The very recent signing of two sets of major oil deals by U.S. oil giant Chevron following the forced withdrawal of Russian firms from key energy projects in Iraq is a key turning point in the West’s resurgence in the Middle East, a senior U.S. Treasury source told OilPrice.com last week. “Iraq is the heartland of the Middle East, a major Iranian ally, vital to Russian and Chinese interests, and it’s allowing a major U.S. force into the centre of its economy,” he underlined. So, what does this mean for Iraq’s energy sector and its geopolitical trajectory moving forward?
The first of the two sets of deals is perhaps the more important, involving the transfer of the management of the supergiant West Qurna 2 oil field (estimated recoverable oil reserves of around 13 billion barrels) to Chevron, following the exit of Russia’s number two oil company, Lukoil, a few weeks before. The field is one of the world’s largest, accounting for nearly 10% of Iraq’s total production of around 4 million barrels per day (bpd) and about 0.5% of the world’s oil supply. The second deal covers Chevron developing the supergiant Nasiriyah oil field (an estimated 4.36 billion barrels of reserves in place), four exploratory blocks in Dhi Qar Governorate, and the Balad field in Salah Al-Din Governorate. The Russian oil giant was forced to exit after the U.S. Treasury introduced a new range of blocking sanctions, including not just the two corporate entities of Lukoil and Rosneft (Russia’s number one oil firm) being added to the Specially Designated Nationals and Blocked Persons List, but key individuals connected to the firms as well. Targeting Russia’s top two oil firms was a huge step up from the previous sets of sanctions that encompassed lower-tier firms such as Gazpromneft and Surgutneftegas, which were in turn part of Washington’s gradual ‘tightening of the screws’ on Putin. Between them, Lukoil and Rosneft were exporting approximately 3.1 million bpd, which the West sees as vital to Russia’s ability to keep funding its war in Ukraine.
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Over and above the economic consequences for the Kremlin from diminished oil exports (and for China from losing heavily-discounted barrels from Russia) was the sea-change the U.S.-led initiative in Iraq has produced. Following the increasing unpopularity among the Iraqi people of the continued Western military presence after the removal of Saddam Hussein as leader in 2003, Russia and China boosted their influence across Iraq for three key reasons, as analysed in full in my latest book on the new global oil market order. Suffice it to say here, the first of these is that the country offers a huge repository of oil at the world’s joint lowest average lifting cost of $2-4 per barrel, together with large quantities of associated and non-associated gas. Second, it occupies the geographical heart of the region, lying west of Iran, north of Saudi Arabia and Kuwait, east of Jordan and Syria (with its long Mediterranean coastline offering access to further critical sea routes), and south of Turkey (affording an entry into the European continent). And third, it is a key member of the ‘Shia Crescent of Power’ geopolitical arc that stretches from Iran through Iraq, Syria, and Lebanon, where Shia communities and Iran-backed groups have historically exerted significant influence over regional politics, economics, and security. All these advantages are diminished for Moscow and Beijing, as the West’s influence in Iraq is reasserted.
Following the signing of the two sets of deals by Chevron, a senior source close to Iraq’s Oil Ministry exclusively confirmed to OilPrice.com that the government expects the U.S. firm to be able to double West Qurna 2’s output within a relatively short time. This looks eminently achievable for a company of Chevron’s size, scale, and capabilities, given that Lukoil had secretly long been able to produce a lot more oil from the field than it revealed to Iraq’s Oil Ministry, as also detailed in my latest book. Specifically, as exclusively told to OilPrice.com back in 2017 by a source very close to Iran’s Petroleum Ministry, Lukoil knew back then that it was perfectly capable of producing at least 635,000 bpd on a sustained basis, having hit 650,000 bpd production over extended periods in August and September 2017. Moreover, its senior engineers had assured Lukoil’s top management that 635,000-bpd production was achievable on an ongoing basis with no problems. The reason why Lukoil did not reveal this to Iraq’s Oil Ministry was that it believed the level of remuneration it was receiving per barrel drilled was too low. It was being paid US$1.15 per barrel recovered – the lowest rate being paid to any international oil company in Iraq at that time and dwarfed by the US$5.50 per barrel being paid to GazpromNeft in its development of the Badra oil field.
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Making matters worse for Lukoil at that point was that it had already spent at least US$8 billion in developing West Qurna 2, and compounding this grievance was the fact that Iraq’s Oil Ministry still owed it around US$6 billion in remuneration on recovered barrels and other development payments. In August 2017, the Iranian source told OilPrice.com, Lukoil was assured that Iraq’s Oil Ministry would very quickly pay the US$6 billion that it owed the company and that a higher compensation rate per barrel would be looked into as soon as was feasible. In addition, the Oil Ministry agreed to extend Lukoil’s contract from 20 to 25 years, thus lowering the average yearly cost to the Russian firm. It was also agreed that Lukoil would invest at least US$1.5 billion in West Qurna 2 in the following 12 months with a view to raising production from the 400,000-bpd level closer to the 1.2 million bpd peak production target. Unfortunately for the Russians, the end of November 2017 saw Iraq’s Oil Ministry discover that Lukoil was holding out on it, followed by a subsequent threat to withhold all payments due to Lukoil until it began to increase production steadily up to the 635,000-bpd level that its own production tests had shown was perfectly achievable. In response, and after the withdrawal of several international oil companies from Iraq, Lukoil’s senior management thought that the time was right try again to force the Oil Ministry into honouring its previous promises to increase its per barrel compensation on the West Qurna 2 field. Surprisingly for the Russians, the Oil Ministry’s response was to say that it was fine if Lukoil wanted to leave, but that before it did so, it would pay compensation instead of the upfront investment that it promised in 2017 and promised again in 2019, as it was not meeting the time-sensitive oil production targets that it had agreed to.
Additionally beneficial to Chevron’s prospects here, and to Iraq’s target of achieving over 6 million bpd of oil production by 2029, are the synergies that will be available to the U.S. firm from other Western majors now in operation again across the country. Not the least of these is the Common Seawater Supply Project (CSSP), which involves taking seawater from the Persian Gulf and transporting it to oil production facilities to boost pressure at key oil reservoirs. To reach and then sustain Iraq’s future crude oil production targets over any meaningful period, the country will have total water injection needs equating to around 2% of the combined average flows of the Tigris and Euphrates rivers or 6% of their combined flow during the low season. This crucial project is now being implemented by French energy giant TotalEnergies as one part of its US$27 billion four-pronged programme in Iraq. The first phase of this is being on the coast near the town of Um Qasr and is set to process and transport 5 million barrels of seawater per day to the main oil fields in southern Iraq. Treated seawater will replace freshwater withdrawals from the Tigris, Euphrates, and aquifers to maintain pressure in the oil wells, freeing up to 250,000 cubic metres per day of freshwater for irrigation and local agriculture needs in the water-stressed region.
The full completion of this project alone should allow Iraq to massively increase its oil production, to the original output envisaged by the International Energy Agency. Indeed, the CSSP was directly referenced in a confidential report (the ‘Integrated National Energy Strategy’) sent to then-Iraq Prime Minister Nouri al-Maliki back in 2012, as also examined in full in my latest book on the new global oil market order. This showed precisely how Iraq could increase its oil output from just over 3 million bpd at that point to a plateau of 13 million bpd in the ‘High Production’ scenario by 2017. The ‘Medium Production’ scenario plotted a course to a 9 million bpd plateau by 2020, while the ‘Low Production’ scenario planned for 6 million bpd by 2025.
By Simon Watkins for Oilprice.com