Iraq and the Security of Energy Supplies for Europe

MEES 53:48 29 November 2010

Iraq And The Security Of Energy Supplies For Europe

ByAhmed Mousa Jiyad

Mr Jiyad is an independent development consultant and scholar and Associate with the Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou‐[email protected]). The following is summary of his presentation to the Politics and Economics of European Energy Security conference organized by the Institute for Energy, Joint Research Centre of the European Commission, in Amsterdam on 18‐19 November.

Geographical proximity, availability of needed regional infrastructure and the magnitude of petroleum re‐ sources could make Iraq a significant energy partner for the European Union (EU). In addition to the in‐ volvement of many international oil companies (IOCs) from the EU in Iraqi upstream projects, Iraq and the EU have already sufficient modalities and frameworks for energy cooperation. What is needed, though, is to move from intention to action, to put the vehicle of energy cooperation on the right platform, and the EU should be proactive and take the initiative in this direction.

EU IOC Participation In Iraq’s Upstream Development Between November 2008 and October 2010 the Iraqi Ministry of Oil conducted three bid rounds, signed 12 long term technical service contracts for 14 brownfield and greenfield oil developments, and held in October 2010 a successful third bid round comprising three gas fields, with over 11 trillion cu ft gas in place. All rounds were concluded in one day.

Total proven reserves of the oil fields amount to 68bn barrels, representing 59% of Iraq’s current (prior to 4 October revision – MEES, 11 October) proven reserves. When they are fully developed, as contracted, their total production capacity would increase from 1.7mn b/d at end‐2009 to a plateau of about 11.7mn b/d sus‐ tainable for the six consecutive years of 2017‐22 and generating a substantive influx (trillions of dollars) of oil export revenues for a duration of 20 years. There will also be 820mn cfd from the three gas fields mentioned above and significant associated gas, estimated at 11bn cfd, as a by‐product of the expanded oil production capacity. If one adds other oil and gas fields in the country the final figures would be higher. For the purpose of this paper the focus is on the outcomes of the three bid rounds only.

Many IOCs from the EU area have direct involvement in this upstream program. Focusing the attention on the contracted IOCs only, excluding oil service companies, they fall in two categories: those belonging to (but not necessarily owned by) EU member states, such as BP, Shell, Eni and Total; and those belong to coun‐ tries not yet member states but having special relations with the EU, such as Statoil (Norway) and TPAO (Turkey).

Assuming complete and timely development of the oil and gas fields and smooth implementation of the re‐ lated contracts, the direct involvement of the European companies in both categories would be significant. Based on the concluded contracts, on aggregate the EU IOCs managed to acquire a participation interest of about 9.77bn barrels in total reserves of oil fields offered and concluded under the first bid round and 8.85bn barrels for second round fields. A total of 18.62bn barrels from the two bid rounds represents a participation interest of 27.7% of all proven reserves of the oil fields contracted so far. As for oil production envisaged un‐ der these contracts, the EU IOCs have a participation interest of 1.865mn b/d and 1.265mn b/d the first and second bid rounds respectively, giving a total of 3.13mn b/d. This represents a participation interest of 28.3% in total production capacity and 31.3% in the incremental production capacity of these oil fields.

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Moreover, from this 3.13mn b/d there will be a corresponding associated gas participation interest estimated at 2.9bn cfd. Contractually, the IOCs are entitled to the same remuneration fee applicable to oil for the proc‐ essed gas based on the barrels of oil equivalent (boe) of the related field. There are also three free gas fields – ʹAkkaz, Mansouriya and Siba. For these gas fields the EU contribution was limited to one company of cate‐ gory two – TPAO – which managed to have participation interests in Mansouriya and Siba, representing about 1.2 tcf of their combined proven reserves and 142mn cfd of their peak production.

