The most recent bid round launched this month for the three gas fields of Akkas, Mansouriah and Siba, promises to be challenging for both sides; the Iraqi oil ministry and the international oil companies, not least because it involves a third party: the electricity sector.
The non-associated gas to be produced from the three fields, estimated collectively at a minimum of 700 MMcf/d to 900 MMcf/d will be allocated as feedstock to existing power plants and planned ones to enter into operation within the next five years. The power sector requires at least double that volume to operate existing gas-fired power plants and plants currently being built. Future power plants planned for the next five years would require double that amount. Iraq currently produces about 1.5 Bcf/d of associated gas, more than half of which is currently being flared.
The challenge for the oil ministry is to make an investment in developing natural gas for the domestic market attractive enough for foreign companies to invest billions of dollars and profitable enough to justify investing in the three gas fields. If the regional experience is anything to go by, it does not look very promising.
Saudi Aramco contracted foreign companies in 2003 and 2004 to explore and produce natural gas for the domestic market pricing the sales gas to the national grid at 75¢ per million Btu minus 15¢ per MMBtu for transportation on the master gas system. Companies were to make a return on their investment from any natural gas liquids which they could export. To date, none of the four consortia looking for gas to produce for the domestic sales declared an “economic” find. Put differently, none of them has found gas that has the right liquid to gas ratio to justify producing and selling it to the government.
Iraqi oil ministry officials finalizing the terms to be offered to investors say international oil companies will get a fixed remuneration fee for each barrel of oil equivalent while all liquids will be spiked into the crude stream, except for liquefied petroleum gas which will be delivered separately.
The dilemma of the Iraqi ministry of electricity is not less taxing. Even if foreign companies decide to take up the challenge and produce the gas – probably betting on lucrative potential exports in the future – there are no guarantees new power plants will be up and running in time. The ministry has on its books more than 15 major power plants, some to be financed by the government and others to be offered to private investors, that should be up and running by 2015. This is in addition to a dozen more currently under construction.
The Iraqi oil ministry invited 45 international oil companies to bid for the three gas fields on Sept.1. Just how many will show up in Baghdad on that day will depend on how desperate companies still are for a foot in Iraq energy sector.