 5.5-6 mm bbpd by 2020.
Basra Oil Terminal
Iraq must also continue to invest in the next generation of home-grown industry professionals. Young Iraqi men and women must be encouraged to consider oil & gas related degrees and professional training programs. Even related fields such as finance, accounting, consulting, construction and HR management must be encouraged. Iraqis will need to maintain a world class talent pool in order to embrace the changes happening within a new Iraqi oil industry – an industry that is markedly different from that of the last 50 years – with a commercial landscape that is now wide open to international competition. Success stories such as the indigenous KAR Energy Works are important in shaping this. KAR produces oil from the Khurmala field and operates the Erbil refinery. It shows how, with the right incentives, education and experience, home-grown operators can succeed. This can be replicated throughout the country.
Incentives also mean having the right oil production frameworks in place. The initial Oil Law passed by the Iraqi government in 2007 introduced production sharing agreements, something unheard of among Middle Eastern OPEC members, due to the length of the contracts and greater ownership typically granted to the IOCs, and it has met with opposition from various parties. Thus future revisions of the law will have to incorporate the concerns of all those affected by it. The interpretation and implementation of this law has become a source of tension, particularly between the central government and the KRG. However, in the long term, there is a very lucrative mutually beneficial relationship to be exploited by all parties – and in the case of the KRG, it should be allowed to export its oil and receive an appropriate share of Iraqi federal oil revenues. Eventually, the influx of IOCs should facilitate the progression towards greater transparency, confidence and trust.
Iraq is currently struggling, sitting between the influences of the Islamic State and the Islamic Republic. However, it need only look back at how far one of its most important industries has come to recognise its future potential. Despite years of colonialism, uprisings, dictatorship, sanctions and war, we may find some solace. It seems that no matter who is in charge, the oil almost always flows.