Iraq Associated Gas U0lizaon Study - Millennium...

IraqAssociatedGasU0liza0onStudy

PerrineToledano,TomRollason,ShayBanerjeeThankyoutoTomMitroforhisreview

Oneofthelargestflarers

Absenceofastronglegalframeworkandinfrastructure

network

Discouraginggaspricingpolicy

AmassivelandmarkprojectforAPGuse

Needformoreinvestmentinpowergenera0oncapacityto

absorbtheAPG

Discouraginginvestmentclimate

Summaryoffindings

S  Iraqistheworld’sfourthlargestgasflarerwhilebeingthesecond-largestcrudeoilproduceroftheOrganiza0onofthePetroleumExpor0ngCountries(OPEC).Ithasthe11thlargestgasreservesmainlycons0tutedofAssociatedPetroleumGas(APG).

S  Onlyin2011,theIraqiGovernmentproposedprescrip0onsforAPGuseintheFederalOil&GasDraYLaw,butithasnotbeenpassedyet.FlaringisregulatedbythePSAsintheRegionalGovernmentofKurdistanintheNorth.MostoftheflaringishappeningintheSouthwhichisalsowheretheoilexportsaregrowing.Inaddi0on,thereisanabsenceofsufficientgathering,processinganddeliveryinfrastructure,cri0calforAPGuse.

S  Iraq’sgaspricingpolicyhasthusfardisincen0vizedtheconstruc0onofgasinfrastructuretoselltheAPGtothedomes0ceconomy.

S  However,theBasrahGasCompany,amidstreamgascompanyresponsibleforse^ngupthelargestAPGuseprojectintheworld,hasbenefitedfromgovernmentalsupportforgasprices,withthegovernmentbuyingthegasfromitatamuchhigherpricethanthedomes0cprice.ItprocessesAPGproducedbythreelargeoilfieldsintheSouthintodrygasforpowergenera0on,LiquefiedPetroleumGas(LPG)fordomes0cuseandcondensatesforroadfuels.Itisauthorizedtoexportoncethelocaldemandhasbeenmet.OtherprojectsforAPGusehavejuststartedattheotherbigoilfieldsinsouthernIraq.

S  Moregas-firedpowergenera0oncapacityisneededtoabsorballtheAPGproduced,meetthepowerdemandandsa0sfyIraq’soilexportambi0ons.Lowpricesandthesecuritysitua0onaredelayingbothstate-ledandprivateinvestmentingasinfrastructure.

0510152025303540

bcmflared

in201

1

Top20gasflarersintheworld(2011)

Sta0s0csonAPGflaring

Onthecompaniesinvolved

S  Iraqistheworld’sfourthlargestgasflarer,flaring9.4billioncubicmeters(bcm)ofAPGin2011accordingtosatelliteimaging.

S  Wastedgasmaybeashighas12bcmperyear,whichis70%ofIraq’sna0onalgasproduc0on.

S  Es0matesputtheopportunitycostofflaringinIraqat$1.8billion.

S  AtthefieldofWestQurna1,around150millionstandardcubicfeetperday(mmscfd)areflaredwhichis“enoughtopoweronemillionhomesandproduce16millionLPGcylindersperyear”accordingtoBasrahGasCompany.

Source:NOAAsatellitedata

Thesta0s0csofAPGflaringinIraq:Howbadisit?


Onthecompaniesinvolved S  APGproduc0onduringthefirstfivemonthsof2016was2,628billion

standardcubicfeetperday(scfd):84%isfromthesouthernoilfieldswhile16%isfromtheNorthOilCompany’s(state-ownedcompanyinKirkuk)oilfields.

S  Outofthisgasvolume,1,714billionscfdwasflared,makingup65%ofthetotalproducedAPG.Mostofthisflaredgas(89%)wasinthesouth.


Source:IraqMinistryofOilandAhmedMousaJiyad

SouthernAPGproduc?on,u?liza?onandflaringsince2009(mmscfd)




S  In2015,theIraqigovernmenthasset2022asthedeadlineforzerorou0ngflaring.

S  Comparingthe2016resultsforthefirstfivemonthsoftheyear(giveninthepreviousslide)tothepro-ratedforecastfor2016laidoutinthisslide,theflaringresultsare10-12%worsethanthetarget.

