XOM Exxon Mobil Corp

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.

Access Investor Kit for "EXXON MOBIL CORP"

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US30231G1022

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

September 15, 2015 08:55 ET (12:55 GMT)

Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Mar 2024 to Apr 2024

Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Apr 2023 to Apr 2024