Exclusive Interview with Al-Ghadhban on Iraq's Oil & Gas Sector - 14 Dec 2015
Iraq Energy Institute (IEI) conducted this exclusive interview with HE Thamir Al-Ghadhban, the Senior Advisor to the Prime Minister of Iraq on Energy Affairs. Mr. Al-Ghadhban has decades’ of experience in the energy sector, working through the nationalization period of Iraq’s oil industry in the 1970s and 80s, and held various senior positions in Iraq’s Ministry of Oil during the 1990s. Following the 2003 regime change, he took an advisory role in Iraq’s interim government, helping draft Iraq’s constitution in relation to energy policy, before becoming Minister of Oil in 2004, then Chairman of the Advisory Commission to the Prime Minister Office. Here, he talks about all of the major energy challenges currently facing Iraq, the ongoing low price impact and the way forward to improve the petroleum industry in Iraq.
IEI: How do you envisage Iraq's oil development progressing with the International Oil Companies (IOC) operations in the south? What are the key challenges facing both IOCs and the Ministry of Oil (MoO) and how would it be best to resolve them? What are the main bottlenecks that have hindered oil production in the south and how do you assess the progress of infrastructure development such as oil storage, export outlet and other mega projects?
TG: Before I answer your question, I’ll start by saying that Iraq since 2003 is passing through a complex transitional period marked by political and social instability, insecurity and a very difficult and challenging work environment. The country is in a state of war with ISIS since June 2014. The oil industry suffered a lot during the last 13 years due to terrorist attacks against oil installations and oil personnel in addition to the effect of numerous negative factors which resulted from this complex transition. This has led to inefficient management in various segments of the industry, slowness in project execution and not meeting planned production or development targets on time. Without taking this in consideration, any assessment of the development of the oil industry in Iraq wouldn't be objective. Finally, I would like to state that my answers to your questions represent my own personal views.
Coming back to your question, I expect development of the upstream sector to continue but at a slower pace than what we have seen during the period 2011-2014, basically due to a shortage in government financial resources as a direct result of the collapse of oil prices in 2014. However, the two sides have a common interest in going ahead with oil field development; the government on one hand is targeting higher production to maximize its revenue and the IOCs want to maximize their revenues as a result of higher production on the other hand.
The key challenge is on time payment to IOCs. This stems from the Bid Rounds contractual payment arrangement which obliges the Ministry of Oil to pay Petroleum Cost and Remuneration Fees in the Quarter following the quarter they were incurred in. Such obligation overlooked the Low Price environment ,a case which is highly probable knowing the cyclic nature of oil prices with time over the last three or four decades. Resolving this isn't that easy knowing the constraints facing the government, the government can't stop or drastically relax its development plans and at the same time can't commit itself to pay on time some $20 billion per year to the IOCs for developing the upstream alone. Similarly, the IOCs, being profit making entities, want to keep the economics of their contracts untouched and they succeeded when they amended their contracts with the Ministry. Although the involvement of the IOCs in the Iraqi upstream sector has led to a significant increase in oil production plus the introduction of new technologies, improved management skills and development of human resources ,better H&S and protection of the environment etc, the prevailing sentiment in the country is very strongly against those contracts, and the Ministry is doing its best to arrive at an amicable solution, but it doesn't have much leeway to meet IOCs demands, so it's left to the IOCs themselves to come to terms with the Ministry, and very soon. The solution lies in reaching an arrangement where the ramping up of production capacity continues at a moderate pace with an acceptable or manageable annual expenditure for Iraq during the coming years when low oil prices prevail. A linkage to oil price mechanism, a cap on expenditure, innovative measures to cut cost even with service type contracts are among the possible measures. Why not? The IOCs had always requested sharing Windfall profit when the price is high and a protection against low prices. I must also mention that petroleum cost, especially the development capital cost of the fields developed and operated by the IOCs are on the high side, actually too high to be accepted. This drastic rise in petroleum cost as compared with the original estimated cost presented by the IOCs in their earlier plans call for a serious revision of development plans as well as efficient cost management.