Expectedoilandgasproduc?on,useandflaring:past,present,future

Source:IraqMinistryofOil,2015




S  PartofthereasonforitslargeflaringvolumesowestothefactthatIraqisthesecond-largestcrudeoilproduceroftheOPECandholdstheworld’sfiYhlargestprovencrudeoilreserves.

S  Iraq’scrudeoilproduc0ongrewbyalmost1.5millionbarrelsperday(b/d)overthepastfiveyears,increasingfrom2.6millionb/din2011toalmost4.1millionb/din2015.

S  Iraq’ses0matednaturalgasreservesare112trillioncubicmeters,the11thlargestintheworldaccordingtotheInterna0onalEnergyAgency–mostlystemmingfromAPG.

Source:EIA,2016

Iraq’stotalpetroleumandotherliquidsproduc?onandconsump?on

Thesta0s0csofAPGflaringinIraq:WhoisInvolved?

S  TheMinistryofOilinBaghdadhasawardedlicensesto21Interna0onalOilCompanies(IOC),includingBP,CNPC,Statoil,andShellwhoalldrillinthecountry’slargestfields.

S  RatherthanPSA(Produc0onSharingAgreement)contractsthatareofferedbytheRegionalGovernmentofKurdistan,Baghdadofferstechnicalservicecontracts.Servicecontractsmightactasadisincen0vetoinvestinAPGinfrastructure.



Whatlegalandfiscalframeworkisinplacetostopflaringandincen0vizeAPGuse?

Agencies

Legalframework

Fiscalframework

Governmentins?tu?onsinvolvedinregula?onofoilproduc?on/flaring

Descrip?on

MinistryofOil Hasbroaddiscre0ontoregulateextrac0onofoilandgasintheFederalProvincesofIraqunderOilLawNo.101.Inrecentyears,theMinistryhassetrenewedeffortsinmo0ontoendflaringinIraqandhasestablishedagoalto“endtheburningofgasen0rely”infavorofu0liza0on.In2016,theWorldBankawardedtheMinistrywithacer0ficateofapprecia0onforitsefforts.

Regula?on/PoliciesonGasFlaring/APGuse

Descrip?on

FederalOilandGasLaw

FederalandregionallawsgoverningthepetroleumsectorinIraqaretypicallymul0-layeredandcomplicated,consis0ngofamixoflawsthatarealegacyoftheHusseinregimecombinedwithanewlegalframeworkins0tutedbythenewcons0tu0on.OnAugust25,2011,theIraqiGovernmentproposedtheFederalOil&GasDraYLaw,includingthefollowingprescrip0onsforAPGuse:•  Thepetroleumlegisla0onmakesmen0onofAPGandrequiresholders

ofexplora0onandproduc0onrightstoproposeop0malplansforu0liza0onordisposalofassociatednaturalgasintheirFieldDevelopmentPlans.

•  Furthermore,allassociatednaturalgasthatisnotusedinpetroleumopera0ons,u0lizedorre-injectedinthefield,istobeofferedfordeliveryfreeofchargetotheMinistry.

•  Flaringisonlypermiredforthepurposesofcommissioning,tes0ngofinstalla0ons,safetyprecau0ons,orwhileawai0ngthecomple0onoftransporta0onfacili0es(providedthattheflaredvolumesarekepttoaminimumandMinistryisno0fied).

•  Flaringshouldbekepttoaminimumandnotbepermiredbeyondamaximumperiodofoneyear,duringwhich0memeasuresshouldbemadetoeitheru0lizethegasordeliverittoanominatedgovernmenten0ty.


Agencies

Legalframework

Fiscalframework

Regula?on/PoliciesonGasFlaring/APGuse

Descrip?on

KurdistanRegionalGovernnmentofIraq(KRG)

•  TheKRGregulatesflaringthroughPSAs.•  Therelevantclausefromthe2011PSAsignedbetweentheKRGandRepsol

YPFOrienteMedioS.A.readsasfollows:

“14.6FlaringofNaturalGasisprohibited,except:(a)inaccordancewithanApprovedWorkProgramandapplicablePermits;or

(b)inanemergency.

14.7TheContractorshallsubmitanyrequestforaPermitforflaringtotheGovernment.

14.7.1TheContractormustincludeinsuchrequestforaPermit:

(a)anevalua0onofreasonablealterna0vestoflaringthathavebeenconsideredbytheContractortogetherwithinforma0onontheexpectedamountandqualityofNaturalGastobeflaredandproposeddura0onoftherequestedflaring;and

(b)itsconsidera0onandplansfortakingallcommerciallyreasonablemeasurestoensuretheextrac0onofnaturalgasolineandotherliquidsfromAssociatedGastobeflared.

