London, U.K. – October 2017
Basra Governorate’s Petroleum Cluster (Part A)
The events of the last years have been quite complicated for Iraq because of divisions at the political level, reduced revenues from the sale of crude oil (low oil prices), and the costs of waging a war against the Islamic State of Iraq and Syria (ISIS), which had conquered large swaths of central and western Iraqi territory. Now, thanks to improved results in the war against ISIS, it’s time for Iraq to focus again on developing the country’s struggling economy. In this regard, some months ago, Foreign Minister Ibrahim Al Jaafari declared that Iraq needed a sort of new Marshall Plan, hinting at the American initiative to aid Western Europe after World War II.
At the end of October 2017, the C.W.C. Group, a world-leading events and training producer for the oil, gas and infrastructure industries, will host in Beirut, Lebanon, the Basra Oil Gas and Infrastructure Conference. The conference will be a gathering point for government officials, projects stakeholders, buyers and sellers working in the southern part of Iraq across several industries in three primary business segments: oil and gas, power, and petrochemicals (first segment), infrastructure and construction (second segment), and transport and logistics (third segment).
The timing, the economic topics, and the geographic target of this conference are quite correct. In fact, if, on the one hand, as mentioned above, now, after some positive advances in the war against ISIS, Iraq is obliged to improve and reinforce its economy, on the other hand, it’s almost impossible to develop Iraq’s economy without developing Basra Governorate’s economy. Basra Governorate, whose capital is the city of Basra (Iraq’s third largest urban center), represents the economic powerhouse of the whole Iraqi state. Last April, Iraq’s Parliament voted unanimously to consider Basra Governorate as Iraq’s economic capital. A few data will clarify this concept.
Map of Basra Governorate — Source: Google Maps
OVERVIEW OF BASRA GOVERNORATE’S ECONOMIC CONDITIONS
Today, Iraq’s economy is the world’s most dependent on oil. Approximately 58 percent of the country’s G.D.P. and 99 percent of its exports are hydrocarbons; oil provides more than 90 percent of government revenues and 80 percent of foreign exchange earnings.
In fact, of Iraq’s more than 4.4 million barrels of oil per day (b/d), 85 percent of the barrels are produced under the terms of technical service contracts (T.S.C.s.) by the giant oil fields of southern Iraq. Majnoon, Rumaila, West Qurna (1 & 2), and Zubair are located in Basra Governorate; Halfaya is located in Maysan Governorate. Below there is some additional information regarding Basra Governorate’s giant oil fields.
Basra Governorate’s Giant Oil Fields — Source: A. Bacci’s Elaboration of a Map by The Oil and Gas Year (TOGY)
- Majnoon — Shell (45%), Petronas (30%), and Iraq’s state-run Missan Oil Company (25%). Production: 235,000 b/d. Estimated oil in place: 12,6 billion barrels. A.P.I. gravity: 19 to 33 degrees.
- Rumaila — BP (47.6%), China National Petroleum Corporation (C.N.P.C., 46.4%), and Iraq’s State Organization for Marketing of Oil (SOMO, 6%). Production: 1.45 million b/d. Estimated oil in place: 17 billion barrels. A.P.I. gravity North Rumaila: 26.3 to 48 degrees. A.P.I. gravity South Rumaila: 12 to 45.9 degrees.
- West Qurna 1 — Exxon Mobil (33%), PetroChina (25%), Shell (20%), Iraq’s state-run Oil Exploration Company (12%) and Pertamina (10%). Production: 470,000 b/d. Estimated oil in place: 8.7 billion barrels. A.P.I. gravity: 22.5 to 46 degrees.
- West Qurna 2 — Lukoil (75%) and Iraq’s state-run Basra Oil Company (B.O.C., 25%). Production: 413,000 b/d. Estimated oil in place: 12.9 billion barrels. A.P.I. gravity: 22.5 to 46 degrees.
- Zubair — Eni (32.81%), Iraq’s state-run Missan Oil Company (25%), Iraq’s state-run Basra Oil Company (B.O.C., 23.44%), Korea Gas Corporation (18.75%). Production: 400,000 b/d. Estimated oil in place: 4.5 billion barrels. A.P.I. gravity: 27.5 to 40 degrees.
Unquestionably, the bulk of Iraq’s proven oil reserves is in the south of the country and, in specific, 60 percent of all Iraq’s proven oil reserves should be located in Basra Governorate), while more than 3 million barrels a day of oil are exported from Basra Governorate. Two types of crude oil are exported: Basra Light Oil, which has an A.P.I. gravity of 29.7 degrees and sulfur content at 2.85 percent and Basra Heavy Oil, which has an A.P.I. gravity of 23.7 degrees and sulfur content at 4.12 percent. The Basra Oil Company (B.O.C., previously known as South Oil Company, S.O.C.) has its headquarters in Basra. It’s the national Iraqi company in charge of the oil development in southern Iraq.