As for the bottlenecks affecting production in the south, no doubt they are many but at the same time the Government of Iraq, the Ministry has done a lot to minimize their negative effects Look at the current production and exports from the south, they are at historical record level. For the first time export exceeds 3.0 million B/D which is a testimony to the positive impact of the government measures to assist the IOCs carrying out their oil operation. Some of the bottlenecks are inherited, like routine, bureaucracy and inefficiency in government apparatus delivering services. It takes time to reform and modernize the Public Sector, however, they are all recognized challenges and the government is carrying out a reform program led by the Prime Minister himself.
There is significant progress in the infrastructure, slower than what we have hoped for earlier, but there is a continuous increase in storage capacity. There has been a delay in the reconstruction of the FAO depot and the construction of the Water Injection Project, those two are the most important megaprojects with significant impact on production and export. There has been another delay in one project, an SPM (an offshore floating loading terminal).The Ministry is well aware of those issues and has put more emphasis on speedy completion of those mega projects. Involvement of a selected one or two IOCs to assist the ministry is one of the options taken seriously by the ministry with payment provided from additional production of one or two producing fields currently operated by South Oil Company (SOC).
IEI: According to the MoO’s website, Iraq’s North and South Oil Companies (NOC/SOC) production has exceeded 3.7mb/d, and we assume another 700kb/d from MNR’s controlled fields. This makes Iraq’s total production 4.4mb/d compared to the country’s capacity 2.4mb/d back in 2010. How is it possible to add another 2 million barrels from both northern and southern production centers before 2020?
TG: I believe it's possible. Let me explain why I think so:
- All the fields of the ten contracts signed with the IOCs, be it brown or green, have not reached their production plateaus, even the super-giant fields which plateaus were very much reduced as a result of contracts’ amendment .The current capacity of those fields is at least 4.5 million b/d below the amended contracts plateaus.
- Provided that a solution is reached by the two sides, it's in the IOCs interest to go ahead with capacity ramp up, besides it's their contractual obligation.
- There is a strong awareness and determination within the Ministry to further develop a number of producing fields which could add a significant volume; examples are Nasiriyia, Bin Umr, Subba and Luhais plus Ratawi oil Fields.
- Further capacity addition in the northern production center is also possible before 2020 but later and less significant than the southern centre. Two main factors lead to slower pace, the war against ISIS and the constrained relationship between the Federal government and Regional government in Iraq's Kurdistan. Rehabilitation of a number of northern fields after the defeat of ISIS will be a priority which would take some time.
IEI: After reviewing the IOCs contracts and revising the initially contracted production plateau targets from 12mb/d in 2017 down to 7.1 by 2020, do you see the latter review possible to achieve on time?
TG: The two sides had a common interest in reducing the initially contracted production plateau targets from 12mmb/d in 2017 to a much lower one. The older contracted targets were inflated, unrealistic, unsustainable and not beneficial to the country. I personally spoke against them in a number of International conferences. Reaching such a plateau for any of the main fields (Rumaila, Zubair, West Qurna 1, West Qurna 2 and Majnoon) would have meant over spending several billions of dollars for what would be a short lived plateau. The IOCs were aware of this; all that they wanted at the time was to win those highly prized fields then renegotiate the targets, a strategy I personally criticized too.
Coming back to your question, without being pessimistic, I would say, it's very difficult to predict the implementing performance of major national plans for many realistic reasons. Although there was great success in the seventies and eighties of the last century, from 1976 to1980,and from 1989 to1990,in the development of the upstream capacity, when production capacity reached 3.8 and 3.5mmb/d respectively, we have failed in implementing several approved older upstream plans; the 1979-1983 plan which targeted 5.5 million b/d, the 1990-1994 plan to attain a capacity of 6.0 million b/d and similarly after the change of regime in 2003.We couldn't achieve the targets of the National Development Plan and similarly those of the Integrated National Energy Strategy " INES". Of course there were reasons behind this like the three wars, 13 years of sanctions and combating terrorism etc. No doubt there has been progress especially in maintaining and increasing oil production and export in spite of the immense difficulties facing the government, but saying Yes or No to your question isn't the right approach. I rather prefer, based on my experience in oil planning to talk about trends and scenarios in addition to avoiding coming up with exact numbers such as 7.0 million b/d by 2020. I would say with confidence that there will be a progressive increase in building oil production capacity as we approach 2020, it could be between 6.0 and 8.0 million b/d or even more if the International Market Fundamentals become encouraging later on. The objective reasoning behind my statement is the fact that the two sides, the Ministry and the IOCs have a common interest in going ahead with capacity development in addition to the good characteristics of Iraqi oil fields ,their prolific productivity, simple geology, absence of technical risks, ...etc.