14.7.2TheGovernmentmayrefusetograntsuchPermitintheGovernment’ssolediscre0on,includingthecircumstanceswheretherequestreasonablyshowsthatflaringwouldbeintheeconomicinterestofthePar0esorisnecessaryfortheproduc0onofPetroleum,andtheGovernmenthasnoimplieddutytoprovideanyPermitforflaring.”•  An0-flaringclausesdonotappearinPSAsbefore2006andPSAsthathave

beensignedsince2011arestricterintheirregula0onofflaringthanthosesignedbetween2006and2010.

Agencies

Legalframework

Fiscalframework



Agencies

Legalframework

Fiscalframework

S  Alargebarriertou0lizingAPGisthepricingpolicyinIraq,whichactsasaninhibitortothegrowthanddevelopmentofitsgassector.

S  AlthoughIraqhashugequan00esofAPGavailableasaby-productofoilproduc0on,thedepressedpriceofgascombinedwithavirtuallynon-existentgastransporta0oninfrastructuremakeinvestmentinthegassectoralow-profitprospect.

S  Byraisingthepriceofgas,theIraqGovernmentmaybeabletoincreasetheincen0vetoinvestwhilereducingitsfiscalspending.Ithaslikelyavoideddoingthisduetopoli0calsensi0vi0esandinsteadhasreliedonindividualarrangementswithcompaniestoensureacertainprice:thegovernmentthroughitsstate-ownedcompanySouthGasCompanybuysthegasfromthecompaniesatahigherpricethanthedomes0cmarketandresellstothedomes0cmarket.

S  Forexample,theBasrahGasCompanyproject(detailedinthefollowingslides)wascreatedwiththesellingpriceofAPGpeggedtothepriceofoil:thedrygassalespriceisadirectderiva0veoftheHeavySulfurFuelOil(HSFO)price,whichinitselfisbasedoncrudeoilprice.Itfollowsthefollowingformula:([crudeoilprice/tonconvertedtoHSFOprice/ton]X[reduc0onfactor]/[hea0ngvalueof1tonHSFO].

S  ForacrudeoilpricebetweenUS$75and$100itmeansadrygaspricebetweenUS$3.20toUS$4.30perMmBtu.Forthesamerangeofcrudeoilprices,othergasintheMiddleEastissoldataround±US$2.0-2.5.InIraq,theindustrybuysthedrygaspriceat$1.2/MmBtu.

S  TheIraqGovernmentbearstheburdenofprovidingthisar0ficialpricebycoveringthedifferencebetweenthedomes0cgaspriceandthenego0atedpricewithBGC.

Whatpowerneedscouldtheflaredgassa0sfy?

S  Ironically,whileIraqflaresasubstan0alpor0onofAPG,itactuallyimportsgasfromneighboringIran.

S  Inaddi0onduetoalimitednumberofgas-firedpowerplants,crudeoilhasbeenincreasinglyburntatpowersta0onsdeprivingthegovernmentfromexportrevenues.

S  Thecurrentpowergenera0oncapacityof13gigawars(GW)onlymakesupforapproximatelyaquarterofthedemand(42GW)andtheoilandgasindustryisthelargestconsumerofelectricity.

S  ManyIraqisruntheirowngenerators,whichaccountsforroughly8%ofthena0on’selectricitygenera0ondespitebeingextremelycostly.Costscanbeasmuchas$1000permonthforhouseholdelectricity,whichrepresents1/6ofaverageannualincome.

S  AccordingtotheIEA,reduc0oningasflaringalongsidethedevelopmentofnewgasfieldsisbecomingfundamentaltomeetbothexportambi0onsandgrowingdomes0cneeds.

S  NewpowerplantsthatwillusetheAPGasafuelsourceforelectricitygenera0onareneeded:In2013,Shelles0matedthatconver0ngthewastedgasintoelectricitywouldgenerate4.5GW—whichcouldcovertheneedsofabout3millionhomes.

Source:EIA,2016

Powergenera0on

LPGandcondensates

Crudeoilburntatpowersta?onsinIraq(thousandbarrelsperday)

WhataresomecurrentAPGuseprojectsthatcouldserveasablueprintforfutureprojects?

