By Samar Rassam-Whitticombe, CEO of Somer Industrial Projects (SIP)
Since my last article a couple of months ago, a few things have taken place such as the drop in oil price. This directly affects Iraq as an exporter, and Iraqi companies. A falling oil price will reduce the value of Iraq exports and mean lower revenues for the Government, so the there is a need to increase crude output and raise production levels.
The drop in oil prices affects most countries, and the expectation is that if the price of oil remains at around $50 a barrel, most countries in the region will have cash problems in the next few years.
Meanwhile, forecasts for oil prices per barrel have been reduced to $45 with an average production of 3.6 million bpd. Iraq is currently producing 3 million bpd. Despite the problems, the Ministry of Oil expects the International Oil Companies (IOC’s) to maintain the same levels of production.
Prime Minister Haider al-Abadi is remaining positive, stating that Iraq has the ability to overcome the drop in oil prices as long as everyone cooperates.
Another development took place in the last few months. On 14 July 2015, Tehran’s nuclear program deal was finalised. The deal was reached after several years of negotiations and will create exciting dynamics in the oil and gas markets. It will also end the painful economic sanctions that have damaged the economy and will bring Iran back into the international fold.
This deal is extremely important and should not be underestimated. Iran is an established producer and exporter of oil and gas and sits on one of the world’s largest oil and gas reserves. It is a member of OPEC and has the potential to alter existing oil and gas market dynamics. If Iran increases its exports, then the oil price elsewhere will continue to fall.
The renewed dispute between Iraq and the Kurdistan Regional Government (KRG) has also impacted the State’s income.
Iraq’s 2016 budget has taken into account the KRG’s share of oil production under a deal struck back in December 2014, whereby the Ministry of Natural Resources (MNR) would transfer 550,000 bpd to the State Oil Marketing Organisation (SOMO) in exchange for 17% of the federal budget.
Baghdad is concerned about KRG’s decision to continue with independent oil sales and is apparently considering reducing their share of the federal budget from 17% to 12%. This would only serve to further increase political tensions and is unlikely to be of much financial benefit. Baghdad has also failed to send the full budgetary allocations to KRG, who have been waiting for it since January 2014.
But on the bright side, both parties maintain their promise that they are willing to negotiate and reach a compromise on the issue of independent oil sales.
In the meantime the fight with ISIL continues. Baiji Refinery was attacked by ISIS and has been out of operation for more than a year. It was reported that Iraqi security forces had taken control of most of the refinery, but that it had been almost completely destroyed. The repairs are expected to take place in the near future. This will be a priority for the Ministry as Baiji is one of the most important refineries in Iraq.
Although there is still uncertainty, we can also see there are potential opportunities that will not stop keen investors from chasing oil and gas opportunities. Investing in Iraq, however, will require confident planning, strong nerves, patience, a considered approach and awareness of the balance between risks and rewards, of which risks are an inherent factor.
Oil companies will have to assess whether the oil and gas contracts are enticing enough to commit significant capital in the country.
As you can see from the above, although there are problems within Iraq, great efforts have been made to overcome a lot of difficulties. The construction team from the Iraqi Ministry Of Oil have worked on many projects such as tanks, water pumping, pipeline network and infrastructure which all helps to increase production and export capacity, as well as increasing output, which is the aim of the Ministry.
The State Company for Oil Projects – SCOP is making progress in leaps and bounds. SCOP is also acting as a construction company for the Iraqi Ministry of Oil (MoO). It deals with most of the Ministry’s projects and accordingly takes the lead as an EPC contractor for most of the Ministry’s work.
With the current situation, and many IOCs working in Iraq, it is SCOP that decides the method of working, which can be either as a consortium agreement or SCOP will be contracted directly to some of these companies, for example BP and Shell.
Many projects are executed by SCOP, or under their supervision, such as but not limited to:
- Al-Basrah Oil Terminal with AL-Fao Depot
- Oil De-Gassing Stations
- Gas Compressing and Treatment Units
- Civil And Mechanical Work to complete the New Imara Depot Project
- 48”Crude Oil Pipeline PS1 to Fao
- 30” Halfaya –Tuba Crude Oil Pipeline
- 24” Gas Pipeline from Majnoon Oil Field to North Rumaila Power Station
- 24” Gas Pipeline Tuba- Qurainat
- Construction of a Tank in North Rumaila Oil Development Field (Degassing Station 4) and was executed by 100% local Iraqi workforce
With regard to this, the Ministry has implemented these ideas while building Iraqi skills within Health, Safety and Environment standards and procedures. The instruction from the Ministry is to recover the country’s technical capacity.
Finally, if Iraq pulls together (North, South & Central), the Iraqi oil will be of benefit to everyone and will serve the Iraqi people. That’s what we are hoping for and this is the way forward.