Saturday, 20 June 2009

What is the future of the Iraqi oil?

What is the future of the Iraqi oil?
(Originally published in Arabic:
Translated by the BRussells Tribunal)

Saadallah Al-Fathi
Former president of the Iraqi refineries, former Head of Energy Studies Department in Opec Secretariat, Vienna.

Translation 11 June 2009.

A lot is being said about the miserable conditions that relate to the Iraqi oil industry. The House of Representatives called in the Ministers, who led the ministry since the invasion, for questioning them on the situation and about the claim of corruption in the Ministry. The media stresses in particular on the questioning of the current minister, Hussain al-Shahristani, who stayed longer period than those preceded him, especially when his predecessors together with the Deputy Prime Minister had written reports which led to this subpoena.

The people are divided between supporters and opponents of the Minister and exchanged letters and proposals on how to put this point of view or the other. It is unfortunate that some people have focused on this person or that or this party or any other party without any mention of the occupation and the tragedy that it brought to the people of Iraq and its oil industry.

Six years passed since the occupation, the oil industry did not recover even to the level before the invasion and it began after the occupation to deteriorate, despite the billions that were directly injected their results were weak in comparison even with the years of siege then and the scantiest possibilities. Total oil production in 2008 reached (2.4) million barrels per day , in comparison with 2.6 MB / day in 2001.

And despite the fact that this represents an improvement over previous years, but there are signs of deterioration in the southern oil production, which fell more than 200 thousand barrels per day to reach 1.73 MB / day in April 2009. The North Oil Company has increased production to 600 thousand barrels per day, two-thirds of its output prior to the occupation, and its fields suffers of problems and the lack of progress in adding new capabilities of the (Khormala Dome), where the Ministry engineers are prevented from completing the construction by the Kurds.

This represents a violation by the Kurds and an extension of their authority outside their areas without a firm stand from the government to impose its authority over its territory and resources and, as in all contracts signed by Kurds in spite of the Ministry and the Baghdad government. It is not likely that the administrative changes and accelerated plans will lead to a quick solution as long as the division and the general situation of instability resulting from the occupation is still existing, and the sector administration, since the invasion, is not being able to put foreword its priorities and addressing the bottlenecks with courage and responsibility, because of being a prisoner of the political balances between the rival blocs, whose only interest is their narrow gains.

So far there is no policy that gains a broad support to move towards the future. In the beginning, everything was left to the Americans on the basis of them being the destroyer and the saviour of the Iraqis and they work for the most part in isolation from the Iraqis. We all know the extent of theft and waste undertaken by U.S. companies as an introduction to deploy and prevalence of corruption throughout Iraq. Some of the projects started since the occupation are still unfulfilled, such as water injection project in the south and all the high cost of the business regardless of payment.

Then came Iyad Allawi in 2004 to announce the allocation of the amount of exports to finance operations and speed up repairs and modernization, and to give the national oil company management and operation of producing fields only, and the assignment of the discovered fields to foreign companies, without considering the differences between the fields and that one general rule can not play a purpose.

Presenting the style of participation in production as a priority has raised a storm that does not die down until today. All this would lead to a production capacity of 8 MB / day in 2010. Non of this is achieved, and those who came after him followed the principle of trying to “ manage thing”.

Their argument is that there is no oil law and no permanent constitution is being approved, and other matters which could have been put aside for the time being, despite their importance, by applying an independent legislation for each project. The existing laws would have ensure that if there was a will to adapt them.

The present Minister came out to present new ideas to the public, and before they become mature he changes his mind and all the exerted efforts would go in vain. As what happened with the projects of technical assistance agreements that were negotiated with foreign experienced oil companies after a long period of work, on the basis of being appropriate and effective because they have limited objective, risks, and appropriate funds within the possibilities of Ministry, and that the participation of Iraqis is high and that it will be a training school for them.

Instead of moving in that direction the Minister presented the giant producing fields, run by Iraqis since the nationalization and even before him, to deliver them to the foreign companies to develop them through long-term service contracts and without the slightest justification. Then he announced a new licensing for a large number of the discovered fields and in a manner unprecedented in any of the oil-producing countries. Any reached agreement is the prerogative of the government without the approval of the House of Representatives. In such a climate, which is not trusted neither by the Iraqis nor by investors, the result will be further non-performance and the deterioration of the fields.

The situation does not differ much in the refineries and gas processing facilities, which work with no more than 65% of their capacity at the time when the country imports petroleum products over the past six years. In spite of an improvement in 2008, the production of light products (LPG, gasoline and average distillate) did not exceed 225 thousand barrels per day, which is less by 25% of the average level in 2001 and 2002.

The situation was bearable because of the significant decline in demand for products by 18% since 2005 due to the deteriorating economic situation and unemployment and the number of Iraqis who have been forced to seek refuge in neighbouring countries or the internally displaced people.

Some boast of declining rates of importation, without referring to the deterioration of demand for products and lower refinery production.

Yes, imports are being reduced by about 60% in 2008 compared to 2005 and this positive result, if it were, due to improvement in production and the reduction of smuggling, not only because of the increasing number of Iraqis unemployed and those who left the country or internally displaced persons. A lot is being said about refinery projects since the occupation, but little achievement so far and so many doubts exist about their utility, especially the two refineries of Al Imara and Kirkuk, with the capacity of 150 thousand barrels a day each.