It should be clear that the participation interest referred to above is confined to two aspects only: the remu‐ neration fee, which has been concluded for the related field and the corresponding share of the IOC in cover‐ ing the “State Partner” share in the capital expenditure, which is carried by the IOCs of the related consor‐ tium until they recover all the capital investment in the field. Therefore, participation interest should not be confused with or interpreted as ‘reserve booking’.

Reality and expectations seldom coincide. Many had cast doubt on the feasibility of the pursued production targets even if the country was able to overcome all difficulties and was successful in installing the declared capacity. In upstream petroleum installed capacity is one thing, its optimum utilization is another. All con‐ sulted international industry sources unanimously agree that Iraq would not be able to achieve its stated ob‐ jectives according to the specified pace, time frame and production targets. The most optimistic among these sources suggest Iraq could, at best, achieve half the target production level. I would argue that even at ‘half‐ target’ success, Iraq would make a significant contribution to the security of energy supplies to Europe, and would also generate a huge influx of foreign exchange to the country.

Therefore, Iraqi decision makers should start from now a serious professional dialogue to explore all possi‐ ble situations and the needed feasible policies to protect from and mitigate their highly probable effects. But this entails having a sound national energy policy and plan commensurate with the sustainable develop‐ ment of the country at large. To do so Iraq could utilize international facilities and engage its partners for that purpose, as discussed below.

Iraq‐EU Cooperation in Energy Matters Three major modalities of international cooperation in the field of energy are currently available: Multilat‐ eral, bilateral and public/official‐private levels. The focus here is on the multilateral level with Iraq on one side and the EU (representing the member states collectively) on the other. Though cooperation between Iraq and the EU in the field of energy is part and parcel of general cooperation, the energy sector has its own sec‐ tion within the International Compact with Iraq (ICI) and its own framework, namely the Memorandum of Understanding on Strategic Partnership in Energy (MOU/SPE).

As early as 2004 the EU and Iraq issued a joint policy entitled, ‘The EU and Iraq: a Framework for Engage‐ ment’, with the objective of achieving “the development of a secure, stable and democratic Iraq.” In March 2009 the European Commission and Iraq signed the Financing Agreement on technical Assistance to Iraqi institutions. This agreement is aimed at “establishing a modern Iraqi administration based on the principles of democracy, good governance and accountability.”

Between November 2006 and November 2009 Iraq and the EU negotiated and concluded a Partnership and Cooperation Agreement (PCA). The PCA will be the overarching framework and constitute the legal basis for cooperation, and its ratification by both parties is expected in 2010, or possibly next year for Iraq. The MOU/SPE, which was concluded in Baghdad in January 2010, reflects strategic EU policy guidelines aiming at diversifying energy supply to the EU, taking into account the possible role of Iraq as a natural gas supplier for the Southern Corridor and Iraq could become an energy bridge between the Middle East, the East Mediterranean and the EU. Finally, the first ever Joint Strategy Paper (JSP) for Iraq is a medium term plan covering 2011‐13. The ‘Concept Note’ presents an outline of the JSP main guidelines, and the general focus of EU support is on helping Iraq to better use its own resources, through capacity building activities.

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MOU/SPE Main Components Since the MOU/SPE is the most direct instrument relating to our subject matter it is worth highlighting its main components as follows:

• Formulating comprehensive and integrated energy policy and modernize the electricity sector for Iraq, preparing an updated Iraqi gas development program and implementing measures aiming to reduce gas flaring; and drawing up an “energy action program covering the period 2010‐15” for their imple‐ mentation. • Specific cooperation measures to enhance energy trade, including exports of surplus Iraqi natural gas, between the two parties with the involvement of EU member states and the private sector. • Preparing a plan of action for the development of renewable energy in Iraq, in particular solar and wind energy resources. • Cooperation on technological, scientific and industrial energy issues and promotion of training and education of young professionals. • Establishing a joint energy working group to explore possibilities and modalities for the implementa‐ tion of the priorities for cooperation set out in this MOU/SPE.

