Tech Talk - More on Iraq

A single picture is sufficient to tell the story of the fate of the Baiji Refinery in Iraq. Recently reached by the ISIS forces, it has been the largest refinery in Iraq, with a capacity of 310 kbd, and has been used to provide products for domestic use. Since it would provide fuel for both sides in the conflict it had been left largely intact, but that “understanding” seems to have fallen apart.

Figure 1. View from space of the fire at the Baiji Refinery in Iraq (Slate)

The remaining significant refineries in Iraq are at Daura near Baghdad which can produce 210 kbd, although promised at 280 kbd and Basra in the south, which can produce 140 kbd. There are an additional 11 very small refineries located around the country.

The conflict has already led to a drop in Iraqi exports of around 300 kbd and while this will not immediately impact the United States, given that imports have been declining in the face of growing domestic production, it will affect the overall global market, with longer term impacts on price and availability. India, for example, is already worried. It is quite possible that Iraq will partition, with the northern tier ending up Kurdish.

Figure 2. The Kurdish part of Iraq (Talking Points Memo)

This region has already run a separate pipeline through its own territory up into Turkey and thence to Ceyhan. From there it is tankered, and the Kurds have just sold a shipment to Israel, which arrived at Ashkelon on Friday and unloaded that night. The report has, however, been denied by the Kurdish Ministry. Three more tanker-loads destined for other customers are now in process at Ceyhan. The tanker was one which has, until recently, been unable to find a market.

In May, the Kurds took a further step by leasing two tankers, loading them in Jihan and looking for buyers. Attempts to sell oil to Morocco and other countries were rebuffed, out of solidarity with Iraq and concerns over legal action. It now seems that the Kurds have re-discovered their old ally Israel, which agreed to purchase the oil. To avoid a direct sale, the Kurdish tanker unloaded its oil onto another tanker. It’s unclear if the purchase is a one-off deal or the start of a permanent arrangement.

But the Kurdish pipeline is currently limited to a capacity of 100 kbd, whereas the main pipeline running up the center of the country (and through ISIS territory and control) can handle 600 kbd. The potential for a continued drop in Iraqi exports flowing north to Turkey of over 500 kbd is thus now quite possible. However the oilfields in the Kurdish territory are only, at present, producing around 120 kbd. Yet, by the end of the year it is projected that the pipeline can be expanded to handle flows of up to 400 kbd, with that capacity being reached as additional oilfields around Kirkuk are connected into the system and production raised. In the meantime additional oil is being trucked up to Turkey.

The impact of the conflict has already caused bidding on the Nassiriya oilfield and refinery to be postponed indefinitely.

Figure 3. Location of Nassiriya (Red point) (Google Maps)

Bidding on development of the 4 billion barrel oilfield, and associated 300 kbd refinery, was scheduled to have taken place on Thursday, but after being postponed in December and January has now been put off indefinitely.

At the same time Lukoil remains optimistic about expanding the West Qurna 2 field over the next year. The field has started production, and reached 200 kbd and Lukoil is hoping to start filling tankers in the third quarter of this year. The project was shared with Statoil, but they dropped out in 2012. West Qurna is in the South of Iraq, and at present a considerable distance from conflict.

Figure 4. The location of the West Qurna 2 field. (Statoil)

The field is anticipated to ultimately be capable of yielding 1.8 mbd of oil. In order to handle higher flow rates a new agreement has just been signed in which Lukoil will build two new pipelines from the field down to the off-shore terminal at Fao.

As long as the conflict remains north of Baghdad, and the oilfields in the South are not threatened then the major restriction on plans to grow exports from the south to 6 mbd may continue to lie with the Iraqi bureaucracy and the delays in installing the necessary infrastructure needed to support both production and also transport of the oil to the offshore terminals. There has also been some reduction in targets, for example Zubair which had been producing at 200 kbd was originally scheduled to produce at 1.2 mbd a target that was dropped to 850 kbd last year. A 200 kbd gas and oil separation plant (GOSP) has just been contracted, with completion in 2016.

This does not discount, however, that sabotage and terrorist attacks will not have some impact. The main pipeline to Turkey has been closed for months due to such attacks, but while that pipeline runs through Sunni territory, the lines from the Southern fields are all within Shia controlled land, and those in the north are now controlled by the Kurds. Oil companies have, however, as a precaution, begun repatriating some of their employees. Gazprom has just begun production from the Badra field. Originally projected to begin, at 15 kbd, in 2013. Production has now begun, although it is now anticipated that it will be another couple of months before the field reaches that initial 15 kbd target, and 2017 before it peaks at 170 kbd. Gazprom have, at least publically, “no problems” at the site.