Meisan province does not consume more than 20 thousand barrels per day and Kirkuk is fed by the pipeline of products and has a refinery with the capacity of 30 thousand barrels a day.
New capacities, if created, will constitute a burden of getting rid of the surplus, in a time which ignores quick and serious work to develop refineries vertically to get rid of the fuel oil products and increase light products and reduces the need for more crude oil. The increase in refining capacity has been realized only by building small units in sites that need storage capacities or to be connected to pipelines and not to small refineries, with specifications of low level products which will be burden on the future refinery industry, even if they meet some immediate needs.

But it seems that pleasing the local administrations of some areas comes before the proper planning of projects, where the need for large refinery projects is working very slowly. The site of the Centre refinery has been moved more than once for reasons which did not appear reasonable, especially after the millions spent on the site by the ministry since the late eighties. This site was planned to be a substitute for Al Dora refinery, which is being expanded just by the capacity of workers and away from any future perception of adding big refinery capacities as alternative to the old units and expansion of the capacity without the consideration of product specifications and without consideration to the age of the infrastructure of the refinery and its site in the Centre of the city with population of over five million people.

The preservation of the highest rates of use in refineries stays elusive either because of the increasing technical problems or the loss of engineers and operators with experience and sometimes even with lack of access as much oil required as in Aldora or because of the inability to get rid of excess fuel oil, as in Aldora and sometimes in Baiji, in particular.

The units for the removal of sulfur from gas oil have remained below the reform in Baiji, Basra and even not existing in Al Dora , in spite of the availability of financial resources. The fact is that these projects were diagnosed and extracting this high percentage of gas oil from sulfur damages the environment and equipment. If the surplus of fuel oil is an obstacle to the functioning of the refineries with high capacities, the solution does not seem to be close because of the failure of the successive departments to improve the system of export capacity in the south, which can not absorb the fuel oil produced in Basra, not to mention the rest of the refineries.

One would have hoped to do the transfer of the surplus for export to the south and by Iraqi hands and equipments instead of relying on other expensive outlets not run by the Iraqis. The hydrogen cracking unit at Baiji to get rid of a large proportion of fuel oil are not working, despite the strenuous efforts to reform and put it in operation in 2001. Iraq was the first since 1959 in the establishment of advanced manufacture of lubricating oils with a capacity of nearly half a million tons a year and has produced at least 200 thousand tons in 2002, despite the devastation that has hit parts of it since the aggression of 1991 and the urgent need for chemicals and spare parts, but even in 2004 produced about 90 tons before it began to decline to 22 thousand tons in 2008. Instead of addressing the root causes of the decline in the production of oil, dependence on imports is costing huge amounts of money and the quality can not be controlled as the private sector mostly imports rather than Iraq being one of the countries that export base oils. At the end of this sad story, we find that the natural gas production and consumption in 2002 amounted to 865 million cubic feet per day of dry gas has dropped in 2008 to nearly 480 million cubic feet per day. The gas burned in vain in 2008 reached about 500 million cubic feet per day. As a result, the electricity industry was forced to use the liquid fuels as alternative, including crude oil, which average usage reached in 2007 about 70 thousand barrels per day and gas oil more than eight thousand barrels per day in electricity generation, which would have greatly benefited from a cleaner, easier and more economic gas, if it was available.

The same thing applies to the production of liquid gas, which in 2002 reached a total of 4000 tons, per day from the campuses in the north and the south, to one thousand tons per day from refineries and the surplus was exported to the neighbouring countries until the occupation. In 2008 the total production reached 2000 tons per day from compilers of gas and 600 tons per day from refineries , and import continues at least partially to compensate for the lack of need of the citizens.

Successive governments have done nothing serious for the advancement of this fact. Some have relied on some of the import and found it easy especially in 2004 and 2005, where the rate of import of products reached approximately 150 thousand barrels per day, out of which 25 thousand barrels per day was of liquid gas.

Finally, in 2007 the Ministry claimed to have found the solution by signing of a principle agreement with a foreign company to deposit all the gas produced in the south for now and in the future, and all South gas installations and compounds that arise subsequent to establishing a joint company in inappropriate conditions, rather than the Ministry strengthens its operational modalities by summoning the executing companies for the repair and rehabilitation and modernization of the South gas facilities, in particular, and the north and the completion of gas pipeline projects for sufficient connection between them.

The suggestion here is not to criticise the workers in the oil sector who themselves have built and occupied this industry, in conditions which were seldom appropriate. They themselves have reconstructed whatever was destroyed in the successive wars. They were the ones in charge of the direct execution of the projects. They represent a school for a large number of professionals, and in spite of the losses they incurred since the occupation so far, they are still able to deliver once the right conditions for working as a national unit become available.

But breaking out of this bleak situation is not easy in the circumstances where the administration lacks a clear vision and does not have the ability to take difficult decisions and to motivate staff to move forward. The call is to establish oil saving committee which takes decisions to achieve specific objectives of the current oil industry, to break out of this situation and be tied only to its objectives and be outside all the usual contexts, may be the best possible proposal, because the Hurricane which Iraq faces would require a declaration of emergency, which has its own provisions.

The assured solution is linked to what is outside the scope of oil, for the country has to get rid of the occupation and the culture that came with it. If oil was the reason for the occupation of Iraq, then the occupiers have failed so miserably and dragged with them those who came on their tanks, and those who joined them.

Saadallah Al-Fathi
Former president of the Iraqi refineries, former Head of Energy Studies Department in Opec Secretariat, Vienna.

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