DJ For Oil Giants, Iraq's Bright Promise Dims -- WSJ - Dow Jones News 22-SEP-2016
DJ For Oil Giants, Iraq's Bright Promise Dims -- WSJ - Dow Jones News
22-SEP-2016 01:33:26 AM
DJ For Oil Giants, Iraq's Bright Promise Dims -- WSJ
Cuts in government spending, weak prices hurt new prospects for BP, Lukoil and Shell
By Sarah Kent and Selina Williams
BASRA, Iraq -- Western companies that for years pumped money into Iraq's oil fields, lured by the prospect of its huge crude reserves and post-war ambition to boost output, now face a reckoning.
The battle against Islamic State and falling oil prices have forced the government to cut investment in its energy industry. Aging fields and delayed infrastructure projects also threaten to stall the country's meteoric output rise of the past two years.
Major oil companies including BP PLC, Royal Dutch Shell PLC and Lukoil PJSC are hunkering down and paring back their own work as a result.
"You're going through difficult months," said Ariel Flores, general manager of the BP-led Rumaila Operating Organization in a recent interview. " You slow down and you make decisions to pause efforts."
The more difficult environment is on display at the Rumaila oil field, Iraq's largest. On a recent afternoon, BP workers buffeted by burning hot winds cautiously lifted well equipment from nearly 4,000 feet below the earth's surface. The expensive, laborious effort wasn't aimed at finding new oil but instead to maximize output from the existing well.
Rumaila now has two rigs drilling for new oil, down from as many as six earlier this year. The company says it still has ambitions to increase production and can do so more cost-effectively by focusing on wells that already exist, but output is expected to remain around 1.4 million barrels a day this year.
Shell is in a similar position at the Majnoon oil field where production has stalled at 200,000 barrels a day. Shell has plans to double output, but this year, the company is just "focusing on sustaining production," said Ahmad Atallah, Shell's general manager of Majnoon.
Russia's Lukoil said earlier this year that it needed to invest more just to keep production steady at the giant West Qurna-2 oil field.
Richard Mallinson, geopolitical analyst at consultancy Energy Aspects Ltd., said Iraq has proved a disappointment for the companies that arrived with high hopes. "This has not been the story they expected," he said.
The companies have been locked in difficult budget negotiations with Iraq's government, which wants to pump more oil but has curbed investment. They also face uncertainty over contract terms that the government would like to modify to make them more affordable in the wake of the fall in oil prices.
Iraq's new oil minister, Jabbar al-Luaibi, has met with oil companies to encourage them to raise production despite the obstacles.
"The ministry has an ambitious plan to go forward for bigger future achievements," said Mr. al-Luaibi, according to a statement on the ministry's website.
The oil companies also are eager to negotiate more favorable terms.
"We're not ready to proceed to the next phase of development until our negotiations with Iraq lead to some changes in the economics of the contract," said Pavel Zhdanov, Lukoil's head of capital markets and M&A, on an investor call last month.
Over the last few years, Iraq's oil production has climbed. The war-torn country pushed its daily output to a near 40% increase from 2014 levels. It is roughly double the level at the time of the U.S. invasion in 2003, and the International Energy Agency predicted in 2012 that Iraq's production could reach 6.1 million barrels a day by 2020 -- behind only Russia, Saudi Arabia and the U.S.
The country is thought to hold at least 140 billion barrels of crude, making it the fifth largest oil province in the world. Large parts of Iraq are still unexplored and its oil reservoirs are relatively easy to tap. At a time when oil companies are searching for barrels deep beneath the ocean and in Texas shale formations, Iraq's resources are fairly straightforward and cheap to extract.
The situation has become more challenging since 2014, when Islamic State took over vast swaths of northern and western Iraq and the oil price crashed. The government fell behind on its payments to oil companies, which act as contractors and receive a set fee for each barrel pumped -- often around $2 a barrel.
"The Iraqi government has to pay the oil companies as contractors, and they don't have any money," said Neil Bruce, chief executive of Canadian engineering and construction company SNC Lavalin Group Inc., which works for oil companies in Iraq.
Though production has risen this year, reaching nearly 4.4 million barrels a day in August, according to the International Energy Agency, significantly more spending is needed to achieve a further production leap.
Several of Iraq's biggest producing oil fields are old and need constant investment to manage their reservoirs. At Rumaila, discovered in 1953, BP has to replace 200,000 barrels a day of lost production every year to maintain steady output.
"The day you start cutting capital, you're sowing the seeds for an inevitable decline," said Tony Hayward, the former BP CEO who took the company into Iraq and is now chairman of the board of Genel Energy PLC, which produces oil in Iraq.