BAGHDAD—A stalled project aimed at sustaining Iraq's record oil
production by injecting seawater into its southern oil fields has
become a symbol of missed opportunities for a country reeling from
falling crude prices and the war against Islamic State.
By using water drawn from the Persian Gulf to extract oil
remaining in the fields, Iraq hoped to expand the country's output
beyond its current 4.1 million barrels a day.
The project's completion isn't expected until 2020 at the
earliest—seven years behind schedule. Without it, production in
Iraq's southern oil wells is expected to decrease by some 10% a
year, said Michael Cohen, head of energy commodities research at
Barclay's.
The faltering venture, known as the Common Seawater Supply
Facility, has become yet another example of how bureaucratic
infighting and ethnic and sectarian tensions have stymied efforts
to modernize Iraq's oil sector and move it up the ranks of global
producers.
"The common seawater injection project is a microcosm of all of
the different challenges that Iraq is going to need to overcome,"
said Raad al-Kadiri, the managing director for Petroleum Sector
Risk at IHS Energy, a Colorado-based energy consultancy.
The undertaking's continuing delays add still further to the air
of uncertainty surrounding Iraq's oil industry and the
oil-dependent government's efforts to restore political stability.
In a Sept. 6 letter to the international oil companies running the
country's energy sector, an Iraqi Oil Ministry official warned that
government spending for the sector will be cut in 2016.
Even before the warning, Baghdad's shrinking oil revenue had
forced it to slash spending by nearly half for the maintenance and
improvement of the country's oil fields, ports and pipelines.
The worries surrounding Iraq's oil sector have been compounded
by a dispute with the Kurdistan regional administration over a deal
to market its oil through the central government.
The disagreement has cost Baghdad badly needed revenue, even as
U.S. nuclear accord with Iran is threatening to saturate the global
market with billions of barrels of oil as early as 2016, putting
further downward pressure on crude prices.
By the end of the year, Iraq will likely owe more than $8
billion to foreign oil companies that extract its oil, said Ali
M'arech, a member of the Iraqi parliament's oil committee.
The government paid some $9 billion in such fees earlier this
year, Iraqi Oil Minister Adel Abdul Mehdi wrote in an article
published last month in Baghdad's Al Adala newspaper. He said Iraq
planned to pay this year's oil bills in installments.
Executives of large foreign oil companies complain that many
Iraqi policy makers aren't taking the oil price downturn and its
budget impact seriously enough.
"It took a while for the government to accept that there was an
issue," said an employee of an foreign oil company operating in
Iraq. "They were almost counting on oil prices bouncing back within
a year."
Amid the downturn in world oil prices, the Iraqi government has
ramped up production to meet its large payroll and fund the war
against Islamic State, the Sunni Muslim extremist group that now
controls large areas of the country.
In July, 4.2 million barrels a day were churned out, up from 3.4
million barrels in November, according to the International Energy
Agency. More than three-fourths of it comes from the southern
region of Basra.
The increased production still hasn't kept pace with government
spending. Baghdad's budget shortfall is expected to reach $21
billion this year, according to official figures. Meanwhile, the
upkeep and improvements to ensure the oil industry's long-term
health have languished.
"The longer and longer that investment is deferred, the more
aggressive the decline becomes," said Mr. Cohen of Barclay's.
Water injection is a commonly used method to replace extracted
oil and maintain the necessary pressure to continue production. The
technique requires less energy and is cheaper than increasing
drilling capacity.
Before the U.S.-led invasion of Iraq in 2003, Iraqi firms pumped
river water into the southern oil fields to keep the crude flowing.
But after Turkey built dams upstream on the Tigris, reducing the
water available for pumping into oil fields, Iraqi policy makers
began considering a massive saltwater injection project.
When planning for Common Seawater Supply Facility started in
2009, its goal was to deliver 12 million barrels of water a day to
five oil fields by 2013.
In 2010, the government awarded the project contract to
ExxonMobil Corp. A year later, however, the contract was suspended
after the oil giant signed an oil extraction deal with Baghdad's
Kurdish rivals in northern Iraq.
ExxonMobil, along with several other large international oil
companies, declined to comment for this article.
The venture was then handed to Iraq's state-owned South Oil
Company, which began in 2012 studying routes for pipelines and
possible locations for pumping stations and water treatment
stations.
Diplomats, analysts and Iraqi politicians blame the continuing
delays on bureaucratic infighting between Iraq's Oil Ministry and
its Finance Ministry, which disagree over who should foot the bill
for the project.
Noora al-Bachari, a member of the economy committee in
parliament, said the dispute could have been avoided had the Oil
Ministry brought in a large international oil firm to undertake the
project rather than rely on the Finance Ministry.
"The Oil Ministry should have dealt with this project in a more
professional way," she said.
The Finance Ministry and Oil Ministry didn't respond to repeated
requests for comment.
In June 2014, the government turned abroad again in search of a
contractor for the project. Though the government has projected the
cost at $4 billion, energy analysts say it is more likely to run at
about $6 billion.
To sweeten the deal for foreign firms, the Oil Ministry decided
early this year to allow the winning bidder access to Iraq's
largely untapped and undeveloped Ibn Omar oil field, said Mr.
M'arech, the parliamentarian. Iraq's government has pledged to
award the contract before the end of 2015.
But in a sign of how cash-strapped the government has become,
Iraqi lawmakers say they are now considering paying Baghdad's fees
to major international oil companies in oil rather than cash.
Ghassan Adnan and Ali A. Nabhan in Baghdad and Kevin Baxter in
London contributed to this article.
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(END) Dow Jones Newswires
September 15, 2015 08:55 ET (12:55 GMT)
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