Iraq to miss oil production capacity targets: US report

Dubai (Platts)--6Dec2006

Iraq will not be able to reach its crude production capacity targets or
sustain higher output because of damage to overworked reservoirs, insufficient
and cumbersome investment procedures, sabotage, corruption and the absence of
a hydrocarbon law, according to a US government report.
"Although US-funded projects have helped increase crude oil production
capacity and exports, the security situation, poorly maintained
infrastructure, corruption and a constrained budget and procurement execution
at the Ministry of Oil continue to pose significant challenges to sustained
development in the sector," said the latest report by the Office of the
Inspector General for Iraq Reconstruction (SIGIR).
Oil production peaked at 2.47 million b/d in late August/early September
but averaged 2.27 million b/d in the quarter after an attack crippled a key
northern pipeline. Oil exports averaged 1.66 million b/d but closed at 1.62
million b/d in September against a target of 1.65 million b/d.
Phase I of the delayed Qarmat Ali project, which will provide treated
water for injection to maintain reservoir pressure in one of the biggest
fields in the south, is complete. Phase II is 28% complete but even when
completed in December, it will not achieve the desired capacity target.

QARMAT ALI INCREASE WON'T BE ACHIEVED
"The schedule has slipped because of the poor condition of original
pumps, motors and valves. Phase II of the task order is expected to increase
water injection to full capacity, resulting in a crude oil production increase
of 200,000 b/d," the report said.
But it quotes an Iraq Reconstruction Management Office expert as saying
the project "has actually taken wells out of production in Rumaila because of
water cut" and it "will not increase capacity by 200,000 b/d."
As of late September, 12 gas/oil separation plants were being refurbished
in southern Iraq to increase processing capacity by 600,000 b/d, SIGIR said.
"All eight GOSP projects in the north have been completed, increasing
processing capacity by 300,000 b/d." GOSP projects in the south were 93%
completed as of late September 2006 and were due for completion in November.
In the south, workovers on 30 wells in the Rumaila field are 8% complete
and will raise capacity by 300,000 b/d when completed by July 2007.
But these gains are expected "to be overtaken by production losses in the
near future due to inadequate maintenance and lack of replacement of critical
parts, material and equipment if nothing is done to change the current
constricting budgetary system for the Ministry of Oil."
While many of projects financed by Iraq reconstruction funds continue to
add to Iraq's capacity, work has suffered "chronic schedule slippages."

CAPACITY TARGET OF 2.8 MILLION B/D BY SEPTEMBER 2007
The report quotes an IRMO expert as saying that when all pipelines are
operational and tankers are loading normally, total crude oil production could
"easily reach approximately 2.6 million b/d." The overall capacity and
production target for Iraq is 2.8 million b/d by the end of September 2007.
Crude oil exports accounted for around 90% of government revenue in 2006.
In early October, year-to-date earnings totaled $24.8 billion. But from
January 2004 to March 2006, Iraq lost a potential $16 billion from oil exports
because of export limitations and billions of dollars spent to import fuel.
Corruption is another impediment to the development of the oil and gas
sector, said the report in what has become a recurrent theme in SIGIR updates.
"Major concerns include robbery and bribery as well as truancy by
employees, external agents and procurement committees," it said, quoting the
minister of oil as admitting that corruption was "significant in the
production and distribution of refined fuels."
The ministry has completed 454 audits so far in 2006 and has developed
revised tactics or standards for 33 aspects of the ministry's work, including
marketing of crude oil, salary scales and transportation of oil products, said
the report. Pipeline damage is forcing the transportation of refined products
by tanker trucks, which are susceptible to smuggling and attack.
"The Iraqi government is also planning to combat corruption and smuggling
in the oil and gas sector by installing production metering systems throughout
the country," though these are unlikely to be operational for some time.
There is also little likelihood of a significant increase in exports from
the Basra Oil Terminal, where efforts are focused on measuring rather than
increasing capacity from the key export node. The metering system, which was
33% complete last quarter and has made little progress in recent months, is
behind schedule and will not be completed till April 2007.
The most important future milestone for the oil and gas industry would be
the passage of a national hydrocarbon law, which is being held up while
Baghdad negotiates with the Kurdistan Regional Government, which has its own
draft law. "The legislation differs in many ways, but most prominently in the
question of regional rights to receive direct revenue from both current and
future fields, as well as the status of Kirkuk."

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