• Iraq’s new Prime Minister is wasting no time in strengthening energy ties with Russia and China.
• After Ghani’s appointment, local media announced that NOCs from China and Iraq had begun multiple seismic surveys as part of the first phase of wide-ranging offshore oil and gas exploration between the two countries.
• Senior officials report that Iraq’s new Prime Minister Ghani will also go along with his predecessor’s intention of allowing Lukoil to go ahead with its planned development program for Eridu.

It is possible that U.S. Secretary of State, Antony Blinken, believed for a moment that his call to the new Iraqi Prime Minister, Mohammed Shia al-Sudani, saying that Washington “is eager to work with the government and people of Iraq to improve respect for human rights, increase economic opportunities, advance Iraq’s energy independence, and address the climate crisis” might resonate in Baghdad. A moment only, however, as it transpires that key deals long planned between Iraq and China and Russia are to go ahead, regardless of U.S. wishes. ‘Same Shia, Different Day’, it might be said.

First, regarding China, Iraq’s newly-appointed Oil Minister, Hayyan Abdul Ghani, shows no signs of reversing the extraordinary ‘oil-for-projects’ agreement that was signed between Iraq and China in the middle of 2019. Last week, in fact, after Ghani’s appointment to his new post by new Prime Minister, al-Sudani, local state-endorsed news agencies reported that Iraq’s Oil Exploration Company (OEC) and the China National Offshore Oil Corporation (CNOOC) had begun multiple seismic surveys as part of the first phase of wide-ranging offshore oil and gas exploration between Iraq and China. According to a separate statement from OEC Director, Ali Jassim, CNOOC has started implementing a joint study contract for two-dimensional seismic and geophysical surveys to explore hydrocarbon gatherings in the Iraqi offshores north of the Arabian Gulf. This aligns entirely with the directive of the Iraqi government in October to include ‘vital and strategic projects’ in the 2019 oil-for-projects agreement between Iraq and China. These ‘vital and strategic projects’ include: roads, bridges, infrastructure, energy, oil and electricity, according to Haider Majid, spokesperson for the General Secretariat of the Council of Ministers.

Having effectively now given China the power to do whatever it wants in terms of offshore oil and gas development, Iraq is also allowing Beijing to expand its reach further into key onshore fields as well. In the middle of last month, the China Petroleum Engineering & Construction Corp (CPECC) signed a US$386 million engineering, procurement, and construction contract to build a two-train oil processing facility at Quraynat to develop production in the southern part of the Rumaila field, Iraq’s largest oilfield. The intention is that each train will handle around 120,000 barrel per day (bpd) of oil from the field’s Mishrif formation. There is much potential in the area as the Rumaila field, which lies around 30 kilometres north of Iraq’s southern border with Kuwait, despite it having already produced around 80 percent of all Iraq’s cumulative oil production to date, together with the Kirkuk field. Rumaila is currently managed by the Rumaila Operating Organization (ROO), a joint venture between BOC, Basra Energy Company Limited (BECL) and Iraq’s State Organization for Marketing of Oil (SOMO). BECL is a joint venture between Britain’s BP (with a 47.63 percent share), China’s PetroChina – the listed arm of the state-owned China National Petroleum Corporation – (46.37 percent), and SOMO (5 percent).

A plan originated in November 2020 was for BP to push production up to 2.1 million bpd, from the then-1.4 million bpd, a level which remains around the same today. With an estimated 17 billion barrels in proven reserves, Rumaila is a prime example of a field for which even a relatively small investment could yield significant increases in crude oil output. However, according to a comment at the time in 2020 from BP’s country head, Zaid Elyaseri: “There is an ongoing discussion with the ministry of oil and Basra Oil Co. on how to proceed [it has asked all international oil companies (IOCs) to cut their capex by 30 percent this year], given the low oil price environment and the reduction in the activity set that the ministry has requested all IOCs to do this year as a result of low oil prices.” He added at the time: “There is a discussion on the timing and all other details….[and] We are working to increase production gradually.” The original plan was for BP to add 100,000 bpd every year up to a total of 2.3-2.4 million bpd of production by the original target date of 2020. The chief impediment to achieving this output rise so far, aside from regular government directives for IOCs to reduce their capital expenditures, has been the lack of any progress on the Common Seawater Supply Project (CSSP) water-injection projection project, principally on IOC fears connected to endemic corruption in Iraq’s oil sector.

