Challenges to Current and Future Upstream Projects and Opportunities

Foreign petroleum companies have been denied access to many of the sizeable reserves in the Persian Gulf region due to long-standing nationalisation of oil and gas deposits and industries; however, access to Iraq’s upstream looks far more promising. Nevertheless, the level of foreign participation will depend entirely on a stable symbiotic relationship between IOCs and NOCs and the fledgling Iraqi government. Inter-government accord is also vital in

this regard as the Iraqi government remains in a politically awkward and rather delicate situation, and a fully stable security situation remains difficult to ensure.

Aside from concern over security, larger-scale involvement by foreign companies cannot meaningfully proceed without proper codified petroleum legislation being passed by the government. This became far more urgent in 2008 as the possibility of significant involvement of foreign companies became apparent. Indeed, the entire future of Iraq’s petroleum politics as it impacts upon the expansion of E & P to the benefit of the national economy, and also the fortunes of the foreign companies seeking access to the few large upstream plays remaining in the world, hangs on the successful adoption of the Iraq Hydrocarbon Law; a proposed piece of legislation submitted to the Iraqi Council of Representatives in May 2007. The law confers authority on the government to distribute remaining oil revenues throughout the country on a per capita basis, and would enable the provinces freedom to award production contracts to foreign companies without central government involvement.46 By early 2011, the legislation was still mired by disagreement over the ability of the three main groupings – Sunnis, Shiites and Kurds - to negotiate contracts autonomously and the equitable distribution of revenue.

Getting sufficient agreement to pass the law is also hampered in the country's main producing region in the south where nationalist oil unions have threatened to strike if the law is passed, arguing that it would cede control of the country's resources to foreign companies. These concerns over losing sovereign control of upstream access and production have also been echoed by senior Iraqi oil-field managers.47 Yet this is the very leadership that would be the immediate administrative and operational bridge with their counterparts in foreign IOCs and NOCs partnering to expand Iraqi production capacity.

Interim Technical Sharing Agreements (TSAs): Paving the way to fuller upstream access

Following an invitation by the Iraqi government to 120 U.S., European and Asian IOCs and NOCs, 35 companies pre-qualified to bid on TSA projects in Iraq comprises the world’s largest and most active petroleum companies; the list clearly demonstrates the scale of international interest in Iraq’s upstream sector (see list of companies at Annex A). It further reveals the geopolitical prism that binds Iraq’s future oil and gas E & P with the fortunes the world’s largest energy companies and the energy security of the countries in which they are based. Though it would be fair to say that several countries have more companies than others and there are different levels of operational and technical capability, the list also shows the

comparative geopolitical influence of the countries and their associated IOCs and NOCs, some of which is also derived from their respective upstream operation legacies. This is particularly true for the major U.S. and European IOCs.

In addition to the listed TSAs, two other sizable projects being led by foreign companies are notable. The first, and one very reflective of the impediments explicit in conflict-generated geopolitical obstruction, involves the China National Petroleum Corporation (CNPC). In March 2008, CNPC and the Iraqi Oil Ministry were close to concluding negotiations on a $1.2 billion contract to develop the one billion barrel Al-Ahdab field; a scheme originally agreed to in 1997 under Saddam Hussein. The deal was originally stalled due to prohibitive UN sanctions.48 This project is interesting not only for its practical scope, but also because it shows that a major power that was opposed the 2003 U.S-led invasion has also managed to benefit from E & P opportunities inside Iraq despite obviously not being part of the coalition. Indeed, it will be interesting to gauge over time the net gains in upstream access and deals for the allies juxtaposed those for countries that were not involved (notably China, Russia and France); all of which have long histories of trade and relations with Iraq under the Ba'athist government.

The second project, one seemingly unexpected considering Iraq’s geographical location and the dominance of its oil production over that of its natural gas, involves the potential development of the 4.6 trillion cubic feet Akkas gas field (located near the Iraq-Syrian border in the Western Desert) by Total, Shell and Edison to produce gas that might eventually find its way to the EU via Syria and Turkey. In May 2008, the EU agreed to work towards eventual gas deliveries of 5 billion cubic metres per year from Iraq; gas that could eventually feed its Nabucco pipeline.49

The Akkas project represents a compelling E & P case study demonstrating a complex binding of two sovereign governments and their NOCs with the technical, financial and project management of three IOCs (all from different EU countries) to develop a very large isolated field that could eventually supply domestic, regional and very distant international markets. It represents an innovative and elastic geopolitical extension of EU energy policy that is fuelled by its drive to diversify gas supply, even into a shatterbelt. It is reflective of one of the contemporary paradigms of ‘frontier’, elevated-risk projects that are being devised by IOCs that can achieve a form of ‘virtual’ upstream access to reserves by providing equipment, financing, technical input and project-management, but little or no foreign

physical footprint as the construction will be undertaken by Iraqi engineering firms. In high- risk upstream environments like Iraq, this may well become a more familiar approach for IOCs and NOCs that are deliberately kept (or chose to remain) operationally/practically peripheral to turbulent geopolitical and insecure environments.

This is important because at the end of 2010, the government had awarded 12 oil-service contract TSAs and three gas licenses as part of a plan to boost production. Of these, the most significant deal involves a joint BP-CNPC project to boost capacity from the giant Rumaila field to 2.85 million barrels a day from its current level of 1.07 million barrels a day.50 BP has said Rumaila may become the world’s second- largest producing field by 2015, which will likely transform Basra into one of the most important petroleum nodes in the Persian Gulf. Indeed, once production has been boosted across all of the other major fields in southern Iraq (such as the West Qurna-1), Basra and the associated production and expanded oil and gas exporting infrastructure will likely constitute a major new ‘petroleum gateway’ in the Middle East.

Another major project being headed by foreign companies is the ExxonMobil/Shell-led partnership to develop the West Qurna-1 oil field, also in the south of the country. Exxon Mobil and Shell initially didn't secure the deal earlier in June 2009 because they rejected the maximum production remuneration fee of $1.90 a barrel set by the oil ministry. The fee had also been rejected by Russia's OAO Lukoil Holdings, China’s CNPC, France's Total SA and Spain's Repsol SA.51 However, in October 2009, Exxon Mobil and Shell, along with Lukoil and CNPC, capitulated and accepted the offer; calculating that to be involved even under these disadvantaged terms was better than having no access at all to this major Iraqi reserve. The consortium has announced that it will raise production to 2.325 million barrels a day in seven years from the current 270,000 barrels per day.