As Wood Mackenzie, a U.K. consulting firm, reported, Iraq’s T.S.C.s relating to the southern governorates since 2009 have added 2.3 million b/d (70 percent of the added barrels are growth, while the remaining 30 percent of the barrels are offsetting baseline decline). Indeed, this increase is an important achievement, but Iraq is currently still quite far from its plateau production target (P.P.T.) of 8 million b/d of crude oil production, which has to be achieved primarily through the expansion of the oil fields located in southern Iraq.
The Oil Production of the Oil Fields Located in Basra Governorate — Source: A. Bacci’s Elaboration of a chart by Wood Mackenzie
One of the reasons for the delay in increasing oil production in southern Iraq is the very slow development of the Common Seawater Supply Project (C.S.S.P.) in Basra Governorate. In practice, to obtain a production increase as high as the one envisaged by the P.P.T., the southern oil fields require substantial increases in natural gas and/or water injection to maintain the reservoir pressure. B.O.C. is undertaking the C.S.S.P., a project that initially should have been able to provide the southern oil fields with around 12 million b/d of desalinated water to reinject into the oil fields. The plan is to treat seawater from the Persian Gulf and to transport it via pipeline to the oil fields. The project is estimated to cost $4 to $6 billion. But this project is not progressing according to the planned timetable. Currently a scaled-down version (2.5 million b/d of water) of the project is in the works.
With reference to natural gas, at the end of 2015, Iraq had total proven natural gas reserves of 3,7 trillion cubic meters of natural gas. Approximately 70 percent of the country’s proven natural gas reserves are associated gas located in southern Iraq. In 2015, Iraq produced 6.1 million tons of oil equivalent of natural gas—this value is expected to more than double by 2021. The gas produced is primarily used for power generation, but around two thirds is still flared. Basra Gas Company (B.G.C.), which is a joint venture between Iraq’s South Gas Company (51 percent), Shell (44 percent), and Mitsubishi (5 percent) was established in 2013 with the specific goal of collecting and treating the until-then-flared gas from Rumaila, West Qurna 1, and Zubair—the cost of this agreement, which will last for 25 years, is $17 billion. This project is the largest flare-reduction program in the world. The processed associated gas is transformed into dry gas for power generation, liquified petroleum gas (L.P.G., i.e., propane and butane) for domestic use, and condensates for road fuels. The company is authorized to export the gas (in the form of liquified natural gas, L.N.G.) once the local demand is satisfied. Basra Governorate will need to build more gas-fired power plants in order to absorb all the produced associated gas.
Source: Basra Gas Company
Basra’s refinery has a nameplate capacity of 210,000 b/d out of something more than 1.1 million b/d in the whole Iraq (including Iraqi Kurdistan). But, according to the U.S. Energy Information Administration (E.I.A.), it is more realistic to assume an effective capacity of 135,000 b/d. There are now plans concerning the construction of a second refinery in Basra with a refining capacity of 300,000 b/d. Several companies have expressed interest in this project.
Iraq, as many other MENA countries, needs to satisfy a relevant increase in the demand for electrical power. Last summer, with temperatures touching 52 Celsius degrees in Basra Governorate, as people used their air-conditioners, demand for electricity soared so consistently that blackouts were quite ordinary. Recently, Japan International Cooperation Agency (JICA) has signed a loan agreement with the Republic of Iraq in Baghdad to provide a Japanese official development assistance (ODA) loan to help Iraq retrofit the Al Hartha Thermal Power Plant (feedstock: gas and oil) in Basra Governorate, which had been built in the 1970s by a Japanese company and had been equipped with four 200 MW units, two of which have not been working since the Fist Gulf War.
So, today, in Basra Governorate electricity is generated by the following powerplants:
- The Al Hartha Thermal Power Plant (feedstock gas and oil, two 200 MW turbines)
- The Najibiyah Thermal Power Plant (feedstock gas and fuel oil, two 100 MW turbines)
- The Al Harta Gas Power Plant (six 20.4 MW turbines)
- The Khor Al Zubair Gas Power Plant (four 63 MW turbines and two 125 MW turbines)
- The Najibiyah Gas Power Plant (four 125 MW turbines)
- The Shuaiba-2 Gas Power Plant (two 75 MW turbines)
- The Rumaila Gas Power Plant (five 292 MW turbines)
And since the beginning of 2016, natural gas from the Majnoon oil field is contributing some fuel to Iraq’s power grid, producing in this way around 300 MW. In addition, Iran will soon supply 5 million cubic meters of natural gas per day via a pipeline to Basra Governorate. The pipeline runs from the city of Ahvaz, the provincial capital of Khuzestan, to Khorramshahr and then to the border between Iran and Iraq.
