Shell's Majnoon deal highlights Iraq oil target verdict

LONDON Fri May 18, 2012 2:05pm BST

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LONDON (Reuters) - Shell is pressing ahead with talks over final development of Iraq's Majnoon oilfield, a senior executive told Reuters, and a lower, more realistic oil production target is a core part of discussions.

Majnoon is one of four southern super giant fields that are vital to Iraq's ambition to at least double its oil output and put it firmly back among the world's top producers.

But crunch time is approaching.

Iraq awarded service contracts in 2009 to foreign firms who vowed to boost its capacity beyond 12 million barrels per day (bpd) by 2017, but this target has proved too aggressive due to infrastructure bottlenecks and logistical shortcomings.

With that in mind, companies are now drafting final development plans due by the start of next year.

"We're having ongoing exploratory discussions with the Iraqi government, to determine the optimum field development plan for Majnoon," said Hans Nijkamp, Royal Dutch Shell (RDSa.L) vice president and country chairman for Iraq.

"But you have to look at it in the bigger context of the optimum aggregate production level for Iraq."

Iraq's top oil officials acknowledge the need for a more prudent output target and have suggested a level of around 8.5 to 9 million bpd.

Other experts see 6 to 7 million bpd by the end of the decade as the most realistic outcome for the war-damaged country. That would imply an output target of around 1 million bpd for Majnoon, industry sources say.

Shell, with junior partner Petronas of Malaysia, won the Majnoon contract by promising to boost the largely undeveloped field to 1.8 million bpd for a fee of $1.39 a barrel. Production capacity is now 65,000 bpd.

Oil ministry documents show that Shell has opened discussions on a target of around 1 million bpd for Majnoon, as part of its full field development plan.

The company, the first to open talks with the ministry of oil, also proposed to extend the field's plateau period - the time period for which its peak production can be sustained and which is to begin in 2017 - to more than 20 years from seven years now.

Those figures are not set in stone.

"It depends on what Iraq wants out of Majnoon. You can develop this field in different ways with different plateau levels and durations," Nijkamp said on the sidelines of an Iraq Britain Business Council event on Thursday.

"The 1.8 million barrels a day that we bid for was a realistic plateau level that we can responsibly develop and produce - but obviously for a shorter period of time than a plateau level below 1.8 million."

HURDLES AHEAD

The Shell executive said Baghdad is doing its best to overcome myriad infrastructure hurdles, but bottlenecks in the export system are choking production gains.

"That will really determine the production capacity - because the production capacity is there from the license round 1 fields," he said, referring to the southern fields of Rumaila, Zubair and West Qurna-1 that are already up and running.

Recovering from decades of wars and crippling sanctions, Iraq is unique among producing nations seeking to boost oil flows. But the level of red tape and logistical sluggishness beats regional rivals.

"Things do take time in Iraq - whether it's entry visas or customs clearance," said Nijkamp. "Customs clearance in most ports in the region is a matter of days to a week. We have some equipment that's been stuck for months."

Around $50 billion will be needed to ramp up Majnoon, which straddles the border with Iran.

"These are early days. We're sticking our toe in the water and learning how to effectively operate in Iraq," said Nijkamp.

"But to be confident that Iraq is a good place to invest, we need to ensure timely payment. That will really determine ongoing investor confidence."

PAYMENT SORTED

Majnoon has yet to reach cost recovery mode, but the ExxonMobil-operated West Qurna-1 project - where Shell is a minority partner - has been in the money for some time.

A prolonged contractual dispute, however, delayed timely payment of instalments totalling some $900 million.

That has finally been sorted out, said Iraqi oil officials, and the companies have now received payment in full. And going forward, Exxon and Baghdad have signed a final agreement for the companies to be able to be paid in oil for work on West Qurna-1.

Shell's southern gas joint venture, the $17 billion Basra Gas Co (BGC) is also going well, said Nijkamp. The company mobilised a sizable technical team and has seconded technical experts to get compressor units up and running quickly to increase gas throughput.

Shell has meanwhile yet to decide whether it will take part in Iraq's exploration round at the end of this month.

"We'll decide very soon whether we'll put in a bid," said Nijkamp.

Although the company has its hands full for now on three mega-projects with estimated investment of around $100 billion, future opportunities are not ruled out.

"We are in Iraq to stay for the long term - it might be more upstream, maybe gas," said Nijkamp.

"There is more we can do to add value to Iraq and run a good business that contributes to the reconstruction of the country, including substantial job generation."

(Editing by William Hardy)

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