Emerging Markets Focus
Iraq –A Diamond in the Ash Written by Greg Hammond, Partner, Akin Gump Strauss Hauer & Feld
Iraq is possibly unique among the major oil producing nations insofar as its oil production profile over the last 30 years shows a succession of truly spectacular collapses in production. Depicted on a graph, it resembles the jagged blade of a giant wood- saw.
Since its all-time production peak in 1979, Iraq has of course been subjected to three devastating wars which brought the country to its knees and destroyed key elements of its hydrocarbons infrastructure.
As if this wasn’t enough, the source of the world’s fourth largest oil reserves has experienced a number of other setbacks. Religious and cultural divisions (for example amongst the Shia and Sunni muslims, as well as the Kurds in the north and the Marsh Arabs in the south) continue to create barriers. These divisions are also sometimes reflected in the political landscape. Following the elections in 2010 (when no clear majority emerged), it took over nine months for a coalition government to be formed which delayed and further hindered Iraq’s rebuilding effort.
In addition, Kurdistan continues to govern itself semi-autonomously through the Kurdistan Regional Government (“KRG”), with the result that there are differing oil and gas licensing regimes in Kurdistan and the rest of Iraq. These differences (which have arisen partly from a disagreement over the interpretation of the Iraqi Constitution adopted in 2005), resulted in the oil embargo imposed by Baghdad which has recently frozen exports out of Kurdistan. Another source of friction between Baghdad and Erbil has arisen from the KRG’s preference for a traditional PSC-style licensing arrangement in contrast to the south where a form of technical services contract (the “DPSC”) is more typically used (which rewards participants with a cash fee per barrel of oil recovered rather than with a pre-agreed percentage share of physical oil).
One of the starkest logistical problems facing Iraq relates to the lack of transportation facilities and storage capacity for hydrocarbons – particularly in landlocked (and mountainous) Kurdistan. While a network of ageing pipelines does exist up and down the country, Iraq is still a long way short of the infrastructure which will be required if its current production targets are to be achieved.
Of course security also remains an issue of concern – both as regards safety of employees, as well as security of assets and infrastructure. Hijackings and bombings continue – and there is concern in some quarters over the ability of the Iraqis to maintain reasonable standards of law and order in the future once foreign forces have left. On a more practical level, unexploded munitions and mines from the Iran-Iraq war and two Gulf wars often need to be removed before fields can be accessed and developed. Indeed the form of Iraqi DPSC makes specific reference (where appropriate) to the preparation of a “de-mining work program” which must then be performed as a recoverable cost of the contractor parties.
Wars (and even previous production methods) have on occasions damaged the oil deposits themselves, leading to by-passed reservoirs and unpredictable operational difficulties. For example, a UN Report in 2000 highlighted such problems in the massive Kirkuk field.
As one might expect, three wars in quick succession have also resulted in the loss or destruction of years of accumulated appraisal data. Oil reserves information is therefore often based on limited data, giving scope for interpretation or error. In addition, the once plentiful pool of world-class technical experts emanating from Iraq (including geologists and geophysicists) has been severely reduced by war and emigration. There are even claims from some circles that certain fields in the south of Iraq may be subject to the stringent environmental laws which govern the area of the Marsh Lands around Basrah – protecting its water supplies, flora and sensitive fishing stocks.
Add to that the global financial crisis, the resulting fall in the oil price and the collapse of Dubai as the hub for Middle Eastern finance and (as one might expect) the list of problems, handicaps and restricting factors goes on and on.
So why then in 2009 did BP and CNPC buck the general trend and alone enter into a DPSC under the First Licensing Round in Southern Iraq when all other bidders had declined? More intriguingly, why in 2010 did the market capitalization of one AIM- listed oil producer soar to £1.5bn when its oil production in Kurdistan is both limited and currently transported solely by road? In short, why (in spite of the catalogue of risk factors listed above) does the tide now appear to be turning in favour of investment in Iraqi oil and what are the prospects in the medium-to-long term for investors there?
As we know, the oil industry is essentially an exercise in understanding and assessing risk – which can take many forms and is often present across the full length of the oil exploration, production and off-take chain.
The big difference in Iraq is that one of the key customary risks – exploration risk – can often be almost eliminated due to the unusual degree of confidence that hydrocarbons are in place. In the south of Iraq, this is frequently because most of the oil fields which have been the subject of the latest three licensing rounds are known to have existed (and indeed have often been in full-scale production) at some point over the last thirty years. The existence of these huge fields has of course been the justification for the technical services arrangement embodied in the Iraqi DPSC – on the basis that there was never any exploration risk for a bidder. All that was required was a large balance sheet and the technical expertise and resources which a super-major IOC could provide to bring a particular field back on stream.
In contrast to southern Iraq, the virtual elimination of exploration risk in Kurdistan arises in other ways. It was best illustrated to me many years ago by the look on the face of one of the industry’s leading geologists who, during the early scramble for
Drillers and Dealers :::
::: February 2011 Edition
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36