David Wood and A. F. Alhajji
The major focus in Iraq over the past year has been the bitter dispute between Iraq’s Oil Ministry and the northern Kurdish Regional Government (KRG) over the national hydrocarbons law, which was drafted for consideration by law makers in 2007. The dispute revolves around how much control the federal government in Baghdad should have over regional oil operations, how revenues would be shared between regional and central governments, and the rights of regional administrations to negotiate contracts with international oil companies. Control of Kirkuk, the disputed northern province that contains Iraq’s largest oil field of that name, is also a factor in that dispute. Kurdistan, which was effectively prevented from developing and producing oil and excluded from Kirkuk’s revenues during the Saddam Hussein era, is now keen to develop its other petroleum resources aggressively, and regain some revenue benefits from Kirkuk. KRG argues that Article 110 of the Iraqi constitution enshrines Kurdistan’s legal right to oil self-determination.
Exploration. Last March, the Iraqi State Co. for Petroleum Projects issued two separate tenders for the development of the Akas gas field and the construction of crude and products pipelines to Iran. The Iraqi Oil Exploration Co. discovered the field in the mid-1990s near the Syrian border. The field contains about 2.2 Tcf of proven reserves with some geologists talking about 7 Tcf. The announcement came after an agreement with the Syrian government to link the field to a gas treatment unit across the border. At that time, the Iraqis expressed interest in linking the field to the Arab Gas pipeline that connects Egypt, Jordan, Syria and Lebanon. Initial production is estimated at 50 Bcfd.
In Kurdistan, after Kurdish Regional Government (KRG) passed the Oil and Gas Law in August 2007, the local government signed more than 20 PSAs with IOCs despite opposition from the central government. These companies include Addax Petroleum, OMV, MOL, Hunt Oil, KNOC (Korea), Perenco, Hillwood, Norbest, Reliance Industries and others. The central government has warned companies that signed contracts with the KRG that they will be banned from deals offered by the Iraqi central government.
Last June, South Korea’s KNOC and KRG signed upstream contracts covering five blocks. The KNOC deal involves two new PSCs and stakes in a further three. KNOC will be the majority partner (60%) in the Sangaw South Block. KNOC will also take an 80% interest in Block K26, the Qush Tappa block. KNOC will add 20% to its 38% share in the Bazian Block that it won last November. In addition, KNOC will get 15% of the Hawler PSC, comprising four blocks in which there have been two discoveries. It will also take a 20% stake in Sterling’s Sangaw North license.
Also in June, Talisman joined Western Zagros to develop Block K44. The deal is divided among Talisman (40%), Western Zagros (40%), and KRG (20%). Talisman also signed a two-year exploration service contract for Block K39.
In May, Search Limited signed a PSC with KRG for the 632-sq-km Shakal Block. The block contains about 300 million bbl of oil. The company plans to drill two exploration/appraisal wells in mid/late 2008. In May, The Canadian Vast Exploration Inc, with its consortium partner Niko Resources Ltd and Groundstar Resources Ltd, signed a PSA with the KRG for exploration, development and production of petroleum resources in the 846-sq-km Qara Dagh Block in the Sulaymaniya Governorate. The contract calls for the acquisition, processing and interpretation of a minimum of 300 km of 2D seismic data and drilling of one well during the first exploration period. The company expects to spend more than $40 million over the next three years on the block.
Norway’s DNO signed a revised PSA for its acreage last March. The revised contract splits the Dohok area into two separate licences and brings the contract into line with revised law of Kurdistan. DNO made an oil and gas discovery with in Hawler-1 exploration well. The well produced 9,000 bpd of oil and11,000 MMcfd of gas. DNO holds three PSAs in Kurdistan: Tawke, Dohuk and Erbil. DNO brought the Tawke oil field onstream last year at 14,000 bpd. The company said that the field has the capacity to produce 90,000 bpd. Last November, the KRG signed several PSA with IOCs. Including OMV and a consortium of South Korean companies.
Drilling/development. During the dispute over the hydrocarbon law, Kurdistan has concluded production-sharing agreements (PSAs) with a number of small and medium-sized international oil companies in defiance of central government. In August 2007, Kurdistan passed its own regional oil and gas law making provisions for it to negotiate its own PSAs with tough standard fiscal terms providing profit splits of 85% KRG: 15% IOC, 60% cost oil-allocation for the IOC party and the involvement of substantial equity participation by KRG. The Iraq Oil Ministry claims such agreements are illegal, but, together with the oil majors, have turned attention towards the southern area of Iraq around Basra, where 75% or more of current oil exports and future oil wealth is located.
In June 2008, the Oil Ministry announced a series of no-bid, short-term service contracts with BP, ExxonMobil, Total and Shell. The technical agreements involve the oil majors working with Iraqi companies until 2010 to introduce modern technology and replace obsolete equipment in the major producing fields with an objective of raising Iraq’s oil production.
Iraqi leaders hope to work around the lack of an oil law by offering short term Technical Service Agreements (TSAs) to boost production to 3.5 million bpd by the end of 2009. They missed the end of June deadline to sign six TSAs that will increase production by 600,000 bpd. They cover six giant fields: Kirkuk, Rumaila, West Qarna Phse 1, Zubair, Buzurgan, Abu Gharb and Fakka, and Subba and Luhais. The objective of the TSA is to provide a short-term fix to increase production capacity while Iraqis negotiate and agree on a new oil law and work with IOCs on long term contracts. Several majors expressed interest in these contracts including Exxon Mobil, Total, Shell and BHP Billiton. The number of oil wells drilled will increase slightly from 20 in 2007, to 23 in 2008.