What should be stated though is that the MOU/SPE “records political intent alone and provides for no legal commitment.” However, the components of this MOU/SPE “may be considered for possible future discus‐ sions concerning further energy cooperation in the context of the implementation of the Partnership and Co‐ operation Agreement.” Thus, it is important to ratify the PCA by both parties as soon as possible, and trans‐ late its components into workable mechanisms. And assuming that the principles of the MOU/SPE are in‐ corporated in the PCA and are fully and effectively implemented, they would undoubtedly make valuable contributions to energy matters for both parties.

Energy Sector Plan In the following space I will address briefly the first two components of the MOU/SPE since the remaining components are incorporated in them. The need to have, call it what you will, a ‘national’, ‘master’, ‘inte‐ grated’ or ‘strategic’ energy plan has been emphasized before, but what was adopted were fragmented plans for the oil sector and electricity generation. Moreover, the ‘big push’ strategy in upstream petroleum devel‐ opment would, by the scale of targeted production, make former plans obsolete, and the fact that more than 80% of electricity generation in the country is oil dependent (gas, heavy fuel oil, crude oil, and gasoil/diesel) makes it imperative to have an integrated energy plan for the country as soon as possible.

The Ministry of Electricity prepared – with the help of UNDP, the World Bank and others – and adopted the Electricity Network Master Plan 2006‐15, stating that the success of delivering its targets depends, among other essentials, on the available oil input. On its part, the Ministry of Oil also adopted its 10‐year plan for 2009‐19 in two phases/five‐year plans, according to which total oil production by 2019 would be 6mn b/d and associated gas production would be 5.6bn cfd. However, the electricity ministry failed to deliver its promises and the shortage of power becomes more acute by the day. And the contracts resulting from the three bid rounds would make oil and gas production surpass by far what the oil ministry planned earlier.

It should be mentioned at this juncture that the Iraqi National Development Plan (NDP) 2010‐14, which was approved by the Cabinet in April, makes no reference to a national or master ‘Energy Plan/Strategy’ in its Section 6. Moreover, the NDP adopted oil and gas levels that are much lower than those envisaged under the concluded contracts for oil and gas field development projects. Obviously, this indicates inconsistency and a lack of harmony between sectoral and macroeconomics planning. Under the International Compact with Iraq (ICI), Iraq was committed to having an “Energy Master Plan” by 2008 as “a priority action” and to prioritize natural gas development within it. For ICI purposes, energy comprises oil, gas and electricity.

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Also, the MOU/SPE calls, as mentioned above, for “integrated energy policy” to modernize the electricity sector, and the drawing up of an “energy action program covering the period 2010‐15” for that purpose. In March (two months after he signed the MOU/SPE), the Minister of Oil reportedly said a major international consulting firm would be selected in April to design a “master plan” for the development of the energy sec‐ tor, which combines petroleum (oil and gas) and electricity sectors. The World Bank would finance this “na‐ tional energy strategy”, and the follow‐up of the international consulting firm and the formulation of the en‐ ergy master plan would be handled by the advisory board of the Prime Minister’s office, headed by Thamir Ghadhban, who said on 20 October that the energy master plan would be announced in the “coming months.”

Considering the above, having such national energy plan is long overdue, and remains important and timely in clearing the ambiguity surrounding the country’s energy policy and/or plans, especially after the massive undertakings resulting from the three bid rounds. Reducing associated gas flaring to the absolute minimum and strengthening the effective linkage to maximize power generation should be priority areas. In formulat‐ ing such a master plan there should be good coordination between Iraq and its partners within ICI, MOU/SPE and PCA the World Bank and UNDP – since all could be involved and make a contribution. It is vital, therefore, to incorporate and harmonize the components of the MOU/SPE and PCA as soon as possible. For this purpose there should be an Iraqi technical team comprising known professionals in oil, gas and elec‐ tricity to be involved actively in the formulation, monitoring and implementation of the master energy plan, and to have such a plan put for public debate among the community of experienced professionals. Once done, the energy plan has to be incorporated properly in the current NDP.