IEI: Would you envisage a second renegotiating round in light of low oil prices and spending cuts, to resolve the repayment issues?
TG: I certainly do. There are no other solutions. The IOCs got what they wanted during the first renegotiation, they managed to reduce the plateaus they contractually pledged to reach thus avoiding significant financial commitment and possible risk of delayed payment ,they also succeeded in keeping projects’ economics without major change; i.e. same NPV, removal of the R Factor which decides their Remuneration Fees and the penalty clause if not reaching the contracted plateau, reduction of the government share from 25% down to 5% in most cases and on top of all these positive amendments an extension by 5 years to already long contracts. By saying this, I believe it’s time for the IOCs to positively respond to the Ministry’s genuine concern.
IEI: What is the total payment made from 2009 until now to IOCs in remunerations by the Iraqi Govt. (cost and profit)? And how much will still be owed by the end of 2015 and through 2016?
TG: There was no payment entitlement during 2009, incurred Petroleum Cost started during the 4th Quarter of 2010 which amounted to nearly $280 million. Total Gross cost paid to the IOCs for the period 2011-2014 including the mentioned payment of 2010 is almost $39.1 billion. IOCs remuneration exceeded $3.0 billion. There is another sum of about $9.5 billion which was rolled over from 2014 to be paid in 2015.The Gross cost includes taxes and the share of the government partner which amounted about $2.1 billion. I don't know about 2015 and 2016 figures because they aren't available yet but what is clear is the eagerness of the government in meeting its obligations towards the IOCs as reflected in the 2015 Budget Law and of course the seriousness of the Ministry to find practical solutions to this issue at times of low oil prices and the government war commitment against ISIS.
IEI: In light of OPEC members’ competition for market share, would you advise the MoO to launch more oil and gas licensing rounds? Can Iraq develop a spare capacity to play a swing producer to rival to Saudi Arabia? If so, what fiscal regimes could be attractive enough for IOCs and multinational investors?
TG: I certainly don't especially for oil. The contracted fields and other fields operated by the national oil companies have ample proven reserves and potential to provide a production capacity in excess of 9.0 million b/d. I do advise to explore for gas with speedy development of any commercially viable gas find to provide badly needed free gas for power generation in addition of course to the utilization of all produced associated gases. Exploring for gas doesn't have to be through licensing rounds and long term contracts like the first and second Bid Rounds. Iraq as far as I know is not seeking competition with any OPEC members and can't afford to develop the required spare capacity to enable it playing a role of a swing producer.
IEI: The INES target for the Basra Gas Company was to eliminate the flaring of gas by 2015. Instead, Iraq’s gas flaring has increased to 1.6bcf/day which could be used as feedstock for power stations. How likely is it that flaring will be significantly reduced or eliminated, and when?
TG: This is rather unfortunate. Gas production in 2014 has increased by 13% as compared with its production in 2011 but gas flaring grew by 34% during the same period. In 2014, almost 60% of produced gases were flared. This lamentable situation happens at times of great need for gas to generate power which forced the government to import gas oil from the international markets and gas from Iran for power generation. The reasons behind it are well known, lack of enough processing facilities is the main cause besides gas gathering and compression systems. Current plans show that ample processing facilities with related gathering and compression networks shall be achieved in 2020.Reduction of gas flaring and thus more volumes of gases shall be made available during the coming years. It’s planned that by 2023, there will be enough processing capacity to handle all the produced gases in the country.
IEI: Do you see any progress with the long awaited 300,000 bpd linked oil field and refinery "Nasiriya Integrated Project" (NIP) in Thi Qar?
TG: I truly wish that this project reaches conclusion. When we seriously started looking for international partners in the refining sector back in the second half of 2004, the dialogue with a number of them resulted in a number of key conclusions, the most important are;
- They are not interested in investing in building refineries irrespective of the contractual model.
