The Superpowers Battling Over Iraq’s Giant Oil Field, by Simon Watkins

This post was originally published on this site
https://2.gravatar.com/avatar/805203347f71b4a9606694b65ac317ee?s=96&d=identicon&r=G

Both the Chinese and Russians have designs on a huge Iraqi oil field. From Simon Watkins at oilprice.com:

Ever since the U.S. signalled through its effective withdrawal from Syria that it now has little interest in becoming involved in military actions in the Middle East, the door has been fully opened to China and Russia to advance their ambitions in the region. For Russia, the Middle East offers a key military pivot from which it can project influence West and East and that it can use to capture and control massive oil and gas flows in both directions as well. For China, the Middle East – and, absolutely vitally, Iran and Iraq – are irreplaceable stepping stones towards Europe for its era-defining ‘One Belt, One Road’ project. Earlier this week an announcement was made by Iraq’s Oil Ministry that highlights each of these factors at play, through a relatively innocuous-sounding contract award to a relatively unknown Chinese firm.

Specifically, it was announced that China Petroleum Engineering & Construction Corp (CPECC) has been awarded a US$121 million engineering contract to upgrade the facilities that are used to extract gas during crude oil production at the supergiant West Qurna-1 oilfield in Iraq, 50 kilometres northwest of the principal oil hub of Basra. The project is due to be completed within 27 months and aims to increase the capture of gas currently being flared across the site. Two factors that were not highlighted in the general announcement were firstly that CPECC is a subsidiary of China’s principal political proxy in the oil and gas sector, China National Petroleum Corp (CNPC), and secondly that the gas capture project will also include the development of the oil reserves at West Qurna 1. The current level of oil reserves at West Qurna 1 is just under nine billion barrels but, crucially, the site is part of the overall massive West Qurna reservoir that comprises at least 43 billion barrels of crude oil reserves. “For China, it’s always all about positioning itself so that it is perfectly placed to expand its foothold,” a senior oil and gas industry source who works closely with Iraq’s Oil Ministry told OilPrice.comearlier this week.

Related: Is Today’s Oil Price Plunge A Sign Of Things To Come?

Apart from this, burning gas associated with the production of crude oil is costing Iraq billions of dollars in lost revenues. It loses money in the first place because in order to try to minimise power shortages, Iraq is forced to burn crude oil directly at power plants that it could sell in the open market for currently well over US$55 per barrel (and the lifting cost per barrel in Iraq is just US$2 on average). In this context, the average volume of crude oil used for power generation has fallen in the past two years from a peak of 223,000 barrels per day (bpd) in 2015 but it still averages around 110,000 bpd, or around US$2.25 billion per year in value. It costs Iraq money in the second place because this associated gas that is flared could itself either be sold off directly or in LNG form or used as high-quality feedstock to finally truly kick-start the country’s long-stalled petrochemicals industry that itself could generate massive added-value product revenue streams. According to the IEA, Iraq has around 3.5 trillion cubic metres (tcm) of proven reserves of gas – mainly associated – which would be enough to supply nearly 200 years of Iraq’s current consumption of gas, as long as flaring is minimised. It added, though, that proven reserves do not provide an accurate picture of Iraq’s long-term production potential and that the underlying resource base – ultimately recoverable resources – is significantly larger, at 8 tcm or more.

Related: Russia Ignores OPEC Commitment Two Weeks Before Landmark Meeting

China knows all of this and has come to the correct conclusion that it cannot lose by expanding its imprint in Iraq in such a way. “However, China is now very wary of being seen in Iran or Iraq as looking to make them into client states, although that’s what it plans for both, so it’s recalibrated its approach to being more of the stealth variety – that is, small, incremental steps but lots of them – until at one point in the future the governments [of Iran and Iraq] look around and wonder how China is calling all the shots all of a sudden,” said the Iraq source. Such is the case in West Qurna 1 in which, although the contract announced principally involves CPECC just building the infrastructure to capture gas rather than flare it, in reality also involves being allowed to take and use or sell the gas at an advantageous rate. “China is looking at taking the gas with a discount of at least 30 per cent to the lowest mean one-year average market price at the hubs [principal gas hub pricing in Europe], and this then allows China to get more involved in the oil as well,” he added. China certainly has the expertise for this – and the appetite – as it has put on hold for a while at least its plans to take over the development of Phase 11 of Iran’s supergiant South Pars gas field.

This large foothold in West Qurna 1 will very neatly fit in with China’s near-identical move just a couple of months ago in Iraq’s massive Majnoon oil field. It is this field that was the focus of the extremely similar announcement that two major new drilling contracts had been signed: one with China’s Hilong Oil Service & Engineering Company to drill 80 wells at a cost of US$54 million and the other with the Iraq Drilling Company to drill 43 wells at a cost of US$255 million. In reality, it will be China that is in charge of both, having given the funds required to the Iraq Drilling Company as a ‘fee’ for its own participation, according to the Iraq source. Also located very close to Basra – around 60 kilometres to the north-east – the supergiant Majnoon oilfield is one of the world’s largest, holding an estimated 38 billion barrels of oil in place. It is currently producing around 240,000 bpd. Longer term, though, the original production tar­get figures for the Shell-led consortium still stand: the first production target of 175,000 bpd (already reached), and the plateau production for the site of 1.8 million bpd at some point in the 2030s.  West Qurna 1, in the meantime, is producing around 465,000 bpd, with an original plateau target of 2.825 million bpd having been re-negotiated down, to 1.6 million bpd again by some point in the 2030s.

from https://straightlinelogic.com/2019/12/03/the-superpowers-battling-over-iraqs-giant-oil-field-by-simon-watkins/

Thanks! You've already liked this
No comments