Q: In Iraqi Kurdistan are you still on track for the Khor Mor expansions in 2022 and 2023 [MEES, 4 October 2019]?
A: We are still working on the expansion [from 400mn cfd], and hope to be able to deliver the next 250mn cfd train by early 2022, with the second [250mn cfd] train following the year after. The primary focus is on supplying the domestic market. As you know, we have the gas sales agreement which was reached last year [MEES, 8 March 2019].
As for the situation in Iraq, there has been some turbulence in southern Iraq, with the demonstrations and then the kind of tit-for-tat between the US and Iran in recent weeks. Our operations are unaffected and we are monitoring the situation, and taking any precautions that are necessary.
Q: What are the next steps, in terms of awarding EPC contracts for Khor Mor expansion?
A: There is a process that we follow. A tender process, evaluation, negotiation and so on. And we will be making an announcement on those once it has been awarded. This should be imminent.
Q: How many firms bid for the project?
A: We have had the bids in, from multiple companies, followed by technical evaluation. The government oversees the process. We are now in final negotiations with a view to awarding it imminently.
Q: Do you have a price tag?
A: That will come with the announcement. This award is for the first train, and the second will be an add on. I don’t yet know whether we will retender it or not. It is a bit of a discussion with the government.
Q: The timeframe has slipped a little bit from its original conception, how come?
A: There were various steps that had to be taken. A lot has obviously been happening in Iraq, but there hasn’t been much slippage considering all the circumstances. No particular individual reasons.
Q: As you said, the first train is for the Kurdistan market, but the expansion also eyes exports. Is there any movement on the planned gas pipeline to Turkey?
A: We understand that the pipeline is moving forward, and it may be more of an incremental approach. The pipe corridor is there. The immediate priority for the local market is meeting the needs of Duhok – there is a power station as you know there that is being underutilized and Duhok is the third city in the Kurdistan Region. We understand that supplying that might be the next step.
Q: This is the plant that was supplied by [the] Summail [gas field]?
A: Yes exactly, you remember.
The reality is that the pipeline is not the most expensive or time-consuming part of the project. The upstream unit and processing, that is actually more rate-limiting than the pipeline.
We showed that back in 2007-08, when there were no qualified international contractors willing to work in Iraq and we had to make a pipe corridor from scratch through mountains, minefields – and we still got the pipeline done across 180km in, what, nine months?
Q:And this is just a 100km stretch?
A: That is if you are going to do the add-on to Turkey. We feel confident that the pipeline will happen as needed.
Q: There have been improvements in the relationship between Baghdad and Erbil over the past year or so. Could you potentially supply Federal Iraq from Khor Mor?
A: Yes, we have announced proven reserves of 16 trillion cubic feet of gas and potential resources closer to 80 tcf. We have enough gas to meet the needs of the Kurdistan Region, which is of course the immediate priority through the 250mn cfd gas sales agreement.
Then there is surplus to meet the rest of the needs of the Kurdistan Region and potentially export if there is appetite. And, of course, the priority is in Federal Iraq. Actually, we are aligned totally. The KRG sees that as well, and even though Iraq overall has plenty of gas and there is flaring in the south, in neighboring governorates there is a shortage and there are even imports going on [from Iran].
Q: Presumably it would be a lot easier to supply northern governorates such as Nineveh with gas from Khor Mor than from Basra.
A: Yes, there is already the transfer of electricity, sale of electricity, going on. So, you can either use the gas to generate more electricity to be delivered to neighboring governorates, or you deliver the gas itself. There are nearby power stations that are starved of gas, like Mansuriya.
I think that the current situation in Iraq – where you have the caretaker government in Baghdad, new elections are expected this year, there is a new election law – is difficult. But before the resignation of the government there were good discussions and relations between the federal government and the Kurdistan Regional Government. And there was an agreement in principle on revenue sharing.
Now, because of the resignation of the government, the protests, it is questionable whether the budget will be passed. And if there is a new government, will it be back to square one? Or will these understandings continue?
Overall, I think recent relations have been cooperative. There has been the use of the oil export pipeline [to Ceyhan], and regular discussions going on.
Q:You mentioned the protests, a lot of that is socio-economic, poor services, power cuts, gas supplies. A deal for Kurdistan to supply gas could help alleviate this couldn’t it?
A: The protests started for bread and butter issues like services and jobs and it has really gone beyond that now. They want to see a better governance system that is devoid of sectarianism, devoid of corruption.
And if you look at the profile of the protestors, I think the median age is 26, they are almost all male and almost all unemployed. This lack of economic opportunity despite the huge wealth that Iraq potentially has is what is driving that – and rightly so. Improvement is desirable.
Q: In Federal Iraq, the contracts that you won in 2018’s bid round under the previous administration still haven’t been signed off by the government. Clearly there won’t be any movement on that in the current situation, but are you optimistic about these?
A: As you mentioned we bid on that bid round, us and some Chinese companies were awarded blocks in 2018. We won two in Diyala, and one in the south [MEES, 27 April 2018].
They were initialed by the previous government. We were waiting on this one to sign and there were some positive engagements. It was moving positively, but slowly. Now that the government has resigned, things are uncertain.
They were initialed, this is something that had already been approved. We would be investing and are ready to hit the ground running, to invest hundreds of millions and create lots of jobs in Diyala where it is really needed. We stand ready, but it is a case of whether the readiness is there on the side of the Iraqi government.
