Operating Environment in Iraq

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Southern Iraq

Between 2008 and early 2010 Iraq awarded a dozen contracts to international oil companies (IOCs), including Royal Dutch Shell, BP, ExxonMobil, Lukoil and CNPC of China to develop the reserves in the south of the country.

According to Maria van der Hoeven of the International Energy Agency (IEA), the principal obstacle for companies operating Iraq are the legal questions raised by the government's failure to pass a hydrocarbons law to regulate the industry. Other obstacles are an immature oil field services industry, complex geology,[1] infrastructure bottlenecks and ongoing security concerns.[2] Corruption is also an obstacle to operations (in 2012, Transparency International ranked Iraq as the 175th most transparent country in the world).

From the perspective of IOCs, the technical service contracts offered in the south are increasingly seen as less attractive than the production sharing contracts (PSCs) offered by the KRG to the north. Eni's CEO, for one, commented in 2012 that "our adrenaline rush now is not what it was when we entered Iraq. Iraq is more complex than we thought." The Petroleum Economist's Derek Brower suggested that the Technical Service Agreements (TSAs) may prove more attractive to national oil companies (NOCs), particularly those from Asia, which seek the stability of a per-barrel arrangement rather than the lucrative but higher risk production sharing agreements (PSAs) offered elsewhere.[3]

While security conditions have improved since the days of the civil war, occasional attacks remind companies that they could become targets. Bombings of pipelines and other facilities have subsided but are still a feature of the security environment, in early 2010 a note was found in a discovered weapons cache in Basra which threatened foreign oil companies, and in 2012 four employees of Athens-based Consolidated Contractors Company (CCC) were kidnapped in Basra.[4] Even once security issues are resolved, local issues presented by communities around the oilfields living in poverty have presented problems, according to security firm Control Risks.[5]

Iraqi Kurdistan

The first companies to invest in the semi-autonomous Kurdistan region in the north of Iraq were smaller, less well-known outfits such as Norwegian DNO and Turkish PetOil. They were followed by mid-tier majors such as Marathon and Hess, and over the course of 2012 by super-majors ExxonMobil, Total, Chevron and Gazprom.[6] However Baghdad considers the deals signed directly with the Kurdistan Regional Government (KRG) as illegal and the moves have led to ongoing disputes between the centre and the periphery.[7]

A senior KRG official estimated that in 2012 there were around 45 to 50 contractors operating in the region, but according to Iraq Oil Report the Kurdistan region witnessed a flurry of mergers and acquisitions in 2012, a process actively encouraged by Natural Resources Minister Ashti Hawrami. This may result in a smaller number of players being involved in the coming years as the remaining blocks are snapped up and smaller companies struggle to raise the financing required and get squeezed out.[8]

While reserves are smaller in Kurdistan than in the south, many investors are attracted by other favourable conditions. Aside from the more attractive contract regime used by the KRG, fewer delays are experienced at customs for imports of parts and materials than going through Basra. This has resulted in many companies operating in the south importing their materials via Kurdistan, according to the Petroleum Economist. Power supplies and other infrastructure in Kurdistan is also superior, according to the Iraq Energy Institute, and security conditions are more favourable.[9]

References

  1. As Kurdistan oil booms, deal-making accelerates”. Iraq Oil Report, 3 December 2012.
  2. IEA predicts boom in Iraq oil production”. Financial Times, 9 October 2012.
  3. Will Iraq be the next oil superpower?”. Petroleum Economist, 12 December 2012.
  4. Oil workers kidnapped in Basra”. Iraq Oil Report, 17 May 2012.
  5. Will Iraq be the next oil superpower?”. Petroleum Economist, 12 December 2012.
  6. As Kurdistan oil booms, deal-making accelerates”. Iraq Oil Report, 3 December 2012.
  7. IEA predicts boom in Iraq oil production”. Financial Times, 9 October 2012.
  8. As Kurdistan oil booms, deal-making accelerates”. Iraq Oil Report, 3 December 2012.
  9. Oil workers kidnapped in Basra”. Iraq Oil Report, 17 May 2012.