A Breath of Life for Iraq’s Downstream Development
By Mohammed Mehdi Walji and Yesar Mustafa
With production reaching 4.804mbpd at the end of 2016, Iraq’s oil minister is optimistic for the future announcing plans to increase production to 6mbpd by the year 2020. Whilst upstream water injection proposals are in place to facilitate this production increase, does Iraq have the downstream capacity to manage an increase in over 1mbpd within the next 4 years?
Iraq’s nameplate refining capacity lies at 900,000bpd, however with aging infrastructure and recent wars, a realistic working capacity is less than 50% of this. The active refineries currently produce more fuel oil than demand dictates, resulting in the excess being blended back into the crude. The more lucrative, and more in demand products like gasoline, gasoil and LPG are currently produced in deficit by the refineries resulting in a $1.3 billion import requirement.
Recent Daesh attacks have further exacerbated the lack of refining capacity in Iraq. Whilst Daesh did not come close to the South of Iraq, which accounts for the majority of Iraq’s exports, the Baiji refinery in the North was targeted and forced to close down. Baiji was Iraq’s largest refinery with a nameplate capacity of 310,000bpd, and still stands tremendously damaged and inactive.
Subsequently, the need to increase refining capacity has now become even more salient. The oil minister, Jabbar al-Le'aibi, is revisiting the program announced in 2012 to build new refineries. The current plan sees 7 new refineries being built along with a 70,000bpd expansion to the current Basra facilities resulting in a total increase in 1.08mbpd of refining capacity, shy from the ambitious 1.4mbpd target envisioned by Iraq’s National Energy Strategy (INES) in 2013. In anticipation of foreign investors, the government has further relaxed regulations. The amendments to Refinery Law 64 and Investment Law 13 incentivises foreign investments further by allowing investors a 10 year tax break, exemption from import tax for 3 years, supply of crude oil at a reduced rate, land allocation for a minimum of 50 years and price setting autonomy over the refined products.
Whilst the new plans are promising, significant investment is required in order to propel the projects from the planning phase. In 2012, similar plans were proposed however, the lack of investment meant that many of the refinery projects were abandoned leading to Iraq now importing 25% of its domestic petroleum demand. Iraq wasted the opportunity to utilise the downstream sector as a revenue cushion after the drop in oil price, and now needs to up her game. This comes at a time where Iraq has pledged a 210,000bpd reduction in production to meet OPEC targets, which may prove difficult without sufficient capacity to divert excess volumes towards domestic refineries.
The only refinery slated for completion for 2019 is the Karbala refinery, albeit being already behind schedule due to the low oil price and, entirely financed by the government. Some foreign investment has meant other refinery projects have also kickstarted. The development of the Maysan Refinery is the first to take advantage of the new legislations and new management has utilised the Build-Own-Operate scheme allowing autonomy for 50 years. The operators, the Swiss firm Satarem with the help of some Chinese financial backers, aim to invest $6.5 billion to develop a capacity of 150,000bpd. Furthermore, an approval by the cabinet to upgrade the Basra refinery financed by loans from the Japan International Cooperation Agency (JICA), would see this site increasing its premium benzene capacity to 4,500 tonnes and also the introduction of 90+ octane gasoline. However the forecasted completion date for this remains in the distant future, with estimates being between 2020 and 2022.
With a decrease in oil revenue and a war against Daesh, the Iraqi government is shying away from the traditional practice of fully financing large scale oil and gas projects from annual federal budgets. Rather, it aims to use loans from the International Monetary Fund (IMF) and World Bank to partly facilitate repayments to IOCs and subsequently stimulate the essential oil and gas infrastructure projects. Last year, the IMF approved a further payment of $634 million to Iraq and if successful, the country could further unlock a total of $18 billion in funds from the IMF, World Bank and G7.
If Iraq meets its 6mbpd production target by 2020, the refining capacity will still not be able to maintain the increase. However, due to political instability, severe fiscal pressures and delayed infrastructure projects, the government’s 2020 target may not be met. Nevertheless, the future of Iraq’s downstream sector looks optimistic as there have been developments in reducing the domestic reliance on foreign crude products and as per the IMF loan conditions, Iraq has started to gradually reduce the subsidies on imported gasoline. This measure might positively influence Baghdad to speed up refinery construction in the face of expected public discontent and an upcoming election.
Mohammed Mehdi Walji (@mmwalji) and Yesar Mustafa (@yesar) are Research Fellows at @IraqEnergy Institute