Pipelines Option To Enhance Energy Trade With The EU The MOU/SPE emphasizes enhancing energy trade and makes specific reference to gas and the Euro‐Arab Mashreq Gas Market/Forum. Hence, the gas pipeline option is or could be a priority in this respect if one takes into consideration the significant volume of associated gas resulting from the expansion of oil contracts and the free gas from the three gas fields referred to earlier.

For strategic as well as operational reasons, Iraq is bound to rely on pipeline options for oil and gas exports through its neighboring countries, namely Saudi Arabia, Syria and Turkey. Though Iraq did not have a spe‐ cific plan for activating the oil pipeline across Saudi Arabia (IPSA), recent reports raised hopes for possible reutilization of IPSA. In addition to oil pipelines, Iraq could provide surplus gas to the EU by pipelines through two possible routes: Syria and/or Turkey. Iraq and Turkey renewed in October the agreement for the Kirkuk‐Ceyhan oil pipeline for another 15 years. Furthermore, the Turkish side talks about a gas pipeline running from Iraq to Turkey, but nothing from the Iraqi side makes specific reference to this proposal.

Iraq and Syria concluded recently a memorandum of understanding (MOU) for two oil and one gas pipe‐ lines through Syria. The plan is to have a crude pipeline with capacity of 1.5mn b/d to carry heavy crude and another one of 1.25mn b/d to carry lighter crude. The crude lines would both originate in Basrah – the heavy oil pipeline collecting crude from southern fields such as Majnoun and Halfaya then heading northwards to gather crude from Badra, East Baghdad and receiving crude coming down from the Najma and Qayara oil fields in Naynawa Province before heading westward to Syria. The two oil pipelines, if completed as planned, would theoretically have 67% more capacity than the existing Kirkuk‐Ceyhan pipeline (which has a capacity of 1.65mn b/d, but carries on average about 450,000 b/d.)

The gas pipeline would serve two functions: supplying the gas turbines that power the two crude pipelines and delivering surplus gas to Syria and beyond, depending on the magnitude of surplus gas. This gas pipe‐ line could, eventually, provide gas to the Arab Gas Pipeline (AGP), so that Iraq becomes part of the Euro‐ Arab Mashreq Gas Market Forum/Centre (EAMGMF/C), which is supported by the EU. The AGP currently involves Egypt, Jordan, Lebanon and Syria, and eventually with sufficient excess gas the pipeline would be extended towards Ceyhan. Currently both Iraq and Turkey are observers in EAMGMF/C.

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Also Iraq has the option of exporting excess gas to Europe through Turkey via Nabucco. This pipeline was planed to transport up to 31 bcm/year of gas from Azerbaijan, Turkmenistan and Iraq to an Austrian hub via Turkey and Eastern Europe. As of August, the Nabucco management has approved engineering work for a feeder line from Turkey to Iraq, in anticpation of having the first gas from Iraq, 10 bcm in 2015. However, one of the Nabucco shareholders, Germany’s RWE, (other partners are Hungary’s MOL, Romania’s Trans‐ gaz, Bulgaria’s Bulgargaz, Turkey’s Botas, and Austria’s OMV), issued a statement on the Kurdistan regional Government (KRG) website, indicating that they have concluded an agreement with the KRG to supply gas for Nabucco. This provoked the Ministry of Oil to issue official statement saying any commitments made other than by oil ministry to export gas via Nabucco are invalid and illegal. Obviously, Nabucco prospects with respect to Iraq have had a rough start with this serious and complex political hurdle.