Tech Talk - Falling gas prices and Iraq

Filling up at the local gas station yesterday I noted that prices are still below $3.00 a gallon, though at $2.99 only just below. Going back to the BBC Calculator this is still $2.04 less per tank than the regional average, and $86 less than I would pay in Italy. So even though the costs are rising over the last time I looked, they are still relatively low.

Figure 1. Relative fuel costs ($/gal) in different locations around the world. (BBC Calculator)

The orange line in figure 1 shows what I paid, and the darker grey horizontal line the regional cost here in the MidWest.

The EIA have noted in last week’s TWIP that the national price is as low as it has been since the beginning of 2011.

Figure 2. Average US retail prices for gasoline (EIA).

The EIA continues to describe the causes of these relatively low prices:

Lower global crude oil prices, high profitability for diesel fuel that has been encouraging refiners to increase throughput, high inventories, and the switch to less-costly winter grades of gasoline are among the factors currently driving gasoline prices.

The OPEC Monthly Oil Market Report (MOMR) reports that global oil prices have fallen $2.04 a barrel (to $106.69) – the first decline in five months, as stocks increase and the Northern Hemisphere moves into winter. The estimate for global demand growth this year remains at 0.9 mbd, with the growth for next year anticipated to be at 1.04 mbd. This steady growth in global demand of a million barrels a day keeps raising the question as to where the increase is likely to come from. This is particularly germane given the disturbed conditions in a number of the MENA countries that provide a significant amount of baseline production, as well as anticipated increases.

The problems in Iraq, for example, have now reached the point that the Turkish government is directly working with the Kurds in Northern Iraq, to develop the oil in the Kurdish northern part of Iraq. This comes at a time that Iraq has been negotiating with the different major oil companies that had contracted to help Iraq reach an overall production target of 12 mbd by 2017. There have been considerable doubts cast on that original estimate, with the IEA producing a report, reviewed in an earlier post that concluded that the country would be lucky to achieve a production goal of 6 mbd by 2020, with an out year estimate that the country would be able to reach 8.3 mbd only by 2035.

Recognizing some of the difficulties in gearing up oil production at the different oilfields around Iraq (some of which were discussed in another post last June) production targets for 2017 had already been scaled back to a goal of 9 mbd by 2017, a drop of 25%. Now there has been discussion between Iraq and its partners for the various fields to drop those target values further, despite the large scale of the reserves that are considered available.

Figure 3. Oil reserves by field (Financial Times)

Exxon Mobil had 60% of the stake in the West Qurna oil field, but after it had started to work with the Kurds independently of Baghdad it found that relations with the Central Government rather chilled. Exxon Mobil has thus sold 25% of their stake to Petro China, and 10% to Pertamina of Indonesia, bringing the EM stake down to 25%. The current discussions between the companies and the Iraqi government are aimed at reducing the production target of the field by around 1 mbd..

Oil has just started to be produced at West Qurna Two, but the initial target is to have commercial production by the end of the year has suffered from local disruptions and the initial goal to reach a production of 400 kbd by the end of 2014 is now also in doubt. Commercial production is now not estimated to begin until perhaps the end of the first quarter of 2014. Initially the field was to be producing 1.9 mbd by 2017. That goal had been lowered to 1.2 mbd at the end of 2012. How the current disruptions will play into that target is difficult to estimate yet, but a year ago the parties were assuming that production would have already reached 150 kbd.

Earlier this year ENI had agreed with the Ministry of Oil to lower the target peak production from the Zubair field from 1.2 mbd to 850 kbd with that goal to be reached in 2016.

Discussions are not yet complete on new target production to be achieved from the Majnoon field. Shell has just announced the start of production from the field with the intent of raising production to over 175 kbd by the end of the year. However the long term target of raising production to 1.8 mbd is now in question. Shell is reportedly suggesting that the 2017 target be lowered to 1 mbd.

Similarly over at the Rumaila field BP is in discussion over long-term production, although earlier last month Schlumberger stopped work at the field because of local disturbances. With the field producing 1.4 mbd the disturbance was short-lived and is not reported to have affected current production, though it is indicative of tensions within the country. Current discussions are aimed at lowering the 2017 target production by around 800 kbd.

When these cuts are combined the total reduction is around 3.65 mbd, taking 2017 production down to 5.35 mbd, which is below the earlier best case scenario envisaged by the IEA.

OPEC notes that, after reaching a peak recent production of 3.194 mbd in August, production has fallen back below 3 mbd in September and October, and with Saudi Arabia also cutting back below 10 mbd in October the Organization is lowering production to meet the reduced winter demand, albeit the reduction from Iraq might not have been anticipated.

Figure 4. OPEC production figures through Oct 13, 2013 as reported by others to OPEC (OPEC MOMR )

This means, unfortunately, that if the world was anticipating that the roughly 4 mbd increase in global demand by 2017 would be met largely by increased oil production from Iraq then they are likely to be sadly disappointed. Enjoy the lower gas prices while you may.