By Sarah Kent and Selina Williams
BASRA, Iraq -- Western companies that for years pumped money
into Iraq's oil fields, lured by the prospect of its huge crude
reserves and post-war ambition to boost output, now face a
reckoning.
The battle against Islamic State and falling oil prices have
forced the government to cut investment in its energy industry.
Aging fields and delayed infrastructure projects also threaten to
stall the country's meteoric output rise of the past two years.
Major oil companies including BP PLC, Royal Dutch Shell PLC and
Lukoil PJSC are hunkering down and paring back their own work as a
result.
"You're going through difficult months," said Ariel Flores,
general manager of the BP-led Rumaila Operating Organization in a
recent interview. "You slow down and you make decisions to pause
efforts."
The more difficult environment is on display at the Rumaila oil
field, Iraq's largest. On a recent afternoon, BP workers buffeted
by burning hot winds cautiously lifted well equipment from nearly
4,000 feet below the earth's surface. The expensive, laborious
effort wasn't aimed at finding new oil but instead to maximize
output from the existing well.
Rumaila now has two rigs drilling for new oil, down from as many
as six earlier this year. The company says it still has ambitions
to increase production and can do so more cost-effectively by
focusing on wells that already exist, but output is expected to
remain around 1.4 million barrels a day this year.
Shell is in a similar position at the Majnoon oil field where
production has stalled at 200,000 barrels a day. Shell has plans to
double output, but this year, the company is just "focusing on
sustaining production," said Ahmad Atallah, Shell's general manager
of Majnoon.
Russia's Lukoil said earlier this year that it needed to invest
more just to keep production steady at the giant West Qurna-2 oil
field.
Richard Mallinson, geopolitical analyst at consultancy Energy
Aspects Ltd., said Iraq has proved a disappointment for the
companies that arrived with high hopes. "This has not been the
story they expected," he said.
The companies have been locked in difficult budget negotiations
with Iraq's government, which wants to pump more oil but has curbed
investment. They also face uncertainty over contract terms that the
government would like to modify to make them more affordable in the
wake of the fall in oil prices.
Iraq's new oil minister, Jabbar al-Luaibi, has met with oil
companies to encourage them to raise production despite the
obstacles.
"The ministry has an ambitious plan to go forward for bigger
future achievements," said Mr. al-Luaibi, according to a statement
on the ministry's website.
The oil companies also are eager to negotiate more favorable
terms.
"We're not ready to proceed to the next phase of development
until our negotiations with Iraq lead to some changes in the
economics of the contract," said Pavel Zhdanov, Lukoil's head of
capital markets and M&A, on an investor call last month.
Over the last few years, Iraq's oil production has climbed. The
war-torn country pushed its daily output to a near 40% increase
from 2014 levels. It is roughly double the level at the time of the
U.S. invasion in 2003, and the International Energy Agency
predicted in 2012 that Iraq's production could reach 6.1 million
barrels a day by 2020 -- behind only Russia, Saudi Arabia and the
U.S.
The country is thought to hold at least 140 billion barrels of
crude, making it the fifth largest oil province in the world. Large
parts of Iraq are still unexplored and its oil reservoirs are
relatively easy to tap. At a time when oil companies are searching
for barrels deep beneath the ocean and in Texas shale formations,
Iraq's resources are fairly straightforward and cheap to
extract.
The situation has become more challenging since 2014, when
Islamic State took over vast swaths of northern and western Iraq
and the oil price crashed. The government fell behind on its
payments to oil companies, which act as contractors and receive a
set fee for each barrel pumped -- often around $2 a barrel.
"The Iraqi government has to pay the oil companies as
contractors, and they don't have any money," said Neil Bruce, chief
executive of Canadian engineering and construction company SNC
Lavalin Group Inc., which works for oil companies in Iraq.
Though production has risen this year, reaching nearly 4.4
million barrels a day in August, according to the International
Energy Agency, significantly more spending is needed to achieve a
further production leap.
Several of Iraq's biggest producing oil fields are old and need
constant investment to manage their reservoirs. At Rumaila,
discovered in 1953, BP has to replace 200,000 barrels a day of lost
production every year to maintain steady output.
"The day you start cutting capital, you're sowing the seeds for
an inevitable decline," said Tony Hayward, the former BP CEO who
took the company into Iraq and is now chairman of the board of
Genel Energy PLC, which produces oil in Iraq.
--Ali Nabhan contributed to this article.
(END) Dow Jones Newswires
September 21, 2016 12:40 ET (16:40 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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