Middle East Economic Survey

 

VOL. LI

No 19

12-May-2008

 

IRAQ

 

A Road Map For Vitalizing The Iraqi Oil Industry

 

By Hussain Rabia

 

Dr Rabia is the Managing Director of Entrac Petroleum Ltd, a specialist company concentrating on providing consulting and training services for the Iraqi and international oil industry. The author has over 28 years of experience mainly with large international oil companies including BG and ADCO. Dr Rabia can be contacted at: info@entrac-petroleum.com.

 

1.    Introduction

The minimum oil reserves in Iraq are estimated at 110bn barrels with a possible upward figure of 324bn barrels.1 The exploitation of these vast reserves is currently at 2mn b/d, well below the production capability of 8-10mn b/d. Oil exports from Iraq average around 1.8mn b/d. To increase oil production from 2mn to 8mn b/d requires a great deal of planning, expenditure and provision of expertise. I will highlight here the roadmap for vitalizing the Iraqi oil industry. Its main elements are:

2.    Oil Law

A prerequisite for the future development of the Iraqi oil industry is the establishment of an oil law that protects the interests of the nation and foreign investors. To a layman, the establishment of such a law may be straightforward. To the oil experts, the preparation and drafting of such a law is a technical challenge. It has to contain all the technical details relating to oil exploration, development and production. Issues relating to the type of contract (PSA, short-term, service etc), its duration and the maximum allowable return on investment must be addressed correctly. I shall leave discussion on contracts to a future article.

 

The released draft of the new Iraqi oil law contains very basic ideas and does not elaborate on many of the difficult issues relating to contracts and duration, return on investment, conflicts with foreign companies etc. It is hoped that at some stage the Iraqi legislators will produce a more detailed oil law document similar to those in many oil producing countries. The oil law must also encompass many of the hidden details, such as the development of the local workforce, technology and knowledge transfer, protection of the environment, and, most importantly, contribution to the development of local economies which are and will be entirely dependent on the oil industry.

 

Elaboration on each of the above is beyond the scope of this paper, but I shall provide two basic examples to illustrate the challenges.

 

1.         Local Expertise: Iraq has been isolated from the outside world since 1991. Huge technological developments occurred in the oil industry in the last 18 years which Iraqi engineers were not aware of or were prevented from having access to. Hence a foreign investor has to educate the local force. This does not mean running a five-day course on a subject which the investor likes, but actually providing long-term training lasting from one-to-three years.

 

2.         Infrastructure: If an investor were to bring in, say, two drilling rigs (not a large number) with 100 people for both rigs and if you add to this the number of supporting and technical staff to run an initial exploration phase, then the total number would be around 200 people. These require accommodation, recreation facilities and, most importantly, medical care. Most local towns in Iraq have very basic medical facilities which cannot cope with major disasters such as workers’ exposure to gas or, worse still, a blow-out disaster with major casualties. I happen to know this better than most people as my family comes from one of those small towns.

 

The foreign investor must then contribute to the building of the local economy by either improving existing

facilities or indeed build new ones.

 

3.    Status Of The New Iraqi Oil

At present, the new Iraqi oil law is being discussed in the elected Iraqi parliament. There is also intense and continued pressure from the US (either directly or indirectly through its occupying army) to expedite the passing of such a law. The Iraqi nation is also divided on the new law. There has been no local debate on the need for such a law or indeed the problems of not having one. Add to this, the Northern Province of Iraqi Kurdistan has unilaterally issued contracts and exploration rights to foreign companies without consultation with the central government. Several foreign companies have already started drilling with remarkable success in the very few wells they drilled to date; some individual wells are producing 23,000 b/d.

 

The current  elected  Iraqi  government is going through a learning curve and it needs all the help it can get from all parties, but  it certainly does not need external pressure from parties who have  little  or no  knowledge of Iraqi culture.

 

4.    External Investment

The Iraqi economy is totally dependent on oil revenues. A large part of them is used to subsidize almost every Iraqi citizen with basic food rations; the other part is used to build the battered and almost non-existent economy. With such a huge demand on oil revenues, there is little money left from the sale of 1.8mn b/d to reinvest and rebuild the oil industry in Iraq.

 

Indeed, if one were to depend solely on internal investment, as some Iraqis advocate, then the Iraqi oil industry would need 30-50 years to reach production rates of just 8mn b/d. In 50 years from now, alternative sources of energy, cheaper and cleaner than oil, would certainly be reaching very advanced stages of development rendering oil as an expensive or indeed an unacceptable source of energy. The major loser in this scenario would be the Iraqi people. One only has to look at Hubbert’s Peak scenarios to realize that this date may be coming sooner than 30 years

 

The development of the Iraqi oil industry needs external investment, right now. Therefore, it is imperative that the Iraqi government embarks on a national education program to explain the merits of foreign investments and the new Iraqi oil law. Only then can those external investors enter Iraq, confident that the nation is in full support of their efforts.

 

5.    Creation Of A National Oil Company

At present, there is a huge debate within Iraq on the need to establish a national oil company. It is seen by many as the cornerstone for revitalizing the Iraqi oil industry. The confusion amongst a lot of experts is the talk about a national oil company rather than an oil company. A successful national oil company should be first and most of all a successful oil operator, with all the strengths and attributes of major oil companies.

