August 26, 2109 [Oil Price] – Two factors make the urgent build-out of Iraq’s ailing and inadequate oil export infrastructure more essential than ever.
The first is the increasingly dangerous security situation in the Persian Gulf following tit-for-tat seizures of vessels connected to the Iran and U.S. sides in the current geopolitical standoff, with more involvement expected shortly from Russia and China. The second is the continued growth in oil exports from Iraq, with sales in July from the whole of Iraq, including the semi-autonomous Kurdistan region of Iraq (KRI), averaging 4.007 million barrels per day (bpd), up from 3.946 million bpd the previous month and edging up to the record 4.159 million bpd last December.
As it stands, with Iraq’s oil exports around the 4 million bpd level, the infrastructure is just about able to cope but any significant movement above that level is not doable, Richard Mallinson, senior Middle East energy analyst for global energy consultancy, Energy Aspects, in London, told OilPrice.com last week. This would stymie Iraq’s core energy strategy of monetising increased crude oil production of 6.2 million bpd by the end of 2020 and 9 million bpd by the end of 2023.
“Virtually all export efforts in the Federal Government of Iraq [FGI, that does not include the KRI], are focussed on the Basra facility in the south, which means moving oil through the Persian Gulf, which puts it in the centre of the current security problem between the U.S. and Iran,” he said. Although Iraq’s Oil Ministry denied that the MT Riah tanker ship that was recently seized by Iran’s Islamic Revolutionary Guard Corps (IRGC) was not connected to Iraq, and it is unlikely that Iran would interfere with the ships of one of its close allies, the danger of an accident remains and the sky-rocketing insurance premia for all ships in the Persian Gulf impacts profit margins on all shipments for Iraq.
To get to Basra, oil is moved via internal pipelines but these are often unsound and need to be upgraded as soon as possible, Mallinson added. From there, oil makes its way into the Al-Fao main export depot, where it is stored and blended. “Here again, though, there has not been adequate investment and anything over current levels of oil coming in is not sustainable, meaning that oil supplies can be backed up in the oil fields themselves, which then means significant production bottlenecks,” he underlined. “This has also held up the roll-out of the Iraq’s new oil grade – Basrah Medium – that was to have added to the revenue streams generated by the existing Basrah Heavy and Basrah Light,” he told OilPrice.com.
Before Islamic State (IS) run riot across Iraq, realistic plans had been in place to construct at least a further 12 full-time operational storage tanks and blending facilities in and around Al-Fao by the end of 2016, with the longer-term aim being for the Al-Fao station to have 24 storage tanks each of 58 thousand cubic metres, for a total capacity of more than 8 million barrels. These plans have yet to be reactivated, given the standard level of Iraqi bureaucracy involved and the uncertain revenue projections arising from the differing oil price scenarios within the Oil Ministry. Once past Al-Fao, the situation is slightly more efficient as Al-Fao pumps the oil to the single-point moorings (SPMs) – there are now five, with four in constant use whilst the other undergoes regular maintenance – and some intended expansion in the capacity of the existing offshore terminal Al-Basrah (ABOT).
There was positive news just last week for the other main offshore terminal at Khor al-Amaya (KAAOT), which saw loading operations halted in 2017 when one of the two seabed pipelines that supplies the offshore facilities suffered ruptures and leakages and had to be shut. According to Iraq Oil Ministry sources, discussions are well advanced with BP and Eni to run a US$400 million project to replace two old seabed pipelines, including the KAAOT-related one, which was to have formed part of the overall Southern Iraq Integrated Project (SIIP) that the Oil Ministry has been on-and-off discussing with ExxonMobil.
Far from irritating ExxonMobil, taking this pipelines project out of the SIIP is likely to be welcomed by the U.S. major, as originally it was just to have focussed on – and financed – the build-out of the Common Seawater Supply Project rather than the much more expensive and unwieldy SIIP. Moreover, it is the CSSP that will be the absolute critical turning point for big increases in Iraq’s oil production and exports in the future.
