December 16, 2012 9:08 pm

Iraq – back in the flow

Western groups revive production, but bureaucracy and stingy contracts drive majors to Kurdistan
Iraqi workers walk at the Halfaya oilfield near the southern city of Amara©AFP

Rough terrain: Iraqi workers walk at the Halfaya oilfield near the southern city of Amara. Iraq’s oil production is on the rebound

Not many oilfields in the world are laid with 100,000 mines. But Rumaila is no ordinary oilfield.

The jewel in Iraq’s crown, it is one of the world’s few supergiants, producing more crude than all of the UK North Sea. So as US-led forces prepared to invade Iraq in 2003, Saddam Hussein’s regime laid an 18km-long defensive minefield right across it to deter their advance.

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It did not help. Iraq was occupied, Saddam toppled and the country entered a turbulent new era. The minefield is now a no-go zone – its only victims the local camels that wander in occasionally and are blown up by “bouncing betties”, each packed with 1,000 pieces of shrapnel.

Pumping oil in a former war zone has its hazards, but none of that matters to Marc Hornbrook, Rumaila’s general manager. He knows all about big oilfields – he worked in Prudhoe Bay, on Alaska’s North Slope, for 10 years – but Rumaila is twice as large as that. Being here is a “dream come true”, he says.

Mr Hornbrook is part of a team of expat oil workers from BP, which in 2009 was awarded a 20-year contract to realise Rumaila’s full potential.

The deal required BP to raise production from the field by 10 per cent in three years. It met that target within a year.

Rumaila’s recovery is just one part of a much bigger story. Across Iraq, oil output is rebounding so fast that it has taken the global energy industry by surprise. Iraqi oil will be “crucial for the health of the global economy”, says the International Energy Agency.

In its heyday, the country’s crude accounted for 5 per cent of global production. But Iraq’s crippling war with Iran in the 1980s, Desert Storm in 1991 and the US invasion in 2003 – along with years of international sanctions – ravaged its oil industry.

That all began to change in 2008 when Iraq signed contracts with a clutch of foreign majors to develop its huge southern oilfields. As security improved and western technology flowed in, output gradually rose. Last January, it reached its highest level since the US-led invasion. In July, Iraq overtook Iran to become the second-largest oil producer in Opec for the first time since the late 1980s.

The IEA predicts Iraq’s production will more than double by the end of the decade, and by the 2030s, Iraq will be the world’s second-largest oil exporter after Saudi Arabia.

Yet there are storm clouds gathering over this sunny landscape. Violence is on the rise again, raising fears of a return to the sectarian strife that plagued Iraq over the last decade. Late last month, at least 33 people were killed in bomb attacks on predominantly Shia Muslim areas south of Baghdad.

That has forced the oil companies to invest heavily in security. BP’s base in Rumaila is a fortified compound defended by dozens of heavily armed private contractors and surrounded by watchtowers. The place is covered with “duck and cover” bunkers, tastefully planted with bougainvillea. Outside the base, all expat staff travel in two-vehicle convoys with armoured protection teams.

But security is not the only problem. Some oil companies are beginning to despair of Iraq’s Byzantine bureaucracy, the glacial pace of decision-making and the poor returns embedded in their contracts. “We’ve lost the enthusiasm we used to have for Iraq,” says one senior western oil executive. “Why should I be there?”

Instead, they are looking north, to Iraqi Kurdistan, a relatively unexplored area estimated to hold about 45bn barrels of oil. Most of the companies that signed deals with the local government in Kurdistan have been small explorers with no presence in the south. But that changed last year when ExxonMobil entered the region. Baghdad protested. So, faced with a choice of sticking with its southern investment or exploring exciting new fields in the north, Exxon chose the latter, putting its stake in the $50bn West Qurna 1 project up for sale.

One company is staying put: BP. It was the first to come to southern Iraq, and that first-mover advantage has helped to insulate it from problems that have ensnared its rivals. Working in Rumaila – the world’s second-largest oilfield after Ghawar in Saudi Arabia measured by production – also gives it a heft others lack.

“Rumaila generates around half of the Iraqi federal budget,” says Michael Townshend, BP’s regional president for Iraq. “It means that if we’re frustrated with something, we can always get an audience with the [Iraqi oil] minister.” He meets the minister, Abdul Karim Luaibi, every two weeks or so.

BP discovered Rumaila in 1953, but it was squeezed out when Iraq nationalised its oil industry. At first the field virtually ran itself. But when sanctions hit, it became impossible to get spare parts and maintain equipment. Rumaila fell into disrepair. “I remember in 1996 we didn’t have anything,” says Moaed Dhai, a drilling manager, who has worked at the field for 20 years. “We had to get stuff from the scrapyard – wellheads, casing, tubing, things we had thrown away years before. We were desperate.”