 

A successful (national) oil company needs:

 

i             Independence

ii           Expertise

iii          Competitive Remuneration

iv         Joint Ventures

v           Collaboration with Service Companies

 

i.          Independence

The oil company should have an independent board of directors, not connected to the Ministry of Oil or any government body. The board, with its chief executive, would determine the direction the company takes based on the broad policies passed to them by the Iraqi government. These would be: protection of the nation’s interests, maximizing profits, development and contribution to local economy and development of local expertise. The government’s major requirement from the company is to meet certain production targets.

 

Of course the chief executive must first be appointed by the Iraqi government. This person will be the catalyst for revitalizing the oil industry, not a political person, chosen for his connection with local parties or because he belongs to an established family. The chief executive must have intimate knowledge of the oil industry from exploration to development. He must also have intimate knowledge of the local culture to be able to transmit ideas and to avoid conflicts. He must have complete freedom to choose his senior staff, provide the vision and foundation for the new company. 

 

The reader only has to look at major successful oil operators to see that most of the top people are true professionals who learnt their skills through many years of experience and their promotion resulted from a business need rather than external influence. The tragedy is that I have already heard people talking about certain former Iraqi politicians being the only ones who can fulfill the role of the chief executive. If this happened, then another tragedy would befall the Iraqi oil industry. The people I am referring to have none of the above attributes for such a job. One can only hope that with democracy, politicians will appoint the right man if they want the Iraqi people to re-elect them again.

      

ii.        Expertise

To increase production from 2mn to 8mn b/d would require a core workforce of approximately 70,000 people, encompassing all disciplines: drilling, geology, reservoir engineering and production. Expertise would be required at all levels from senior people to maintenance staff. Ancillary support activities will also be required, providing further employment to perhaps more than 70,000 people.

 

Today, there is a worldwide shortage of expert staff in the areas of drilling and production engineering. On average it takes 5-10 years to train and develop a drilling engineer; a similar number of years for most other disciplines within the operational side of the oil industry. Hence expertise will have to come from outside Iraq and this will present a major problem when it comes to staff salaries as will be discussed next.

 

iii.      Competitive Remuneration

A field drilling supervisor can earn $1,000-2,000 per day, depending on location. A senior petroleum or drilling engineer can command an annual salary of between $100,000-200,000 a year, before benefits and pension contributions. Compare these figures with an average salary for an Iraqi oil expert of just $800 per month, ie less than one pay day of an expatriate. Such a huge disparity in pay will create conflict and unrest within the new (national) oil company.

 

The author presents here a model which is successfully employed in some of the Gulf States and of which he has intimate knowledge. In this model the salaries of all operational staff would be raised, on the arrival of  foreign experts, to a minimum of $4,000 per month, rising to a maximum of 50% of the expatriate staff pay, assuming both the Iraqi and the expatriate are doing  exactly the same job. The salaries would be reviewed annually and compared to a basket of salaries of similar oil professionals in the Gulf States. The advantages of such a scheme are many, including:

I have, of course, left the salaries of the chief executive and the directors to the end to soften the shock to my Iraqi compatriots. If the best is to be attracted then average salaries of $1mn per annum must be considered as the norm for the top executives and not the $80,000 per year, touted by many as an attractive salary.

 

iv.       Joint ventures

To be successful, the new company must have the right to enter into joint ventures inside and outside Iraq to explore and develop oil reserves. Internal joint ventures would involve the establishment of offshoot oil companies involved in the development of Iraqi oilfields. These may be new fields requiring extensive investment or ones that require special expertise such as very deep, high pressure and high temperature wells in the Jurassic reservoirs. For these oilfields, the new national oil company would find it advantageous to seek partners to reduce costs, expedite development and acquire expertise. Once again, detailed studies must be made to ensure that the return on investment for foreign investors remains within the internationally acceptable limits.

 

External joint ventures should also be encouraged. After all, if this company has the expertise and if it can enhance its revenues by doing external work, without jeopardizing its initial remits, then it should be encouraged to seek external joint ventures to add extra revenues to the Iraqi economy.

 

v.    Collaboration With Service Companies

Of paramount importance is collaboration with international service companies and the establishment of new service companies to help the development of the oil industry. There is little to be gained from depending on a major foreign oil company to bring in a service company to do some short-term work and then leave after it is completed. This service company will provide little or no long-term contribution to the local economy.

 

The new national oil company should, therefore, encourage the establishment of local service companies. This is achieved by awarding them grants, short-term contracts and facilities to help these new fledgling Iraqi service companies to get established quickly and successfully. Of course some companies will fail; this is part of the learning process. However, if only 50% of the new service companies were to succeed then this should be regarded as an achievement. The establishment of local service companies should not be regarded as an alternative to using major established ones. The two can work together, as is the case in many Gulf countries.

 

As an oil expert, I believe Iraqi oil engineers can easily establish and run basic services such as wireline services, cementing, acidizing and coiled tubing without waiting for foreign service companies to get established in Iraq. These are incidentally the main services required in any oil well.

 

6.    Conclusions

Efforts should be focused on extracting as much oil as possible to generate revenues for the Iraqi people. There is a lot of wasted effort by some Iraqis talking about other energy sources which at present represent 0% of Iraqi output and input. These moves will further delay the development of the Iraqi oil industry. You only have to look at the background of these people to realize they have little or no knowledge of the oil industry. My shout here is for every Iraqi to think oil, oil and only oil for the next 20 years.

 

1.  Rabia, H “Iraqi Oil Reserves Show Great Potential,” World Oil, July 2007.