EPRINC

By Stan Harbison, Vice President of Research and Analysis at energy consultants EPRINC.

In the past week, the ministry announced that two fields won at Iraq’s 2009 oil auctions had achieved their first significant benchmark. Production at Rumaila and Zubair each met the 10% production increase which allows them to begin to earn their per barrel profit on each barrel of oil they produce. It also allows them to begin collecting the money each has spent on their respective fields.

Both of these elements are critical to the ability of the companies to earn a return on their investment. We expect a third field, the West Qurna 1 consortium to achieve its 10% benchmark within the next several months. These three fields hold roughly half of the prospective production and half of the current reserves of the ten oil fields won at Iraq’s 2009 oil auctions. They lead the other auctioned field because they are the only fields of the ten that have significant current production and installed infrastructure.

Informal news about production at both Rumaila and Zubair was quite a bit more positive than the implied 10% increases. At Rumaila, production increased nearly 20%, or 200 tbd (thousands of barrels/day) and at Zubair production was up by 80 instead of the 20 tbd that was needed to achieve the 10% target. This led an oil ministry spokesman to state the Iraq’s production was at 2.7 mm b/d and would rise to 3 mm bd in 2011.

How are the companies doing so well? Our conversations with oil company executives who have spent time in Iraq testify to the prolific nature of Iraq’s oil. Re-working old wells has the potential to dramatically increase production. We believe some of the initial production gains have been achieved in this way. The companies are not chasing volume by drilling as many wells as possible. We believe that their first priority is to carefully lay the groundwork needed to achieve and manage much higher production levels. They are spending time mapping each reservoir, measuring the pressures, volumes and temperatures of each well and preparing infrastructure to be capable of handling much greater volumes. Activity will accelerate as initial steps are completed.

To date the progress in the oilfields and in the infrastructure efforts by the government have moved forward well. The news this week is a good report. It supports the notion that the contracts are being carefully followed, that no major failures have interfered with achieving the 10% production increases and that further positive news from the fields should be expected.

Stan Harbison has been an oil and gas analyst since 1982. He has worked as a research investment analyst for a prominent US investment firm for BP, Louis Dreyfus Commodities Energy Trading and for the US. Department of Energy. He has met regularly with top managers in the world’s largest oil companies, key officials in more than ten of the world’s largest National Oil Companies and has attended many OPEC meetings. In the past year, he has devoted all of his time on Iraq’s oil development with EPRINC, (www.eprinc.org), an independent oil analysis firm in Washington DC, which provides analysis on critical emerging issues in the oil industry. Its work is read by the public, the US Congress and key US government officials.