In the absence of solid and long term commitments for gas deliveries, the economics of gas export pipelines become, for Iraq, very doubtful, especially with the forecast gas glut in the coming 10 years. Moreover, the proposal by the Iraqi authorities to build the gas pipelines through the build‐operate‐transfer (BOT) ap‐ proach would add additional uncertainty for foreign investors, unless Iraq guarantees over a long term suf‐ ficient gas for export, plus having in place a clear gas pricing formula. However, the declared policy is to give priority, and correctly so, for domestic requirements for power generation and other gas based indus‐ tries. This acts as disincentive for foreign investors. The gas fields’ contracts, like previous oil field contracts, are built on the take‐or‐pay (TOP) principle, which put the risk totally on the Iraqi side. Hence, BOT modal‐ ity could eventually turns out to be TOP, and thus augment the risk for Iraq even further. Moreover, there is local resistance against gas exports, especially in the Anbar province where the ʹAkkaz gas field is located, making the contrasting priorities of domestic versus export somewhat difficult.

In addition to the above, the prospect of Nabucco itself is surrounded also with serious uncertainties. Nabucco is rival to the South Stream pipeline of Gazprom and Eni, and the two pipelines have similar time‐ frames for beginning and completion. Industry reports from and on both projects are not conclusive and this leaves Nabucco’s prospect with respect to South Stream in limbo, making it even more difficult for Iraq to take a firm position in favor of Nabucco.

On the other hand and considering Nabucco’s complexities, Iraq could utilize AGP. Any new gas discoveries offshore Lebanon (and Cyprus) could feed AGP with extra gas, and with surplus gas from Iraq the planned extension of AGP towards the port of Ceyhan becomes more feasible. The AGP option could be beneficial to Iraq in many ways:

• Iraq (and Turkey), which are observers, could become full members of EAMGMF/C, which is supported by the EU, and benefit from the logistical advantages of membership and potential related improved economics of the Iraqi section of the pipeline. • Unlike Nabucco, in which Iraq could be on one side and the Nabucco partners on the other, Iraq within EAMGMF/C would not be alone, bringing advantages in negotiating, as gas suppliers, the terms and conditions of deliveries to the European partners. • The AGP route is less vulnerable to attacks, especially from PKK in Turkey, compared with Nabucco from both location and distance viewpoints. • From the geopolitical perspective, AGP has greater regional integration and value than Nabucco, and this could reduce the vulnerability of the gas pipeline to the ups and downs of bilateral political rela‐ tions, especially between Iraq and Syria. In domestic politics, Nabucco is more controversial because of the relationship between the federal authorities and the KRG. • Gazprom and Eni oppose Nabucco and have a strong presence in Iraq (in Badra and Zubair oil fields respectively), while IOCs supporting Nabucco have none. This could make the pendulum tilt even more against Nabucco.

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Concluding Remarks According to the recently announced draft of the EU Energy Strategy 2020, “EU will sign energy framework agreements with key suppliers ... to diversify supply sources and routes.” Iraq stands among the key poten‐ tial suppliers of oil and gas for Europe. However, there is good deal of uncertainty with regard to the magni‐ tude and the timeframe of possible oil and gas supplies from the country.

Moreover, it is vital to activate the existing cooperation frameworks, and if need be conclude new agree‐ ments with the EU to help Iraq develop its upstream petroleum. For Iraq the priorities for such cooperation are: putting an end to associated gas flaring; formulating and implementing sound national energy policy; assisting in selecting the optimum gas export pipeline option; and institutional and human capacity devel‐ opment in the fields of energy. And since energy security is of strategic importance for the EU, Iraq, as from 2010, will fall under and benefit from the newly extended Instrument for Cooperation with Industrialized Countries (ICI+).

A speedy ratification by the Iraqi Parliament of the MOU/SPE and PCA should have priority, since both in‐ struments fall under the prerogatives of the parliament. The EU, on its part, should be more proactive and take the initiative to help Iraq to become a reliable contributor in securing energy supplies for Europe by moving from declared intentions to target‐oriented actions.