- They are prepared to play a role of a Project Manager if the Iraqi government is going to build refineries by its own resources through an EPC arrangement.
- They are willing to construct a refinery like Nasyria if the project is linked to an upstream development.
The delegation led by a deputy minister came back from Amman in April 2005 with those conclusions. This information killed the "BOO or BOOT" model which we thought at that time might work and led to the concept of constructing Nasiriyia refinery together with developing Nasiryia Field .The story is long, but the Ministry tried to meet the ever changing demands of the interested international parties without success. The Ministry is at present engaged with an international consortium, an agreement may be reached by the end of the year, but let's wait and see.
No doubt the need for the refinery is long overdue; the country imports rather costly oil products, a sizable market and a growing demand in the coming years is evident. Two important factors have delayed the project: the first is the unfavorable location being about 250 km from the sea ports as viewed by the potential investors because they maintain their desire to export products to the international market in avoidance of being totally dependent on the domestic market. The second factor is the current nature of the distribution sector and the need for its reform leading to the gradual removal of subsidies thus investors won't find themselves facing two pricing mechanisms for the sale of oil products.
IEI: Since Baiji’s 220kb/d of refining capacity went off line, are there any plans to achieve the much needed 1.5mb/d target for fuel production? If so, how could this be achieved and when?
TG: The loss of Baiji meant a loss of more than 50% of Gasoline and Gas Oil production in the country, the two critical fuels required for transport in addition to the reliance on sizable volumes of Gas oil in power generation besides the loss of other products. This grave event came at a time when there was already a shortage in oil products with rising demand, so it made a bad situation worse leading to more reliance on fuel imports adding further burden on the country’s decreasing resources .It's true that INES forecasted a demand of about 1.5 million b/d needed for the refining industry by 2020.It also advised a drastic change in the Ministry’s refining plan due to its imbalance in providing adequate Gasoline as well as Gas Oil after 2020.I believe we have very serious problem in the refining industry, the country will continue to depend on fuel imports for many years to come. The only concrete project in sight is the Karbala 140 kb/d refinery. Various upgrade projects in Dora and Basrah refineries are ongoing but at a slow pace because they are capital intensive. The industry itself is heavily subsided, crude oil feed is supplied at upstream production cost and the sector is overcrowded with employees to provide jobs for Iraqis. Not to forget the old technology of all the present refineries .A dramatic policy revision is needed; to start with, such revision has been laid down in INES but there was no will and determination to implement. Time required for project execution, project delays and their negative economic impact should be taken seriously .Investors and contractors’ reputation and their track records should be looked at seriously in a similar way that the upstream bidders were prequalified. Reform of SOEs, the refining and distribution companies among them should be implemented as outlined by a comprehensive study prepared by PMAC and unanimously approved by the Cabinet this year. Based on requests from the national private sector, the Ministry came to the Energy committee with a proposal for the construction of small size refineries; 50 kb/d as a quick solution since no serious and well known international investors have shown interest, the committee had no choice but to approve the proposal after raising the capacity to 70 kb/d. I don't want to contradict myself in saying let's wait and see how successful the national private sector, which I fully support, is going to contribute in solving this complex problem. In INES, we recommended large scale, deep conversion refineries but not refurbished old refineries with old technology which were shut-down in Europe or other places.
IEI: As the fight over global market share increases, it seems that Iraq is losing sight of a viable oil marketing strategy to secure its fair share. What is your view on this?
TG: So far, the State Oil Marketing Organisation (SOMO) has done rather well. It has managed to market all the oil made available at the offshore terminals. However, what you are alluding to must be taken seriously .Iraq is increasing its production capacity. The country is in dire need for maximizing its oil revenue, it can't afford having expensive idle capacity and it has no appetite to become a swing producer, so, SOMOs capabilities should be enhanced, a significant budget should be allocated for human resources development, recruitment of talented young Iraqis, utilization of international expertise, having physical presence in the main oil markets abroad in addition to more powers to be delegated to SOMO. As for a viable strategy, this is not a new question at all. It was raised among other points more than twenty years ago, should Iraq’s marketing strategy be volume based or income based! Should Iraq like some Gulf produces enter into partnership with oil consumers, be it countries or oil companies in constructing refineries abroad using its oil as feed! What about long term supply contracts with consuming countries? How about having sizeable floating storage near the major oil markets and marketing a portion of the oil on CIF basis provided an oil tanker company is or can be operated on commercial basis.