The CSSP remains absolutely critical for Iraq’s ambitions to reach its previous oil output targets – of 6.2 million bpd by the end of this year, and 9 million bpd by end-2023 – and is vital to the new target of hitting 7 million bpd oil production by 2025. It also hints at why Iraq was so in debt for so long to various international oil companies (IOCs). As exclusively reported by OilPrice.com at the time, U.S. oil supermajor ExxonMobil was long in a prime position to finally expedite the development and completion of the CSSP, as part of the broader US$53 billion Southern Iraq Integrated Project (SIIP) – either alongside the China National Petroleum Corporation (CNPC) or alone – until further consideration of all of the unsavory details attached to the project stopped ExxonMobil in its tracks. 

Second, regarding Russia, Iraq’s new Oil Minister also shows no sign of reversing his predecessor’s intention of allowing Russian oil giant, Lukoil, to move ahead with the exploration and development of the huge Eridu oil field, despite Russia’s invasion of Ukraine in February. Located in Block 10, around 120 kilometres west of Basra in southern Iraq, the preliminary consensus opinion was that the field contained between 7 and 10 billion barrels of crude oil reserves. This alone would have made it the biggest oil discovery in Iraq in at least 20 years, but subsequent Russian oil industry estimates point to reserves of up to 12 billion barrels of oil. With a remuneration fee of US$5.99 per barrel – among the highest of all Iraq’s awards under its technical service contract model – and likely peak production of between 250,000 and 300,000 bpd, Lukoil was awarded a 60 percent share in Block 10 in the fourth round of licensing in 2012, along with a 40 percent stake being given to Japan’s Inpex. 

Before Russia became a political and economic pariah of the West, following its invasion of Ukraine, Moscow held all the cards in its dealings with Iraq and stalled the development of Eridu as a bargaining tactic to get a better deal on its development of nearby West Qurna 2. At that point back in 2021, Lukoil had a 75 percent stake in West Qurna 2, which it still retains, and had already spent over US$8 billion on developing it, but was only being compensated US$1.15 per barrel recovered. This was the lowest rate being paid to any IOC in Iraq at that time and was dwarfed by the US$5.50 per barrel being paid to Gazprom Neft in its development of the Badra oil field. Coinciding with visit to Washington by then-Prime Minister, Mustafa Al-Kadhimi, Iraq’s Oil Ministry then counter-threatened that Lukoil was free to withdraw from West Qurna 2, but that before it did so it would have to pay the Ministry billions of dollars in compensation for breaking the contract. 

As of now, according to a senior source who works closely with Iraq’s Oil Ministry, exclusively spoken to by OilPrice.com last week, although no final decision has been made, the signs are that Iraq’s new Oil Minister Ghani will go along with his predecessor’s intention of allowing Lukoil to go ahead with its planned development program for Eridu. In September, former Oil Minister, Ihsan Abdul Jabbar Ismail, met with Lukoil’s Vice President for Central Asian, Middle Eastern, and North African affairs, Stepan Gorgi, and stated that although the Oil Ministry was awaiting the full view on the subject from the Council of Ministers, he commended the technical study of Eridu by Lukoil. As Ghani also linked the Eridu development with Lukoil’s continued progress on West Qurna 2, and Russia is keen to hold on to the influence it has in the Middle East as its influence over Europe diminishes, it appears as though an accommodation on Eridu may be made by the Russian oil firm. 

By Simon Watkins for Oilprice.com