Q+A-How daunting is the Iraq energy challenge?

By Jon Hemming and Barbara Lewis

LONDON, Oct 28 (BestGrowthStock) – Iraq signed deals with
international oil companies following auctions last year that
could in theory take its oil capacity to 12 million barrels per
day (bpd) in seven years’ time.

But security problems, inadequate infrastructure and
political deadlock, which has left the country without a new
government nearly eight months after an election, have made most
analysts sceptical that target can be achieved.

Gas auctions this month attracted little interest from
international oil companies. Deals were nevertheless awarded —
although not signed yet — to develop three gas fields with
combined reserves of 11.23 trillion cubic feet of gas.
[ID:nLDE69J0FQ]

The following addresses some of the questions overshadowing
Iraq’s hydrocarbon production.

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Graphic on Iraqi production versus rest of OPEC:

http://graphics.thomsonreuters.com/F/10/CMD_IRQOIL1010.gif

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HOW MUCH PROGRESS?

More than seven years after the U.S.-led invasion,
production levels are still below the peak of around 3 million
bpd hit before the 1991 Gulf war.

Following last year’s oil auctions, the winning companies
have issued tenders and agreed contracts for new wells, renewing
old ones, de-gasification plants, de-mining oilfields and
building new export terminals.

The companies have pressed ahead even in the absence of a
formal legal framework, laying the foundations for increased
production, although output figures have yet to respond. (For a
factbox on Iraq’s oil deals: [ID:nLDE69Q2C9])

Most analysts see only a gradual increase in Iraq’s oil
production over the next four years, and predicted in a Reuters
poll it would reach around 4.5 million bpd by the end of 2015
[ID:nLDE69L15M]. That would still leave the country far off the
12 million bpd capacity goal.

WHEN WILL IRAQ GET A GOVERNMENT AND A HYDROCARBONS LAW?

Following an inconclusive March 7 election, Iraq’s political
leaders have failed to form a coalition and the new parliament
has not met since June. Talks could speed up after Iraq’s
highest court on Sunday ordered the assembly to resume sessions
immediately. [ID:nLDE69O1MP]

There is no guarantee Oil Minister Hussain al-Shahristani
will remain in office once a new government is in place, adding
a further element of uncertainty to the oil and gas sector.

Even before the impasse following the election, rows between
majority Arabs and minority Kurds over revenue-sharing and
control of some fields held up laws to establish a modern legal
framework for Iraq’s oil and gas sector.

Work began on the legislation after the Iraqi constitution
was passed in 2005. The draft which garnered the most consensus
in parliament appeared in 2007, but the Kurds objected and the
proposed legislation has been stymied ever since.

There are actually four draft laws: one providing a general
framework for the energy sector, a revenue-sharing law, a law
related to a new national oil company and a final law
reorganising the Oil Ministry.

WHAT’S THE LOGIC OF THIS YEAR’S GAS AUCTIONS?

The prime purpose of this year’s gas auctions is to get gas
for power generation to help tackle Iraq’s electricity blackouts
and meet pent-up demand.

But given challenging economics for gas extraction at a time
of global oversupply, some question the logic of auctioning off
acreage.

There is plenty of gas associated with Iraqi oil to be
captured and Royal Dutch Shell (RDSa.L: ) and Japan’s Mitsubishi
(8058.T: ) had already agreed to a deal to capture gas being
flared at southern oilfields. [ID:nRAS932746]

Analysts ask whether the domestic market will provide enough
demand to absorb additional supplies and for now there is a lack
of infrastructure, meaning the potentially high-demand wider
Middle Eastern market and other customers are off-limits for
now. [ID:nLDE68622X]

OPEC output targets could at some point constrain associated
gas output, but the Organization of the Petroleum Exporting
Countries is not expected to impose curbs on Iraqi crude
production for several years.

IS THERE ANY RISK OF CONTRACTS BEING REPEALED?

Although the lack of a formal legal framework is a worry,
many analysts still say a future government would be unlikely to
repeal the contracts awarded this year and last year because the
terms were so favourable for Iraq.

The oil contracts were service contracts and remuneration
fees were in most cases only $2 per barrel or less.

For gas exploration — which, more than more profitable oil,
requires a stable environment and high incentives —
remuneration fees ranged between $5.50 and $7.50 per barrel of
oil equivalent.

Another disincentive for renegotiation would be reluctance
to halt progress.

Iraq has realised, however, it might not have enough money
for the enormous expansion of oil infrastructure needed and has
asked international oil firms whether they would be interested
in becoming involved. [ID:nLDE68P01J].

WHAT ABOUT THE CONTRACTS SIGNED WITH KURDISTAN?

The Kurdistan Regional Government (KRG), which runs northern
Iraq, has signed around 40 production and exploration deals with
international oil companies.

Baghdad has declared the deals unconstitutional and refuses
to pay firms involved, such as Norway’s DNO (DNO.OL: ) and
Turkey’s Genel Enerji. That has halted exports from Kurdish
oilfields since last year.

“All the signed contracts should be sent to the central
government and oil ministry to study and make sure they agree
with Iraqi laws, otherwise we still consider them illegal and
void,” Shahristani told a news conference last week.

The dispute stems from different interpretations by Baghdad
and the Kurds of current laws on the ownership of oil and gas
resources.

The oil ministry says only the central government has the
right to develop national energy resources under laws that date
back to the nationalisation of the oil industry, while the Kurds
say their own regional hydrocarbon law passed in 2007 gives them
the right to sign oilfield deals with companies.

The Kurds say the deals they have signed could lead to the
rapid development of fields in a largely peaceful region the KRG
says has 45 billion barrels of oil reserves.

The Kurds also claim the oil-rich region of Kirkuk and other
areas, but a national census that would determine the ethnic mix
of the region has been postponed because of tension until Dec.
5.

If it shows the Kurds are in a majority around Kirkuk, it
would strengthen their case for bringing it under their rule.
(Additional reporting by Rania El Gamal, Ahmed Rasheed and
Michael Christie in Baghdad; editing by James Jukwey)

Q+A-How daunting is the Iraq energy challenge?