Indeed, the above data concerning the power plants show that there is some infrastructure to generate electricity, but this infrastructure has to be improved and expanded consistently. An additional problem is that there is not enough natural gas to deliver to the present gas power plants. And this is the reason for the future natural gas imports from Iran into Basra Governorate with the specific goal of feeding gas to the Rumaila Gas Power Plant, the Najibiyah Gas Power Plant, and the Shatt Al Basra Power Plant. The latter is still a project relating to the construction of a gas power plant with 10 turbines capable of producing 1,250 MW.
Additional activity in Basra Governorate is centered around the petrochemical industry. The State Company of Fertilizers (S.C.F.) has capabilities concerning the production of sulfuric acid, ammonia, urea, and ammonia sulfate. The State Company for Petrochemical Industries (S.C.P.I.) is in the business of manufacturing high quality high density polyethylene, low density polyethylene, polyvinyl chloride (P.V.C.), polyethylene master batch (colored and black), polyvinyl chloride compounding, agricultural film, and other chemical products. Finally, Basra Governorate is located in a fertile agricultural region, which produces rice, maize, barley, pearl millet, wheat and dates and which raises livestock.
Basra Governorate is Iraq’s only access to the sea. The port of Basra is Iraq’s main port, but it doesn’t have deep-water access, which has instead the port of Um Qasr (22 platforms) lying south of the city of Basra on the Khawr az-Zubayr Waterway. The presence of the ports has transformed the governorate in an important center for trade, transportation, and storage.
Al Basrah Oil Terminal (ABOT) and Khawr al ‘Amīyah Oil Terminal (Kaaot) are located 31 miles southeast of the Al-Faw Peninsula in the Persian Gulf. The two loading terminals and three single-point moorings (S.P.M.s) plus a spare buoy, provide the principal point of export for Iraq’s crude oil, but they are operating well below capacity as a consequence of three wars and scarce maintenance. In January 2017, the Ministry of Oil announced that it intended to double the crude loading capacity of Kaaot, which is the smaller terminal of the two, to 1.2 million b/d in order to permit the loading Suezmax vessels. Instead, ABOT alone, without considering the S.P.M.s can transfer up to 3 million b/d.
Source: Iraq’s State Organization for Marketing of Oil (SOMO)
The city of Basra also hosts the University of Basra, which is a large public university comprising all the most important types of faculties and some research centers linked to Basra’s economic activities, and Basra International Airport, which is Iraq’s second largest international airport and serves primarily Middle Eastern destinations and some Asian destinations.
The conditions of the general infrastructure in the governorate are poor. These conditions are common across all sectors. In specific, the oil sector infrastructure is still aging as witnessed by the I.O.C.s that returned to Iraq after the first licensing round in 2008-09. Only recently did Iraq obtain some improvements such as expanding onshore pumping and storage infrastructure in the south to increase crude production, expanding offshore loading with capacity doubling to 4.5 million b/d of crude thanks to single-point moorings, building new tie-in pipelines and pipelines to the loading terminals of the Al-Faw Peninsula for the fields West Qurna 2 and Majnoon (Basra Governorate), Halfaya (Maysan Governorate), Missan (Maysan Governorate), Gharraf (Dhi Qar Governorate), and Badra (Wasit Governorate).
Poor infrastructure is a big limit to the economic development of the governorate. In the past, the Basra region had been an important battleground during the Iran-Iraq war and during the two Gulf Wars. All these wars have damaged the economic infrastructure and have left, scattered throughout the region, a host of mines and unexploded ordnance, which, as a result, necessarily slow the economic development of the region. In addition to the three mentioned wars, after the 2003 invasion, the governorate one more time became a center exposed to violence with militia conflicts and resistance acts against the Multinational Force and the new Iraqi government. At that time, both simple criminality and sectarian violence increased. Only after 2008, was it possible to recreate a sort of peaceful environment in the governorate.
The governorate of Basra, but this is a recurrent condition throughout Iraq, is hyper-urbanized with 80 percent of its population (4,7 million people live in Basra Governorate) living in the few urban centers present in the governorate. In 2017, the metropolitan area of the city of Basra has an estimated population of 2.8 million. Hyperurbanization means a large and growing housing deficit in all the major Iraqi centers, Basra included. This deficit has been compounded by population growth, the pace of urbanization, and the inflows of internally displaced people.
