Oil companies temper Iraq's dreams of production expansion

By Ahmad Ghaddar and Dmitry Zhdannikov

LONDON, March 14 (Reuters) - Iraq, OPEC's second-largest

producer of crude, is hitting a roadblock in the next phase of

expanding its oil production capacity as the appetite of

international energy firms for investing in the country's

low-return environment slackens.

Having slashed production targets in 2013 and 2014, most

international oil firms in Iraq are revising their oilfields'

plateau production levels even lower, and the discussions

involved are moving slowly, Iraqi and company sources say.

Growth has been the hallmark of Iraq's oil production in the

past decade with a rise of over 2.5 million barrels per day to a

peak of 4.71 million bpd in late 2016, Reuters assessments show.

(PRODN-IQ (Kuala Lumpur: 5107.KL - news) )

Iraq owes much of that growth to the likes of BP,

Exxon Mobil (Swiss: XOM-USD.SW - news) , Lukoil, Eni (LSE: 0N9S.L - news) , Total (LSE: 524773.L - news) and

Royal Dutch Shell (LSE: 0LN9.L - news) , which oversaw the redevelopment of

its oilfields after the U.S.-led invasion in 2003.

But those companies have long complained that the technical

service contracts Baghdad offers are too stringent and give

little return on investment.

Most companies in the past five years negotiated their

production plateaus lower, forcing Iraq to reduce its capacity

expansion plan from 12 million bpd to 9 million bpd by 2018.

Now (Frankfurt: 11N.F - news) this new target is far from attainable, and Iraq aims to

raise capacity to 7 million bpd by 2022.

All companies except Petronas and Total are suggesting their

plateaus be lowered, Abdul Mahdi al-Ameedi, head of the Iraqi

oil ministry's licensing and contracts office, told Reuters.

On the sidelines of a conference in Berlin last month,

al-Ameedi told reporters: "In principle we accept that we reduce

the plateau level for certain fields to lower production rates,

but this is all under discussion."

Total, with partner PetroChina (HKSE: 0857-OL.HK - news) , has committed to phase three

of the expansion of the 4.1-billion-barrels Halfaya oilfield,

which will double production there to 400,000 bpd in 2019.

Petronas is on track to attain production of 230,000 bpd at

its Garraf oilfield.

"What you're seeing now is a second wave of renegotiations

in light of the oil price and the fact that budgets are down

considerably compared to five years ago," Ian Thom, principal

analyst at consultancy Wood Mackenzie, said.

"There are alternatives in tight oil and deepwater from many

of the Iraq players that are more favourable," Thom said.

Only Lukoil has so far reached a preliminary agreement with

the oil ministry on a lower plateau target, bringing the goal

for its West Qurna 2 oilfield down to 800,000 bpd from 1.2

million bpd, al-Ameedi said.

But the two sides have not yet finalised talks as

discussions continue on when Lukoil can hit the new target, he

said.

"We are in discussions but nothing has been approved yet,"

al-Ameedi said.

Iraq wants the plateau to be hit earlier than Lukoil does,

al-Ameedi said, but he declined to specify which timeframes were

being discussed.

Lukoil declined to comment.

Delays in such negotiations are a headache for any oil

company that needs to plan its annual budget based on how many

oilfields it wants to drill and what new facilities it needs to

bring extra production on stream.

The impact of negotiation delays is being felt

disproportionately, with companies that have production levels

farthest from the previously agreed plateau feeling the most

heat, a source at one of those firms told Reuters.

LIMITED GROWTH ON ITS WAY

Iraq's oil capacity is near 5 million bpd and it can easily

increase that by a further 10 percent in the next year or two,

even without a new agreement on plateaus, analysts and industry

sources say.

"If you bring the few fields where there is activity under

way ... and if the Kirkuk and Bai Hassan fields return ... you

could see production capacity from existing investments getting

close to 5.5 million bpd in the next year or two," Thom said.

But beyond those investments at oilfields such as Rumaila,

West Qurna 1, Halfaya and Zubair, "you would certainly expect a

flat-lining of Iraq's oil production with the element of natural

decline kicking in", Thom said.

Oilfield Companies Plateau New plateau

(million

bpd)

Rumaila BP, CNPC 2.1 (from

2.85)

Majnoon Shell*, Never

Petronas agreed new

plateau

(from 1.8)

West Qurna 1 ExxonMobil, 1.6 (from

PetroChina, 2.825)

Pertamina

Itochu**

West Qurna 2 Lukoil 1.2 (from 0.8***

1.8)

Zubair Eni, KOGAS 0.85 (from

1.2)

Halfaya CNPC, 0.4 (from 0.4

Total, 0.535)

Petronas

Maysan Oil CNOOC, TPAO 0.45

Garraf Petronas, 0.23 0.23

Japex

* Shell (LSE: RDSB.L - news) exiting project and will hand its share https://www.reuters.com/article/us-iraq-oil-shell/shell-to-hand-over-iraqs-majnoon-oilfield-by-end-june-2018-iraqi-oil-officials-idUSKBN1D817D

to Basra Oil Co by end of June

** Shell selling 20 percent stake https://www.reuters.com/article/us-iraq-energy-shell/shell-agrees-to-sell-its-stake-in-iraqs-west-qurna-1-oilfield-to-japans-itochu-idUSKBN1F41TO

to Itochu

*** Deal on plateau reduction not finalised yet

(Additional reporting by Olesya Astakhova in Moscow; Editing by

Dale Hudson)