No matter how much crude oil lies beneath the sands of Iraq, in its natural state it is useless. Unless it can be brought to the surface, processed, stored and transported to market it does no one any good. So, reviving and replacing moribund oil infrastructure is critical – and no small job – as is ramping up the country's refining capacity.
Steps towards achieving these goals are being taken, at varying speeds. In June, deputy prime minister for energy Hussain al-Shahristani said that 750,000 barrels per day (bpd) of refining capacity will be added to the current 500,000 bpd production levels through the building of new refineries and the expansion of existing ones.
"We are continuing work on the existing refineries to try and de-bottleneck these refineries. As you can imagine, they have accumulated a lot of problems through all the years and through the period of embargo when we could not get any spare parts or any help," Ahmed al-Shamma, Iraq's deputy minister for refining and gas processing, tells fDi.
“Now we are calling the contractors to look at them and propose whatever action is required to try to at least bring them back to their capacity – plus making any improvements that are possible as a result of the technology advances that have been made during the past three decades,” he says.
A need for modernisation
The most recent refineries, in the north of the country, were built in the 1980s and a lot has changed since then on the technology front. They need to be brought into the modern era, and quickly.
“We are building a number of units in these refineries to improve the quality of the products, also because we are not happy with the quality of products we are providing in the market because these refineries are based on technologies of the past,” says Mr Shamma.
Last year the government offered up four planned refineries for investment. The front-end engineering design (FEED) package was completed for one of them earlier this year – a refinery at Karbala that will produce 140,000 barrels a day. Construction should begin by the end of this year with operations commencing within three and a half years.
Pending final agreement, Saipem, part of Italian oil company Eni, will be technical partner for the project, overseeing the engineering, procurement and construction work. As per a recently inked initial agreement, the group has six months to complete financing and technical agreements with contractors. There is an exclusivity clause for the first three months; however, if the government does not feel adequate progress is being made by that point it can engage other potential investors.
The other three refineries are in Maysan province (also called Missan), slated for a capacity of 150,000 bpd; Kirkuk (another 150,000 bpd); and Nasiriyah (300,000 barrels bpd). They are all still in the FEED stage.
“[FEED packages] will be completed according to the time schedule we have now – towards the end of the year for Maysan, the middle of next year for Kirkuk and similar for Nasiriyah. We are talking with investors about all of these refineries," says Mr Shamma.
“Our first priority is the Karbala refinery because the package is ready and it is positioned in the centre of Iraq, in [an] area of high consumption of products, [close to] the capital Baghdad and the neighbouring governorates of Babil, Karbala and Najaf. These constitute a good percentage of the consumption of Iraq.”
Karbala is key because the existing refinery at Dora is no longer enough to cater for this central region. The Karbala project was urgently needed when it was started as far back as the 1990s, but was put on ice after the 2003 invasion.
“Right now we are importing a lot of products and we expect that when this refinery is complete all its products will already be required for local consumption to substitute for what we are importing now,” says Mr Shamma.
There is a proposed fifth refinery, in Mosul, that was not part of the government’s original planning but is welcomed nonetheless. It was suggested by Egyptian firm Citadel Capital, which wants a refinery specifically to process the heavy, high-sulphur-content crude oil that will be coming out of the Najma and Qayyarah fields in a few years’ time.
A preliminary memorandum of understanding was signed in August for the project. Construction is slated to begin in three years with completion three years after that. This would allow the investor to check that crude is flowing out of the fields in sufficient quantities to justify the outlay.
Apart from that, plans have been drawn up for a fluid catalytic cracking unit in a refinery at Basra. The government hopes to finance this through an additional loan from Japanese lenders. This would provide about 3 million litres of gasoline from processing excess fuel oil. There are similar units planned for the refineries at Baiji and Dora as well.
“All these three will help. We hope they can be implemented earlier than all the new refineries and can somewhat ease the need for gasoline, which is increasing every day. Our import levels are getting higher,” says Mr Shamma.
The FDI challenge
International interest in the projects has been disappointing. The government had hoped some of the international oil companies would bite, but has had no such luck so far, with the exception of Eni’s involvement in the Karbala refinery.
As an enticement, the government has introduced into law that the international oil companies investing in refineries could have petrol stations in Iraq, providing ready outlets for selling the product while also reducing the Ministry of Oil’s Herculean task of distributing petrol throughout the country. Delivering fuel to the whole of Iraq remains a huge headache. Privatisation would help, but is not yet a practical reality.
The Kirkuk refinery is the hardest sell of the lot due to insecurity and uncertainty over its political future, and as such there have been no takers for that one. But the Kirkuk government is determined to have a refinery there, with or without outside investors.
A consortium including Czech company Prokop, Turkish financiers and an Iraqi partner has filed a letter of intent and signed a non-disclosure agreement for possible participation in the Maysan project. Hyundai had expressed interest in Maysan but could not agree payment terms with the government (which says it prefers investment on 'build-operate-own' or 'build-operate-transfer' terms).
For the Nasiriyah refinery there are no serious contenders, although requests for information are trickling in from a few groups after discussions with Reliance, an Indian company, fell through.
Mr Shamma suspects international investors are still unsure about Iraq’s investment environment and that is dampening interest in participating in the downstream oil sector. For that, he says, he can hardly blame them. “I still consider [us] to be amateurs in this field and there is a lot to be done to improve the environment. There is still government bureaucracy here and there that is discouraging investors. But we are moving in the right direction and the investment bureau is trying to change laws and regulations,” he says.
There is indeed a huge amount of uncertainty and confusion related to Iraq’s investment environment and it remains a frontier market that is not for the faint of heart. Yet what is certain is that the Iraqi oil sector is too big, too promising, too important not to keep barrelling forward. Getting in at the ground stage of development is no less gutsy yet potentially wildly lucrative in the downstream segment than the upstream one.