S  In2015,themid-streamgascompany,BasrahGasCompany(BGC),wasawardedtheWorldBank’sGlobalGasFlaringReduc0onPartnershipExcellenceAward.

S  BGC,ajointventurewithSouthGasCompany(51%),Shell(44%)andMitsubishi(5%)setupin2011,processesAPGproducedbythethreehugeoilfieldsinsouthernIraq–Rumaila,ZubairandWestQurna1,andturnsitintodrygasprimarilyforpowergenera0on,LPGfordomes0cuseandcondensateforroadfuel.BGCisthereforeamidstreamgascompany.

S  The25-yearprogrambeingundertakenbyBGC,valuedat$17billion,isboththelargestgasprojectinthehistoryofIraq,andthelargestflarereduc0onprogramintheworld.ThecurrentoilpricedropisslowingdowntheplansoftheIOCsinvolvedinthejointventureandsomeprojectshavetobeputonhold.

S  Inaddi0on,theabilityofthegovernmenttoinvestinthisprojectandfinanceitspartisinques0onata0meoflowoilprices,thereduc0onofnorthernexportsandhighexpenditureinthecampaignagainsttheIslamicState.

Powergenera0on

LPGandcondensates

APG-usecasestudy:BasrahGasCompany

S  BGCstartedopera0onsin2013.Atcapacity,BGCwillbuyupto2billionscfdofAPGfromthethreeoilfields.Itisasoftodayprocessingmorethan600mmscfdofgas.Therehabilita0onwork(withouttheexpansion)oftheinfrastructureshouldleadtoaprocessingcapacityofaround1.3billionscfd,whichwillcapture80%oftheAPGproducedbythethreefields.

S  BGCoperatesmorethan1800kmofpipelinesandninecompressionsta0onsthatitasbeenrehabilita0ng.BGCisadding300kmofpipelinesandthreenewcompressors.

S  BGCalsooperatestwogasprocessingplantsthatarealsounderrehabilita0on.IntheNorthRumailaplan,aYertreatmentandsepara0onfromtheliquids,thedrygasisdirectlysuppliedtoSouthGasCompanythatthenmakesitavailableforlocalpowergenera0on.ThenaturalgasliquidsaresentbypipelinetotheKhorAlZubairplanttobefurtherprocessedintoLPGandcondensate.ThesearethenpumpedtotheUmmQasrStorageTerminal,wheretheyareblendedwithimportsofhighoctanegasolineandLPGandthendeliveredtoSouthGasCompanyfordistribu0onintothelocalmarket,tovariousborlingplantsandtoroadtankerfillingsta0ons.

S  Last,BGCoperatesthemarineterminal,comprisedoftwomainje^eswheretankersdock,andasmallerservicejeryforsmallvesselsthatisnowdevelopedbyBGCintoanewjeryforexport/importofLPGtomeetfuturerequirements.

S  Theinfrastructureinplaceisstate-ownedandoYen30yearsold.Yearsofconflictsandsanc0onshavedelayedtheirfullupgradingandu0liza0onun0lnow.

Powergenera0on

LPGandcondensates

APG-usecasestudy:BasrahGasCompany

S  Itises0matedthataround70%oftheelectricitygeneratedinBasrahprovincein2015and60%to70%ofthealltheLPGconsumedinIraqwasprovidedbythegasproducedfromtheproject.

S  ThecontractallowsBGCtoexportthegasascondensatesandalsoLPGoncelocaldemandismet.LPGproduc0onisnowat3,300tonsperday.

S  InMarch2016,thefirstcargoofAPGconcentrate(veryhighAPIoilingasformthathascondensedwhenrisingtothesurface)ofapproximately10,000cubicmeterswasexportedbyBGC.TwocargosofLPGexportsfollowedsoldat$350/ton.Reportedly,theexportsreceiptswereearmarkedtotheIOCpartnersinthejointventureaspaymentfortheirpastarrearsatendof2015.

Powergenera0on

LPGandcondensates

Source:MitsubishiSource:LNGWorldNews.com

OthersmallerAPG-usedevelopments

Powergenera0on

LPGandcondensates

S  Al-Ahdaboilfield:supplies70mmscfdtotheWasitprovincepowersta0onsandLPGofmorethan240tonsperdayasofMay2016.