We are still committed to implementing those projects.
Q: In terms of those Diyala projects, they are both gas plays?
A: Actually, they are gas and liquids. Both have gas and liquids.
Q: And is there much infrastructure nearby to help with development?
A: There is not much infrastructure there, but potentially the two of them could be developed in unison as they are neighboring.
Q: Based on the information that you have, what is the potential of these assets? Potential production?
A: We feel confident. The priority for Iraq is rapid progress and production, especially of gas. We feel confident and we have communicated this officially and in writing to the Iraqi government that we could add 200mn cfd of gas within a year, or just over.
We are ready to hit the ground running. It is a case of when the Iraqi government is willing to move forward. But we have good relations, regular dialogue. As I said, not much has moved forwards on any oil and gas contracts [in Iraq] as you have reported, since the new government came in. But we are still very committed to the country from north to south.
Q: And turning back to Crescent Petroleum. You have your Kurdistan operations, your investment in Dana Gas. Are you looking to diversify your operations? You are very focused on Kurdistan at the moment.
A: So, we are in our 50th year of operations now. We have operating experience across the region and worldwide, in countries as diverse as Yemen, Egypt and others – Pakistan for instance. At the moment as you mentioned, we are very focused on Iraq and we are increasing that commitment in the Kurdistan Region and hopefully in the rest of the country.
That is not to say that we are not looking at other opportunities in the wider region. In countries in North Africa, and the Middle East. Iraq is clearly somewhere where we have a track record, over 10 years of production now. Even though there are risks, we have been through a lot – whether it is the rise of ISIS, or local issues that all got resolved – and so we feel that given our track record and its potential, it is certainly a place that we can commit to longer term.
Q: You mentioned North Africa. But rather than expanding, Dana is looking to sell off its Egyptian assets [MEES, 17 January], what is the logic there?
A: The key there is that it is a strategic choice, it is not driven by any financial need. The company has over $400mn cash at the moment, and a healthy cash flow. I think it is just a case of where it should be focusing. Focusing on its current strong position in Kurdistan Region.
It has had a good, long track record in Egypt. But some of the exploration opportunities haven’t panned out more recently in the offshore and so on, and there have been issues with the receivables. Although it has been significantly reduced, it still exists, at the moment in the Kurdistan Region our receivables are zero and we get paid in full and on time – which is actually a very important driver in investor confidence.
But there is also the relative reserve base; I mean, the reserve base that we have in Egypt is in the hundreds of bcf, whereas what we have in the Kurdistan Region is in the tens of tcf. So it is also a case of focusing on where it makes the most commercial sense.
Q: Back to North Africa, you would consider investing elsewhere in North Africa, perhaps Algeria?
A: You are talking as Crescent Petroleum?
Q: Well you are on the board of Dana, so both.
A: Both companies are not closing out any countries in the region. The general focus is on the Middle East and North Africa still, but all opportunities are considered.
Q: And with Sharjah’s bid round, were you interested in that?
A: We didn’t bid on the Sharjah bid round [MEES, 18 January 2019] – we know the assets, some of it we relinquished ourselves. But I think that the progress made in Abu Dhabi, Sharjah, Ras al Khaimah and others in having professional bid rounds and attracting new investment is a very positive thing. It is showing how the UAE, like other countries in the region, is recognizing the need to increase private sector involvement in this transformation.
Q: And finally, the next couple of years, what does that hold for Crescent?
A: We are here for the region, we are from the region and for the region. We are excited for the potential in the region notwithstanding some of the geopolitical challenges. My concern, looking at the private sector is that somehow our industry has allowed itself to be demonized in recent years, that somehow oil and gas is portrayed as the problem when it comes to climate change.
And we haven’t done a good enough job of getting out the message about how we are a vital part of the solution. Gas, as we have heard at this meeting, replacing coal worldwide has had a hundred times bigger impact in reducing emissions than all of the electric cars in the world. Oil is needed for petrochemicals and things like shipping, air and trucking still don’t have electrification solutions.
For decades to come, oil and gas is going to be an important part of the mix. Oil demand may peak at some time in the middle of the century, gas demand will continue to grow as a necessary complement to renewables, indeed as an enabler of intermittency of renewables. As the UAE energy strategy has wisely set for 2050, there will be almost equal gas and renewables in the power mix.
I think that we need to do a better job with this new investor focus on ESG concerns that you have in western capital markets. We need to be doing a better job. And the Middle East needs to do a better job of maximizing the value of its oil and gas potential.
We still punch well below our weight. We hold half the world’s oil and gas reserves, but contribute only a third of oil production, a sixth of gas production. The US has actually taken a bigger market share growth in recent years. We need to do a better job.
Q: Electricity Minister Luay al-Khatteeb has previously spoken of how Iraq is underexplored.
A: Iraq is vastly underexplored. Only a few thousand wells have been drilled in its history, compared to maybe ten times as many in Saudi Arabia, and a million in just the state of Texas.
I think that Iraq’s reserves potential will be much higher than the 140bn barrels so far. At the moment the constraints are infrastructure and policy rather than reserves. To get to 5mn b/d despite the war on ISIS, the political rancor within the country, and the lack of legislation is an amazing achievement.
*Interview conducted by Senior Editor Jamie Ingram in Abu Dhabi on 11 January. See analysis, MEES, 17 January.
