PROSPECTS FOR IRAQI NATURAL GAS PRODUCTION AND

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 000090 SIPDIS E.O. 12958: DECL: 01/13/2019 TAGS: EPET ENRG EINV PGOV IZ SUBJECT: PROSPECTS FOR IRAQI NATURAL GAS PRODUCTION AND EXPORTS REF: A. 08 BASRAH 84 ¶B. 08 BAGHDAD 3101 ¶C. 08 BAGHDAD 2891 Classified By: CETI Ambassador Marc Wall, reasons 1.4(b,d) ¶1. (C) Summary: Iraq sits on top of the world's tenth largest natural gas reserves. The vast majority of the gas is associated gas suspended in oil reservoirs and separates as the oil is produced; while some of this associated gas is captured for use in power generation and domestic production, the majority is flared. Significant investment to expand the collection of natural gas is only now being planned and will take several years to come on line. The GOI's intention, as PM Maliki recently told the Ambassador, is to direct increased gas production first to domestic use. We estimate that significant natural gas exports may not materialize for five to ten years. End summary. Potentially Abundant Gas Reserves -------------- ¶2. (U) According to DOE's Energy Information Administration, Iraq has 112 trillion cubic feet (tcf) of proven natural gas reserves, the tenth largest in the world. Probable reserves are estimated to easily be double that figure, at 275-300 tcf. The Arab Oil and Gas Directory reports that 70% of the natural gas is associated, 20% is free gas (non-associated in deeper deposits that are largely natural gas) in deposits classified as natural gas fields, and 10% more of free gas is located under oil field salt domes (cap gas). The associated gas reserves are split almost evenly with 55% in developed oil fields and 45% in undeveloped; geographically, 83% of associated gas is located in southern oil fields and only 17% in northern and central fields. Free gas reserves are contained in ten fields: Kormor, Chamchamal, Khashm al-Ahmar, Jeria Pika, and Mansuriyah (located in the northeast); Siba (south of Basrah); and Akkas (in the Western Desert, near the Syrian border). ¶3. (U) Iraq currently does not export natural gas, and the pipeline infrastructure that existed for past export has deteriorated to the point that replacement would probably be more cost-effective than repair. In a November 2006 presentation, MoO reported that, out of a total production of 950 million standard cubic feet per day (mmscf/d) in the southern region, the MoO South Oil Company flares about 600 mmscf/d of associated gas and produces 300-350 mmscf/d. Of the total production, MoO facilities take back 40 mmscf/d, while the Shuaiba, Khor al-Zubair, Najaf, and Hilla power plants use 160 mmscf/d. The Basrah Fertilizer and Petrochemical plant uses an additional 120 mmscf/d. ¶4. (U) In the north, the North Gas Plant processes 175 mmscf/d of associated gas. In addition, the Jambur Dome produces 140 mmscf/d and the Ajeel Dome, 175 mmscf/d of free gas. Thus, total gas production in the north amounts to 490 mmscf/d, of which regional power plants use 250 mmscf/d and the Beiji Fertilizer Plant and MoO facilities use the remainder. Since the MoO presentation, the Dana Gas/Crescent Petroleum consortium has begun producing 75 mmscf/d from the Kor Mor gas field, which would bring the northern total to about 565 mmscf/d. Company representatives project that production will rise to 300 mmscf/d in the first half of ¶2009. This additional production is used to power the new 500 MW Pir Daud power plant. But Export Potential Could Be Limited -------------- ¶5. (C) Despite relatively abundant natural gas reserves, Q5. (C) Despite relatively abundant natural gas reserves, Iraq's propects to export natural gas appear limited. First, export of natural gas is a low GOI priority. During a January meeting, PM Maliki was indifferent when the Ambassador stressed the geopolitical and economic advantages for Iraq in providing natural gas to Turkey and Europe via the planned Nabucco pipeline. Maliki said his first priority was to meet all of Iraq's domestic needs and exporting natural gas was a secondary concern. Independent petroleum analysts generally agree that, in priority order, Iraqi natural gas should be used to maintain well pressure at existing oil fields, as fuel for domestic power generation, as feedstock for industrial output, and lastly for export. Second, substantial investment will be needed to expand BAGHDAD 00000090 002 OF 003 natural gas production and rehabilitate gas processing facilities at a time when low oil prices constrain GOI finances and deter international oil company investment in Iraq. Third, time is required to implement current arrangements and plans to expand gas production. Flare Gas and New Gas Field Development -------------- ¶6. (C) While the recent Heads of Agreement (HOA) signed with Royal Dutch Shell is a good sign of forward progress (reftel),the joint venture company between Shell and the Southern Gas Company remains unformed. Even after the final contract has been signed, Shell will require time to mobilize and build the infrastructure needed to