July 29, 2019, 10:00 AM MDT
Last week saw two apparently independent major events occur in Iraq centred on its gas sector but a senior oil and gas industry source who works closely with Iraq’s Oil Ministry told Oilprice.com they were a lot more connected than they seemed. The first was a statement by the Secretary General of the Iran-Iraq Joint Chamber, Seyed Hamid Hosseini, that Iran’s gas and electricity exports to Iraq are expected to reach US$5 billion by the end of the current Iranian calendar year, ending on 21 March 2020. The second was an announcement by Iraq’s Oil Minister, Thamir Ghadhban, that a U.S. consortium led by Honeywell has signed a memorandum of understanding for a huge deal that would reduce the country’s current level of gas flaring by nearly 20%.
“Iraq under the auspices of Moqtada al-Sadr – the real power behind the [Adil] Abdul-Mahdi government is very good at playing the U.S. with the Iran card, so every time there is a hint that Iraq will continue with its historically close relationship with Iran, the U.S. comes in to offer the services of one of its companies at beneficial terms to Iraq,” the source said.
The deal itself involves U.S. giant, Honeywell, partnering with another U.S. heavyweight, Bechtel, and Iraq’s state-owned South Gas to build the Ratawi gas hub In the first stage that is expected to last for three years this project will process up to 300 million standard cubic feet per day (scf/d) of ‘associated gas’ (generated as a by-product of crude production) at five southern Iraqi oil fields: Majnoon, Gharib al-Qurna, al-lhiss, al-Tubba, and al-Siba. It comes shortly after the granting of a new waiver from the U.S. for Iraq to import electricity from Iran, first awarded last November and subsequently renewed in December, March, and June, each time for 90 days. At the same time, Iraq has been steadily importing around one third of its total energy supplies from Iran, which equates to around 28 million cubic feet (mcf) of gas to feed its power stations.
With peak summer power demand in Iraq perennially exceeding domestic generation, Iraq’s dependence on Iran is acute – a highly troubling situation for the U.S. in all circumstances, let alone the current impasse – and made worse still for its capacity to cause major civilian unrest in the country. Last summer’s widespread protests across Iraq – including in the major oil hub of Basra – were widely seen as being prompted in part by chronic electricity outages. The situation also promises to become much worse as, according to the International Energy Agency (IEA), Iraq’s population is growing at a rate of over one million per year, with electricity demand set to double by 2030, reaching about 17.5 gigawatts (GW) average throughout the year.
In addition to the ongoing dependence on Iran that this energy imbalance necessitates, Iraq is losing billions of dollars in two streams of revenue. The first is the oil that it is forced to burn burns crude oil directly at power plants in order to attempt to address the shortfall in power supplies accrued from other raw materials, such as gas. Although 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 July and September 2015, it still averages around 110,000 bpd, or around US$2.5 billion per year in value.
The second reason is that the associated gas is largely flared rather than captured and either sold on as raw gas or used as feedstock for the production of value-added petrochemicals products. On the first point, according to the IEA, Iraq has around 3.5 trillion cubic metres (tcm) of proven reserves of gas, mainly associated with oil that is produced from the supergiant fields in the South hydrocarbon region. These reserves 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.
On the second point, Oilprice.com was told recently by the managing director of a major foreign oil company operating in Iraq that the failure to capture this gas – more than half of the gas that is extracted in Iraq today is flared and it is the world’s second worst offender in this regard – is a key reason holding back the development of a viable petrochemicals sector in the country.
“Iraq needs to put into action its plans to develop a second gas hub away from Basra that would get the gas volumes up to an average of 800 million to 1 billion standard cubic feet per day so that the ethane can be extracted on a sustainable and reliable basis that would give sufficient volume for a major petchems plant to be viable,” he said. “Ethane should be the initial feedstock for Iraq’s first few plants in the same way that it was in the development of Saudi Arabia’s master gas system that captured associated gas, which was then fractionated and supplied as primary feedstock to the flagship Jubail Industrial City,” he underlined.
This latest project would build on the previous plans to address Iraq’s power shortfall and to monetise its oil and gas assets better, as was the original intention of Iraq last year stating that it was joining the United Nations and World Bank ‘Zero Routine Flaring’ initiative aimed at ending this type of routine flaring by 2030. Shortly after this, the Oil Ministry announced that it had signed a gas capture deal with U.S. oil services provider Baker Hughes to harness 200 million cubic feet (mmcf) per day from the Gharraf oil field – being developed by Japan Petroleum Exploration Co. (JAPEX), Malaysia’s Petronas, and Iraq’s North Oil Co. (NOC) – and the neighbouring Dhi Qar site, Nassiriyah, plus other oilfields north of Basra. At that time, Baker Hughes stated that addressing the flared gas from these two fields would allow for the provision of 400 MW of power to the Iraqi grid.
The then- Oil Minister, Jabbar al-Luaibi, added at that point that Iraq was also currently negotiating a similar gas capture deal for the state-run Nahr Bin Umar field with Houston-based Orion Gas Processors and that there were similar plans to construct gas-processing facilities in the Missan and Halfaya fields that would have a combined capacity of 600 mmcf per day of gas when completed. This, in turn, was in line with an ambitious statement last January from al-Luaibi that Iraq would have ceased all gas flaring from its southern producing oilfields by the end of 2021, so additionally freeing up some of this gas capacity for export.
“By the end of last year, there had been some progress, with the Basrah Gas Company (BGC) processing and producing the equivalent of around 10 bcm of gas per year and earlier this year the shareholders in BGC [Iraq’s South Gas Company with 51%, Shell with 44% and Mitsubishi with 5%] stated that they’d increase the volume to around 14 bcm by 2021, with a target of 20 bcm of gas per year focussed on Rumaila, Zubair and West Qurna,” the Iraq source told Oilprice.com last week. “Unfortunately, with Iraq there is often a big gap between what is said and what is done, with the space between filled by people looking to line their own pockets  so it is difficult to be optimistic,” the Iraq source added. “Ironically it may be the man that the U.S. hates – and vice-versa – Moqtada al-Sadr, who forces these projects through, as he is a genuine nationalist and is clever enough to see that by monetising all of these resources properly, Iraq will be able to free itself of all foreign interference, which is exactly the message he ran on in the last election and which keeps him as the major power in Iraq,” he concluded.
By Simon Watkins for Oilprice.com