In this week’s Oilgram News column, New Frontiers, Tamsin Carlisle and Adal Mirza illustrate the widely varying states of oil production in a region where reserves and potential are bountiful — if they can be tapped.
From the outside, it can be tempting to lump together the Persian Gulf oil states as a homogeneous mass. After all, oil statistics on the region typically talk of the “Middle East” and they export crude to much the same markets, mainly in Asia.
However, as delegates at the Middle East Petroleum and Gas Conference in Abu Dhabi recently heard, not all Gulf oil producers are created equal, and those with some of the biggest reserves may, in coming years, be outperformed by more reliable suppliers.
Two Gulf oil exporters receiving special attention at the April event were the UAE and Iraq. The two have similar oil production capacities of about 3 million b/d and 3.4 million b/d respectively, but are worlds apart in nearly everything else.
While the UAE makes it look easy in achieving its oil strategy, Iraq is scrambling to keep up.
ADNOC’s offshore oil chief, Qasem al-Kayoumi, told Platts that the country was on track to reach its medium-term production capacity target of 3.5 million b/d by late 2017 or early 2018. Longer term, ADNOC has set stretch targets, notably for its largest offshore oil field, Upper Zakum, which would help the UAE support OPEC in its new policy of maintaining market share.
Some of ADNOC’s major projects are aimed at increasing operational efficiency and optimizing reservoir management, in keeping with the maturity of major UAE oil fields. As Kayoumi further explained, developing the ability to do more with less would help the country in a world of lower oil prices.
To achieve its goals, ADNOC needs access to the latest oil field technology, especially for enhanced oil recovery. This was a priority for the Abu Dhabi Supreme Petroleum Council as it sought to negotiate new contracts with international partners for major onshore and offshore concessions, Suwaidi said.
Currently, the SPC is selecting partners for ADNOC in a new concession covering Abu Dhabi’s biggest onshore fields, replacing one that expired in January 2014. In a slow-moving process, it has so far announced only two — France’s Total and Japan’s Inpex with 10% and 5% stakes, respectively — with further announcements expected.
Addressing delegates, Kayoumi said ADNOC was planning $25 billion of investment over the next five years in offshore development alone.
In the downstream petroleum sector, Abu Dhabi was seeking to build on the platform of its recent major expansion of the Ruwais refinery, ADNOC’s largest, Suwaidi indicated. Petrochemicals sector expansion related to refinery upgrades was a pillar of Abu Dhabi’s strategy of economic diversification, which in light of lower oil prices was more urgently needed than ever.
Iraq, despite proven oil reserves over 40% higher than those of the UAE and far greater remaining exploration potential, struggles to meet its near-term production goals, delegates heard.
This was a major concern for executives of international companies, who noted that development was progressing slowly as Baghdad struggled to pay its bills.
In a very different approach to oil development from Abu Dhabi, which allows international oil companies to hold equity stakes in oil and gas concessions, Baghdad has opted for technical services contracts, obliging it to pay fees for incremental production capacity at set rates per barrel, regardless of international oil prices.
One reason for Iraq’s approach was that it may have been more politically expedient to sell the fee for service model to a populace that was weary of international oil companies’ motives. Also, the Kurds had little choice but to offer production share contracts as its resources were unexplored, unlike the rest of Iraq, which offered low-cost proven reserves or the UAE’s equity model.
The contracts were awarded from 2010 during years of high oil prices, and the percentage of the state budget needed to compensate international contractors through fees and reimbursed costs was correspondingly low. However, low oil prices have seen the current share of state funds jump to an unsustainable 25%, experts said, and made reinvestment difficult with dwindling funds.
Baghdad consequently meets annually with its contractors to decide how much it can afford to pay and have oil companies adjust their work programs accordingly. Since Iraq is concurrently paying for a war against Islamic State militants and rebuilding the country’s economy, something has to give.
A Lukoil executive said Iraq could still raise its production capacity to 6 million b/d by 2017, but that would depend on infrastructure upgrades and a return to higher oil prices.
It also depends on Iraq achieving a level of stability that would allow it to perhaps mirror some of the strategies the UAE has adopted to great success.