Although the oil export routes to the North, and into mainland Europe via the Turkish port of Ceyhan, appears theoretically the better export option, the practical political considerations involved render the theory obsolete. The original Kirkuk to Ceyhan Pipeline, also called the Iraq-Turkey Pipeline (ITP) actually consisted of two pipes, which theoretically had a nameplate capacity of 1.6 million bpd combined (1.1 million bpd for the 46 inch diameter pipe, and 0.5 million bpd for the 40 inch one).
Even before IS entered the picture though, this pipeline was subject to repeated and ongoing attacks by various militant groups in the region, which led to the government of the Kurdistan region – the KRG – to oversee the completion of a single side track, from the Taq Taq field through Khurmala, which runs into the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur, with a nameplate capacity of 0.7 million bpd, which was then increased to 1 million bpd. Further complicated by the ongoing disagreement with the KRG over the budget-for-oil deal struck in 2014, Baghdad instead planned to renovate and re-open the Federal Government-owned oil pipeline section that runs from Kirkuk to Ceyhan, bypassing any Kurd control. “This would be a good play by Baghdad, if it can get around the political angle with the KRG,” said Mallinson.
So, if Iraq cannot export safely through the South via Basra due to the U.S.-Iran standoff or to the North due to the FGI-KRI standoff, and can only move relatively minimal amounts of oil West to Iran on tanker lorries, Iraqi Prime Minister Adel Abdul Mahdi stated that the government is considering export routes through Syrian and Jordanian territory. Realistically, given the ongoing security situation in Syria, this option would appear at best unlikely to occur for many years. However, the plan does exist and, as originally envisioned, the pipeline would stretch some 800 kilometres from Kirkuk to Banias in Syria, via Haditha, with an initial nameplate capacity of 0.3 million bpd.
Russia was involved in the original plans for this, the first of which originated in 2007 but was annulled in 2009, when no progress had been made by Russian company Stroytrangaz, a subsidiary of hydrocarbons giant, Gazprom. The second, agreed in September 2010, involved building two new pipelines – one for Heavy crude (planned capacity of 1.5 million bpd, from the northern Baiji area), and one for Light (1.25 million bpd planned capacity, potentially connected to the southern fields of Majnoon, Halfaya, Badra, Ahdab, and East Baghdad).
An interesting corollary of this, OilPrice.com has been told exclusively by senior sources in the Iraq and Iran Oil and Petroleum Ministries, respectively, is that Russia is involved in discussions centred on this pipeline project, including offering all financing, which is entirely in line with the Russia-Iran plan for post-conflict Syria. “This plan is that alongside the movement of Iraq oil to Syria and then onto Europe and Asia, Iranian oil could flow through the same pipe and the same route and onto the same export destinations as well, and, later on, gas from South Pars to Syria and then into Europe,” said one of the sources.
Right now, though, the Jordan route is actually doable, with Baghdad keen and Jordan also having given the go-ahead. “But, we have often seen this announcement but nothing has happened, so don’t get too excited,” Mallinson underlined. Nonetheless, according to an official statement from Iraq’s Oil Ministry recently: “The Jordan project was voted upon by the Council of Ministers after its implementation was agreed upon with Oman and 1 million barrels of Iraqi oil will reach the port of Aqaba every day…We are currently studying investment offers from international companies that will establish the pipeline in return for a percentage that will be deducted for each exported barrel.”
Again, a very detailed plan has been in place from the period just before the IS troubles began, envisaging a twin gas and oil pipeline between Iraq and Jordan. The estimated US$4.5 billion 1,680 kilometre double pipeline would pump one million barrels of oil a day, and 258 million cubic feet of gas, from Basra to Aqaba, via Haditha. Around 150,000 barrels of the oil from Iraq would be used for Jordan’s domestic needs, whilst the remainder would be exported through Aqaba to various destinations, generating about US$3 billion a year in revenues to Jordan, with the rest going to Iraq.
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