IEI: The dispute between Erbil and Baghdad over oil sent to SOMO and oil independently exported by the Iraqi Kurdish region is ongoing. Is there a light at the end of the tunnel? What are the practical steps for reviving the long awaited hydrocarbon law and revenue sharing law?
TG: Yes, and it will most probably continue next year. It's to the credit of the current Minister of oil in arriving at the ongoing solution although it was not implemented as agreed and approved by the Federal Council of Ministers. The best one hope for this is the implementation of what the 2016 Budget Law shall include of the arrangement. The reason I'm saying this is partly based on the experience of past years especially 2015 and more on the complex nature of relations between the Federal government and Iraqi Federal region of Kurdistan. This implicitly includes the immense difficulties facing the federal government after the advance of ISIS, the loss of control on the Iraqi Turkish Pipelines (ITP) and the Kurdistan Regional Government (KRG) takeover of a number of federally controlled oil fields in Kirkuk governorate. This complex relation is an outcome of an ongoing struggle staged by the region for the control of land and oil wealth, this is why I don't see a long lasting solution. Short term solutions, interruptible implementation of the arrangements as stipulated by the Budget Law, accusation and counter accusation may continue. The Cabinet took practical steps for reviving the long awaited oil Law ,revenue sharing law and other linked laws ,a committee was formed which started work nearly a year ago. The same old issues regarding the powers of the Federal government and the federal regions surfaced. Those issues that prevented the Iraqi Parliament for two terms from promulgating the draft law of 2007 are non-technical, they are political and explicitly related to the struggle on land and oil wealth that I mentioned earlier.
IEI: After years of centralization, many provinces are demanding greater decentralization. Do you think Basra or other producing provinces are aiming for regionalization? If so, how would this affect oil contracts and operation joint ventures?
TG: The second amendment of law No-21 has transferred lots of the shared powers to the governorates, actually it involved the powers of eight federal ministries. The amendment did not involve the powers of the Ministry of oil. The provinces became more vocal after the inability of the Federal Government to pay the Petrodollars as stated in the 2015 budget. Although I'm a firm supporter of decentralization, I fully believe that Parliament made a grave mistake in the way it allocated the petrodollar to the producing governorates. I wrote about it and gave a presentation to the Cabinet as a chairman of a study committee .Briefly, the allocation should have been chosen as a percentage of the price of the barrel of the exported oil but not a fixed amount ( $5 per barrel ) of produced oil since the price of the barrel is variable as we have seen in the last two years and the domestically consumed (refined) barrel doesn't generate much revenue to be charged $5 beside it leading to a double charge ( produced and refined) .This is also true for gas which is supplied at a subsidized price to the consumers. Our recommendations were based on those points stressing on allocating revenues to the producing governorates and taking care of non-producing governorates through an equalization mechanism based on minimizing the gap of the GDP per capita between producing and non-producing governorate. The present policy of the Ministry is to listen to the grievances of the producing governorates, having regular meetings with them and involving them in many decisions. I proposed to represent the producing governorates in the Board of Directors in all national oil companies so that they have a role in the top management as stated by article 112 of the constitution. Although I believe in giving the governorates more powers in running their affairs and that they should be given all the support and opportunities to develop their capabilities leaving the verdict in judging their performance to their citizens by the ballot box, I also believe we have to be very careful when it comes to oil. Oil is the major wealth of the nation, the record of most if not all the Governorate councils and Governors is far from being satisfactory, so ,the right solution for them at present time is to concentrate on managing their extended duties which resulted from the mentioned second amendment of the Law in order to provide better services to the citizens and leave oil and gas affairs to the Ministry with all possible participation of the producing governorates as stated in Article-112 of the constitution. Oil issues are technology and capital intensive beyond the governorate capabilities.
As for regionalization, it's a constitutional right and there is an ongoing campaign in Basra to become a region. I don't know for sure what would be the outcome but what I could say it's coming in the wrong time when the whole country is in a state of war with ISIS.
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