To get fields such as Rumaila back in shape, Iraq signed 19 technical service contracts with international oil companies. It is a type of deal the majors normally avoid, because it turns them from investors into mere contractors. But they were so eager to gain a foothold in Iraq that they held their noses and signed.

Under BP’s deal, the UK group and its partners – CNPC of China and Iraq’s Southern Oil Co – pledged to almost triple Rumaila’s production to 2.85m b/d. They were to be paid a flat fee of $2 for every barrel produced above an initial target. That gave the lion’s share of revenues to Iraq.

The first few months were tough. BP’s team, which took up residence in the US military headquarters for southern Iraq near Basra in 2009, were regularly shelled by insurgents.

. . .

At the field itself, BP found a shocking state of affairs. Safety standards were non-existent; workers wandered around barefoot. “On my first day there was a leak on a pipeline and I saw someone weld a patch straight on to it,” says Asif Zeynalov, a BP operations manager. “You could have had an explosion.”

On a turbine running one of the export pumps, BP discovered a brass nameplate dated July 1952. Control panels “look like something out of Thunderbirds”, one contractor says. “If they go on the blink, you bang on them and they start working again.”

Gas: Clearing the smoke

Rumaila not only has oil – it also has vast quantities of natural gas. But much of that is burnt or “flared” straight into the atmosphere, a practice so wasteful and polluting it is banned in many countries.

All over the field, dense columns of black smoke rise into the desert sky – forbidding symbols of an oil industry stuck in a bygone age.

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“The most surprising thing was that there was so little activity in the field and yet it was still doing 1m barrels a day,” says Mr Townshend.

One of the first things BP did was to clear 10,000 pieces of unexploded ordinance, ranging from bullets to cluster bombs. Among the discoveries was an 8-foot long Tomahawk cruise missile tipped with a tonne of TNT.

Rumaila was tough in security terms, but from an engineering perspective it was a doddle. Its oil flows at prodigious rates thanks to a natural water aquifer that maintains pressure in the reservoir. “Some wells produced in excess of 50,000 barrels a day each – which is as good as you get in the oil industry,” says Gil Beuhler, BP’s vice-president for subsurface. The geology is simple, too. “It’s like drilling through Victoria sponge-cake,” says one drilling engineer.

BP made simple improvements, drilling new wells, hooking up flow lines and repairing oil vessels that had not been maintained or inspected for years. That quickly resulted in big production increases. Within six months the partners had hit their initial production target – a crucial milestone, because it meant they could start recovering their costs and earning their per-barrel fee.

But output fell sharply in 2011 as bureaucratic snarl-ups meant BP could not obtain enough work visas for its expat staff – a problem other companies have also faced. Rumaila was also bumping up against Iraq’s notorious infrastructure bottlenecks. The south lacks oil storage capacity, so any delays or weather-related interruptions to loading tankers for export mean production has to be curtailed. “You can shut down the whole field in six hours but to get back to where we were takes two months,” says Mr Townshend.

Iraq has vastly increased its export capacity this year by commissioning new offshore crude loading facilities, which have eased bottlenecks. But infrastructure remains a problem. There are still not enough pumping stations, pipelines and storage.

Lack of water is also a huge concern. Many of Iraq’s big oilfields need water injection to support reservoir pressure. One solution, an Exxon-led project to treat and pump seawater from the Gulf to the southern oilfields, now faces delays after the US major withdrew this year.

Meanwhile, western companies complained that the Iraqi government was taking too long to reimburse their costs, which undermined the economics of their projects.

Raed Alkadiri, a partner at PFC Energy who advises companies active in Iraq, says Baghdad often balks at the price tags of some projects. “Twenty years of isolation mean they often underestimate the costs of operating in what is still a high-security environment,” he says.

BP has also struggled to get paid what it is owed. The invoices it presents need 15 official signatures before they can be approved – although payments are more timely than they were a year or two ago. And customs is another huge headache.

Jim McCrum, a turnround manager at Rumaila, says he is waiting for 2,000 valves that are stuck in Iraqi customs. “The system is creaking at the edges,” he says.

Meanwhile, BP is planning to drill into a new reservoir known as Mishrif where the oil is harder to extract and will need more water and gas injection. As time goes by, BP will become more reliant on new water infrastructure and power generation capacity that is still on the drawing board.

Despite the problems, BP remains committed to Iraq. It has plans to increase production from Rumaila by 100,000 b/d every year for the next three years, and is investing heavily in training. Moaed Dhai says BP has sent 95 per cent of local staff from Rumaila’s wells division to training courses. “Morale is really improving,” he says. “For 30 years Iraqi people were isolated from the world. Now they are thinking about the future.”

But other companies grumble that unless the bureaucracy eases up and their terms improve, they may follow Exxon’s lead and head north.

“A lot of Iraqis believe they’re doing the majors a favour by letting them into what was a closed sector,” says Mr Alkadiri. “They don’t understand that for the majors, it’s not about the oil – it’s about the value they can extract from the oil.”

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