These agreements are unusual and appear to be a stop-gap measure by the Oil Ministry to circumvent the stalled hydrocarbon law. They are unlikely to fulfill the oil majors’ aspirations in that they provide them with no access to long-term reserves or exploration rights and, at best, might be considered as a “foot in the door” to securing more valuable exploration and production contracts in licensing rounds.
Then in July 2008, the Iraqi government said it intends to limit these no-bid contracts to one year to avoid overlap with longer-term deals expected to be signed in June 2009. Five of the oil fields up for longer-term development are Rumaila, Zubair, West Qurna 1, Maysan and Kirkuk, which are also included in the no-bid contracts under negotiation.
Such licensing was not expected until the ratification of a national hydrocarbon law was concluded. However, in June 2008, the oil Minister announced plans to launch its first post-war oil bid round in July for long-term development of existing oil and gas fields. This followed announcements in April 2008 of 35 international companies pre-qualified to participate in a licensing round, which excluded those companies that had already negotiated agreements with Kurdistan. The oil majors have avoided signing direct agreements with KRG because of such a backlash from Baghdad.
KRG has been keen to sign PSAs with small and medium-sized foreign oil companies over the past two years. Its stated aim is to achieve 1 million bopd production in the long term (excluding production from Kirkuk) beginning from a base of just a few thousand bopd in 2008. DNO (Norway) drilled the first well under such arrangements (prior to the execution of the regional hydrocarbon law and definition of PSA terms) in 2006, which now produces some 7,000 bopd. DNO reported that the production capacity of Tawke Field is of the order of 90,000 bpd. DNO has announced, since the discovery of Tawke Field in the Dohuk license in 2008, a second oil discovery, Hawler -1, located in its Erbil license.
KRG granted a joint venture led by state-owned Korea National Oil Corp (KNOC) awarding exploration rights to the Bazian oil field (reserves of 3.7 Bbbl) and began work in January 2008 with an initial work program continuing until 2010. The scope of that deal was expanded substantially in June 2008, with exploration and development rights to eight blocks near the cities of Irbil and Sulaymaniyah being awarded to KNOC and Korean partners, and increasing their equity stake in Bazian field to 80%. That deal involves a $100 million initial exploration and drilling commitment followed by more than $2 billion in field development infrastructure.
KRG has subsequently signed more than 20 PSAs with other IOCs including: Hunt Oil and Texas Keystone (USA); KNOC (South Korea); Western Oil Sands (Canada); Reliance (India); OMV (Austria); Sterling Energy and Gulf Keystone (UK); MOL (Hungary); Niko Resources (Canada, May 2008); and Talisman Energy (Canada, June 2008).
The Hunt Oil deal with KRG embarrassed the US government by potentially undermining its support of the Iraqi Government’s attempts to establish a nationwide hydrocarbons law, because of Ray Hunt’s close association with the President George Bush.
The situation in Iraq, and Kurdistan in particular, remains fragile with significant and complex geopolitical issues, involving Iran, Turkey, Syria and the USA, in addition to the unstable internal political alliances within Iraq, threatening to overwhelm oil and gas development.
Recently, Iraq announced that it intends to invite international bids to develop and rehabilitate 10 of its oil fields. Up to 41 foreign oil firms, including six state-owned oil companies, are now qualified to participate in Iraq’s coming licensing round for oil and gas contracts.
Production. Iraqi crude supply (exports plus use in refineries and power plants) reached 2.5 million bpd in May 2008, with exports achieving a postwar record with more than 2.0 million bpd. Kirkuk exports of 0.44 million bpd through the pipeline to Ceyhan (Turkey) and southern exports of 1.57million bpd from Basrah and Khor al-Amaya have both shown a steady increase over the past year. Iraq’s oil production had languished below 2 million bpd from April 2003 to early 2007. Latest statistics show oil production now restored to pre-war levels some five years on, Fig. 1.
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Fig. 1. A decade of crude oil daily production in Iraq. Source: IEA Oil Market Report June 2008.
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In June, 2008 Iraq’s Oil Minister stated that the short-term production goal was 4.5 million bpd within five years and 6 million bpd thereafter. Iraq also has natural gas export aspirations and, according to the Oil Minister, is negotiating large LNG projects. Iraq produces very little natural gas, except associated gas from oil production, which is mainly flared, and it exports none.
The Iraqi government hopes to increase production to 2.9 million bpd by the end of 2008. Oil production increased in 2007 by about 28,000 bpd over average production levels of 2006, which were about 2 million bpd. Iraqi oil production declined in at the beginning of this year from 2.32 million bpd in December 2007 to 2.242 million bpd in January 2007 due to power shortages and sabotage. By May, Iraq increased its production to 2.44 million bpd.
Reserves. Iraq’s official proved oil reserves remained at 115 billion bbl (9.3% of global proved reserves) for year-end 2007. This figure has been carried forward unchanged by successive governments since 2001 and is not verifiable. Iraq’s booked proven gas reserves are some 112 Tcf, but with huge exploration potential to expand those figures. 
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