capture all the gas flared in Basrah province. Deputy Minister of Oil Shamma anticipates Shell will require at least five years before the entire infrastructure is built and Iraq has enough excess gas production in the south to begin export. He added that this gas would be most likely exported as LNG from southern Iraq. ¶7. (C) The two gas fields, Akkas and Mansuriya, announced for bid in London on October 13, 2008, will be awarded and signed in June 2009 at the earliest. (Comment: The tight timetable is probably unrealistic, suggesting that this date will slip. End comment.) A June 2009 contract signing suggests meaningful quantities of natural gas can only begin to be produced by late 2010. Technical Directorate DG Sameer Michael stated that the MoO has no plans to export Mansuriya gas. While the MoO does plan to export gas from Akkas, Sameer complained that the Ministry of Electricity had recently advised that it plans to build a large power station in Anbar, which may require the Akkas gas. (Comment: The MoO had already promised as much Akkas gas as they would conceivably produce over the first two years of production to Syria. End comment.) ¶8. (C) Last month Minister of Oil Shahristani announced two new gas fields available for bidding in the second round to be awarded in the fourth quarter of 2009, Siba and Khashm al-Ahmar. The Minister stated Siba will be available to bid independently while Khashm al-Ahmar will be part of a group of fields in Diyala province offered in one package. Siba will present problems because the field stretches across the Iraq-Iran border and currently the two nations do not have unitization agreements to exploit cross-border fields. Khashm al-Ahmar is located in the disputed territories between the KRG and the GOI and in areas where Iraqi Army units and the KRG Peshmerga have had recent stand-offs. Aside from the four fields named in the bid rounds and in the Basrah province, with Shell, the MoO does not have contracts or strong prospects in place to increase gas production or capturing capabilities. Domestic Use before International Export -------------- ¶9. (C) Deputy Oil Ministers Shamma and Motasam point out that some generation currently burning liquid fuel would run more efficiently on gas as it becomes available within the country. They argue that Iraq's first priority should be to meet its domestic needs before exporting gas. The Ministry of Electricity's December 2008 contract to purchase 56 GE gas turbine generators reinforces the deputy ministers' argument: the GE multi-fuel generators can burn liquid fuels, but work most efficiently with natural gas. Several MoO officials have commented that it will be difficult to fuel all the new Qhave commented that it will be difficult to fuel all the new gas turbine generators contracted for by the Ministry of Electricity. (Comment: The plan to fuel these generators is still not complete and they could run on liquid fuels. End comment.) ¶10. (C) Deputy Minister Motasam, a Kurd and member of the PUK party, also noted that the gas from the Kurdish fields, Chamchamal and Kormor, is dedicated to electricity production in the Kurdish regions. When asked if the current negotiations between the MoO and the KRG on potentially exporting KRG crude oil could allow the KRG to export gas, he said that the KRG gas will not be exported. He added that he believed Iraq will not export gas for ten years. Gas for Oil Production -------------- BAGHDAD 00000090 003 OF 003 ¶11. (U) International Oil Companies (IOC) often use gas injection/lift to maintain reservoir pressure as an enhanced oil recovery technique. Reinjecting produced associated natural gas or injecting gas from another source helps maintain reservoir pressure and production rates. Currently the MoO uses water injection to achieve the same result, but gas injection remains a strong option for the future. In discussions with IOCs, many expressed concern over the Shell HOA because in their view it promised the gas produced in Basrah province to Shell and removed gas injection as an option. Gas injection, especially with associated gas, is most often the less expensive option to bringing water in for injection. Utilizing natural gas for this purpose would remove yet more gas from the table for export. Comment -------------- ¶12. (C) Iraq will eventually export natural gas. Ministry of Oil officials have often stated that Iraq desires to become an exporter and they have promised gas periodically to the Syrians, Jordanians and EU. The will to export does not change the fact that the infrastructure on the ground and domestic requirements will not allow large exports for a period of five to ten years. Iraq currently generates less than half the expected future demand for electricity in the country. Natural gas is best suited to fuel most of the current generation capacity the Ministry of Electricity is purchasing. Barring some unforeseeable circumstance, Iraq's natural gas production will continue to grow, but will not exceed domestic demand for five to ten years. CROCKER