According to both the International Monetary Fund (I.M.F.) and the World Bank, in 2016 Iraq’s per capita G.D.P. was around $4,620 per year. The United Nations estimates that at least 10 million Iraqis need humanitarian aid. Iraq’s 18 governorates are divided in districts and sub-districts. And contrarily to expectations, the sub-districts with the highest poverty rate are in the southern governorates despite the presence under the ground of the hydrocarbon reserves.
Iraqi Minister of Planning Salman al-Jumaili last spring declared that, apart from areas directly touched by the war against ISIS, the last survey in Iraq in early 2015 showed that the level of poverty was 31 percent in the southern provinces, 17 percent in the center, 12 percent in Baghdad, 17 percent in Diyala and Kirkuk, and 13 percent in the Kurdish regions. In practice, the percentage of people living under the poverty line of $2.5 per day in the governorate is higher than the national average.
THE LOGIC BEHIND THE ECONOMIC DEVELOPMENT OF BASRA GOVERNORATE
So, if Basra Governorate doesn’t continue to develop, there will be serious problems throughout the whole Iraq—and the country’s survivability could be at stake. In brief, this southern governorate is the only one that can consistently provide Iraq with the economic resources necessary to the federal government in order to then reconstruct part of the country with the specific goal of assisting the recreation of a fabric of Iraqi small and medium enterprises (S.M.E.s). For instance, before ISIS’s capture, the city of Mosul boasted an interesting S.M.E. fabric capable of producing medicines and medical equipment, sugar, yogurt, clothes and cotton textiles, pre-cast concrete elements, furniture, and leather products.
Indeed, as confirmed by the best textbooks of economics, Iraq should try to diversify its economy. On paper, this goal is always the best outcome because a diversified economy permits a country to have an improved resiliency in the face of difficulties in one specific economic sector. Diversifying a portfolio of investments reduces the implied risk. This concept is true in relations to private investors, companies, and countries as well. And to confirm this point, it’s good to underline that presently, on the basis of Iraq’s current economic structure, low oil prices immediately mean that the federal government will experience a consistent reduction in its revenues, which later on will translate into fiscal budget troubles.
But, is it easy to diversify the economy of a country? The answer is no. Petroleum literature well shows how diversifying an economy primarily relying on the export of commodities is never an easy task. And, if a positive result is obtained, it normally takes several years. Norway, a country in 6th position in June 2016 in the World Bank’s Ease of Doing Business, a business ranking relating to several parameters, shows a still quite unbalanced export sector. And in the Middle East, Saudi Arabia, OPEC’s most important member with around 10 million b/d of crude oil production, has been trying to diversify its economy since the 1970s through 10 development plans, but it has obtained unsatisfying results.
What Did the Saudi Arabia Export in 2014? — Source: The Atlas of Complexity, Harvard University
Iraq’s National Investment Commission (N.I.C.)—the body responsible for all the national policies for investment and the promoter, facilitator, monitor, and policy advisor for investments in Iraq—correctly underlines that Iraq needs a more diversified economy via the increase in the number of Iraqi S.M.E.s. The idea is that more S.M.E.s will enlarge the job market, which in turn will provide the federal government with an enlarged and more stable tax base. And if Iraq wants to increase the number of its S.M.E.s, it has to attract more foreign direct investment (F.D.I.). The problem is, and this is especially true (and quite normal) in a country that is at least partially exiting a conflict, the presence of a high level of corruption.
International oil companies (I.O.C.s) and foreign national oil companies (N.O.C.s) can deal with corruption problems because the former often have deep pockets while the latter have big pockets often coupled with a political agenda. In other words, in their operations, companies with large shoulders can better factor in all the additional costs linked to corruption. But, to an Iraqi investor, the costs and the risks involved in supporting a small or a medium enterprise are too high if they are not at least partially covered by the back-up of F.D.I. On top of this, Iraqi banks don’t easily lend financing resources to local businesses because the local guarantees are insufficient.
Summing up, while the goal of diversifying Iraq’s economy should stay as a long-term goal on the radar of Iraq’s institutions, right now it’s of paramount importance the promotion of the economic development of Basra Governorate. This development of Basra Governorate will then be instrumental in the long-term diversification of Iraq’s economy. This two-step process is necessary especially now that Iraq requires a continuous flow of revenues to redistribute to its young population. In fact, almost 40 percent of the Iraqi population is aged between 0 to 14 years. In summary, if the country won’t be able to provide the young Iraqi citizens who will enter the job market with real jobs, it should at least try to provide them with some economic assistance, which under the current circumstances could only come from the oil revenue.
And, it’s then important to understand that, as it has been studied by the World Bank, youth exclusion is probably the main factor favoring youth radicalization and recruitment by militias and violent groups. Most Iraqi youths joined ISIS because they had no realistic life opportunities other than that in order to improve their social standing—most youths earn a week salary of less than $22, while a very basic rent costs around $180 per month.