New report on Iraqi oil outlook

Iraq has proven oil reserves of around 112bn barrels, second only to Saudi Arabia. This figure is considerably understated as vast areas of the country remain unexplored.

Out of Iraq's 73 discovered fields, only 15 have been developed. Oil wells are sparsely scattered over the fields. Estimates show that there are only 2,000 wells drilled in Iraq, as compared to 1mn wells in Texas.

The majority of reserves lie in the north, at Kirkuk, with sizeable quantities at Rumalia in the south. Oil accounts for approximately three quarters of Iraq's GDP. Previously, Iraq reached its peak production of 3.5mn b/d in 1979 but has never been able to reach that level since.

Iraq also has been estimated to have reserves of 110 trillion cubic feet of natural gas, which is the world's tenth largest reserves. The main sources of natural gas are at Kirkuk, Ain Zalah, Butma, and Bai Hassan fields in the north, and the Rumailia complex and Zubair fields in the south.

The resumption of steady supply of oil from Iraq is the key ingredient for economic growth of the nation. The utilization of valuable oil and natural gas resources will provide the essential financial resources that will fuel reconstruction efforts in other key sectors.

An increase in production would provide for lost revenue, exploration and more importantly new infrastructure. Unfortunately, since the toppling of the former regime, pipelines have been under constant attack, cutting exports of crude oil and creating colossal supply shortages in a country with the world's second largest oil reserves.

The situation has improved slightly though in the last few months and Iraqi production and exporting is generally seen to be on the rise. Average production is closing in on the 2mn b/d mark as of the end of November 2003. Although problems will continue to hinder the oil sector, progress is expected to be made with the completion of various bids, projects and legislature.

Before the war, Iraq enjoyed a nameplate production capacity of around 2.6mn b/d of crude oil. Domestic consumption was estimated at 400,000 b/d, potentially leaving a large export capacity.

International sanctions have limited the full potential of Iraq to utilize its most valuable asset. The United Nations Oil for Food Program which was initiated in 1996 has however helped alleviate the situation partially.

According to a report published by the Council on Foreign Relations and the Baker Institute in December 2002, Iraq's was witnessing an annual production decline of 100,000 barrels per year. The report also estimated the cost to return Iraq to pre-1990 levels at around US$5bn plus US$3bn in recurring annual operating costs.

The massive repairs and reconstruction would take months, if not years to upgrade Iraq's oil sector. According to the Middle East Economic Survey (MEES), problems at Iraq's oil fields include among others: years of poor oil reservoir management; corrosion problems at various oil facilities; deterioration of water injection facilities, lack of spare parts, materials, equipment, damage to oil storage and pumping facilities.

There was initial optimism after the war as the worst-case scenario of damage to Iraqi oilfields from fighting during the war had not occurred. By the end of the war, figures showed only 9 oil well were set on fire by the retreating Iraqi forces, out of 1,800 wells in more than 500 oil fields in the southern region. The northern oil fields in Kirkuk and Mosul were not set afire. But since then, even though production has increased, it remains far below the pre-war level of around 2.5mn b/d.

The main reason for the decline in output post war is that the sector has been hard-hit by looting and is plagued by theft and sabotage. Further, security problems make it almost impossible for anyone to predict accurately predict the production levels in the coming period.

Iraqi oil officials had previously hoped for exports of 2mn b/d by the end of 2003, and during November 2003, the average production was 1.88mn b/d. Exports are occurring only from the southern oil fields.

The pipeline from the northern oil fields around Kirkuk to Turkey's Mediterranean port of Ceyhan has not been able to regularly transport crude oil due to explosions caused by sabotage which have damaged the pipeline. As of mid-December, Iraqi oil sold at Ceyhan was reported to have come from supplies previously stored there.

According to Energy Intelligence, Oil Minister Ibrahim Bahr al-Uloum expects oil production to recover in the coming year, despite the pipeline sabotage that continues to make northern oil exports impossible and the looming capacity constraints for exports out of the south.

At the start of 2004, the minister reaffirmed that oil production will return to its prewar peak of 2.8mn b/d by the end of first-quarter 2004, with exports of 2mn b/d. The minister gave a new low estimate of only 200,000 b/d for current output in the north, net of re-injection.

Despite the closure of the northern export pipeline to Turkey, first-quarter exports of 2mn b/d are based on the assumption that the northern Kirkuk fields will contribute some 300,000 b/d. With recent sabotage crippling the pipeline once again in December and no sign of an imminent restoration of the pipeline, the production of 300,000 b/d from the Kirkuk fields may be difficult to achieve.

According to the United States Energy International Agency, Iraq has 110 trillion cubic feet of proven natural gas reserves, along with roughly 150 trillion cubic feet in probable reserves. About 70% of Iraq's natural gas reserves are associated, i.e. natural gas produced in conjunction with oil, with the rest made up of non-associated gas (20%) and dome gas (10%).

Until 1990, all of Iraq's natural gas production was from associated fields. In 2001, Iraq produced 97bn cubic feet of natural gas, down drastically from peak output levels of 700bn cubic feet in 1979. Iraq plans to increase its natural gas output in order to reduce dependence on oil consumption and exports. Prior to the recent war, Iraq was developing plans to build a liquefied natural gas terminal.

Main sources of associated natural gas are the Kirkuk, Ain Zalah, Butma, and Bai Hassan oil fields in northern Iraq, as well as the North and South Rumaila and Zubair fields in the south. Iraq's only non-associated natural gas production is from the Al-Anfal field in northern Iraq. Al-Anfal production, which began in May 1990, is piped to the Jambur gas processing station near the Kirkuk field, located 20 miles away.

Al-Anfal's gas resources are estimated at 4.5 trillion cubic feet (tcf), of which 1.8 tcf is proven. In November 2001, a large non-associated natural gas field was reportedly discovered in Akas region of western Iraq, near the border with Syria.

The field was estimated to contain 2.1 tcf of natural gas reserves. Besides al-Anfal, Iraq has four large non-associated natural gas fields (Chemchamal, Jaria Pika, Khashm al Ahmar, Mansuriya) located in Kirkuk and Diyala provinces. In February 2000, a project to develop these fields, which reportedly have total recoverable reserves of more than 10 tcf was launched.

Since most of Iraq's natural gas is associated with oil, progress on increasing the country's oil output will directly affect the gas sector as well. Associated gas often is simply flared off. Significant volumes of gas also are used for power generation and re-injection for enhanced oil recovery efforts.

The allied forces have made the reviving of Iraq's oil industry a priority all along because they count on export revenues to help meet the mounting costs of reconstruction. But the oil sector's continuing problems make it uncertain how significant its contributions will be.

Efforts are underway by all relevant authorities to continue the rehabilitation and development of the sector. In January 2004 an announcement was made of the likelihood of the creation of a state-run company to own and manage the Iraqi oil industry. Both the American and Iraqi oil officials are proposing a state-owned business model based on similar arrangements in Saudi Arabia and Kuwait.

The oil ministry's ambitious program of priority rehabilitation projects worth US$1.2bn for the new year is not clear on how it will be financed and implemented. The ministry has already invited international oil companies to Baghdad for a major conference in February to discuss investment in the sector.

However, the deteriorating political circumstances could hinder the attendance of international oil companies. As the situation becomes more stable, the oil sector is expected to recover and help in the reconstruction of Iraq.