S  Mejnoonoilfield:agasprocessingsta0on(withacapacityinthefirstphaseof70mmscfd)inauguratedinApril2016providesgastoRumailagas-firedpower-plant.Thispowersta0onwillbecompletedin2017andwillgenerateupto235megawars(MW)perdayatpeakefficiencyduringwintermonthsandaminimumof150MWinthesummer.

S  Gaspipeline:inApril2016,theMinistryofOilinaugurateda$150millionliquefiedgaspipelineprojectforthetransporta0onof3000to4000tonsperdayofgasfromproduc0onloca0onsinKhorAl-ZubairtothegascomplexinThi-Qarprovince.

S  GEandIraqMinistryofOilhaveagreedtopartneronasolu0ontoreducegasflaringinIraqioilfieldsanduseitforpowergenera0onwithinabroaderpartnershipbetweenGEandtheMinistryontheop0miza0onoftheMinistry’spowerassetsaswellasmanagementsystem.GEsolu0onscouldaddmorethan200MWpersiteandrecoverseveralthousandsofbarrelsperdayofLPG.

S  Thecon0nuousunsteadysecuritysitua0onmightlimitaddi0onalinvestmentinlonggaspipelines,inaddi0ontothoseofBGC,giventhehighvulnerabilityofgaspipelinestosabotageduetotheirhighpressureandthevola0lityofgaswhenreleased,aswellasthedifficultyinopera0ngmaintenanceworkonboththepipelinesandcompressors.

S  AlFathi,Saadallah.“Iraqhaslostbillionsfromgasflaring.”GulfNewsAnalysis.Feb.15,2015

S  Al-Khateeb,LuayJ.“NaturalGasintheRepublicofIraq.”HarvardKennedySchool.Nov.18,2013.

S  AlKhareeb,LuayJ.“RAQGasFeedstockAssessmentForPower,Petrochem,Industries,OilOpera0onsandExport.”Presenta0on.IraqEnergyIns0tute.Feb.2013.Availableat:hrp://www.iraqpetrochem.com/files/presenta0on/04%20Luay%20Jawad%20Al%20Khareeb.pdf.

S  AlMonitor,“DogascondensateexportsrepresentnewbeginningforIraq'shydrocarbonindustry?”March2016.

S  BasrahGasCompany.Website.Availableat:hrp://www.basrahgas.com/.

S  Bur,Gerald.“Iraq’sAlial-Saadypostponesflaringrule.”PetroleumEconomist.Nov.18,2015.

S  Chazan,Guy.“Shell-backedIraqi$17bngasprojectgetsunderway.”FinancialTimes.May1,2013.

S  Devine,RichardandSafwanAl-Amin.“OilandGasRegula0oninIraq:Overview.”Prac9calLaw.Sept.1,2014

S  TheEconomist.“NotYetSwitchedOn,InAnyWay.”March23,2014.

References

S  GlobalGasFlaringPartnership.“GuidanceDocument–FlaringEs0matesProducedbySatelliteObserva0ons.”Availableat:hrp://siteresources.worldbank.org/INTGGFR/Resources/Guidance_Document_Flaring_Es0mates_Produced_by_Satellite_Observa0ons.pdf.

S  Interna0onalBusinessPublica0ons.IraqBusinessLawHandbook.Vol.1.2015.

S  IraqBusinessNews.“ListofInterna0onalOilCompaniesinIraq.”Availableat:hrp://www.iraq-businessnews.com/list-of-interna0onal-oil-companies-in-iraq/.

S  Jiyad,AhmedMousa.“MidyearReviewoftheIraqiUpstreamPetroleumSector.”May2016.

S  Kent,Simon.“CondensateandLPGExportsCon0nue.”IraqBusinessNews.Aug.22,2016.

S  OilFieldTechnology.“GEOil&GassignspartnershipagreementwithIraqMinistryofOil.”April26,2016.

S  RebuildingIraq.“BasrahCompanyWinstheWorldBankGlobalGasFlaringExcellenceAward.”Oct.3,2015.

S  Repsol–Kurdistan2011PSA.hrp://www.resourcecontracts.org

S  U.S.EnergyInforma0onAdministra0on.“CountryAnalysisBrief:Iraq.”April28,2016.

S  Willems,SimonDaman.“Iraq’sBasrahGasCompanysetsambi0ousproduc0ontargets.”GulfNewsEnergy.Sept.13,2016.

References

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