Iraq oil production was higher this year than since before Saddam Hussein took power. The problem: getting it out of the country.
Iraqi oil fields pumped 3.6 million barrels of crude a day on average in February, 50% more than four years ago. That beat—if only for a month—the country’s annual-output record, 3.5 million barrels a day, in 1979 during Iraq’s petroleum heyday.
Companies including BP BP.LN +0.74% PLC, Royal Dutch Shell RDSB.LN +0.36% PLC and ExxonMobil Corp. XOM +0.51% have invested billions of dollars to revive oil fields battered by decades of war, sanctions and neglect. But Iraq’s government has been slow to modernize the infrastructure to move that oil from wells to tankers.
With such ancient pipes and paltry storage, even minor disruptions—routine pump maintenance, say, or a windy day in the Persian Gulf—can force companies to shut down wells. Violent attacks on infrastructure and personnel are still frequent. And bureaucracy and corruption have slowed projects aimed at easing bottlenecks.
Underscoring the industry’s fits and starts, Iraqi production fell last month by some 340,000 barrels a day, a decline of more than 9% from the February high, according to the International Energy Agency. An attack on an oil-export pipeline in northern Iraq was to blame.Iraqi officials often order foreign operators to cut output from some of the country’s biggest fields ahead of bad weather or amid equipment breakdowns, Western executives working in Iraq say. “They don’t have the storage,” says Diane Munro, an oil-market analyst at the IEA. “They have problems at the pumping stations.”
The stakes aren’t just high for Baghdad. A global oil market has quietly grown dependent on rising Iraqi supplies. Coupled with the boom in U.S. shale-oil production and oil-sands output in Canada, growing Iraqi production has helped stabilize prices amid climbing global demand and big disruptions in places like Libya and Syria.
The IEA forecasts that Iraq will be the single largest contributor to global-production growth over the next 20 years. The agency is counting on steep Iraqi growth in its long-range price forecasts, predicting the country will produce about eight million barrels a day by 2035. But it warns that if Baghdad falls short of that target by three million barrels a day, global oil prices will be 10% higher than they would have been.
Growing Iraqi output is also crucial for Baghdad and Washington. Oil sales supply about 90% of Iraq’s budget, making them a key pillar of stability. Last year, Baghdad’s budget deficit hit 6% of gross domestic product after it failed to meet its own export targets and spending on security rose. Sectarian violence is still widespread, and al Qaeda-affiliated groups have seized territory in western Iraq.
After an oil-fueled boom, which reached its peak in the 1970s, Iraq’s petroleum industry suffered decades of war and sanctions. When U.S.-led forces invaded in 2003, they found Iraq’s reservoirs strained by years of underinvestment and mismanagement.
American and Iraqi engineers struggled to boost output amid the violent aftermath of the invasion and U.S. occupation. The industry’s big break came in 2009. BP and China National Petroleum Corp. signed a 20-year deal to boost production at Rumaila, one of Iraq’s biggest oil fields, in an early bidding round. A year later, the country awarded new contracts to revive and expand several other fields, including the giant Majnoon, which Shell and Malaysia’s Petronas are developing jointly.
The challenges were steep. Shell dredged a riverbed to accommodate a dock needed to unload heavy equipment at Majnoon, says Hans Nijkamp, Shell’s Iraq chief. The company also had to remove tons of unexploded ammunition left from years of battle.
Now, many of these efforts are bearing fruit. Shell started production at Majnoon in September, and it’s pumping some 200,000 barrels a day now. Last month, Russia’s OAO Lukoil started output at the West Qurna II oilfield northwest of Basra with initial production of 120,000 barrels a day.
BP quickly increased output at Rumaila. The field now pumps some 1.4 million barrels a day, compared with about one million barrels a day before BP started work in 2010.
“A field [that’s] 60 years old, still flowing naturally for most of the wells, is remarkable,” says Marc Hornbrook, BP’s general manager at the field. “There are only a handful of places like this in the world.”
At BP’s Rumaila operations, the British giant has erected semipermanent trailers and one-story offices for 4,000 foreign workers. Neatly manicured hedgerows and flower beds conceal concrete, emergency shelters for workers in case of a mortar attack. BP has cleared and flattened land nearby for permanent offices, recreation facilities and tracts of luxury villas.
Getting the oil from the field and onto tankers bound for global markets has proved more challenging. The southern port of Basra, a conduit for around 90% of all Iraqi exports, lacks adequate oil-storage facilities.
When bad weather slows down tanker loadings, engineers have to throttle back production at the oil fields. Routine pipeline maintenance on the country’s aging network can also force shutdowns. The government acknowledges the problem and has commissioned 16 new tanks. So far, though, only four have been built.
“We don’t really have enough storage to keep on producing and storing so you can load it to the tankers when the weather is better,” Iraqi Deputy Prime Minister Hussein al-Shahristani, the country’s former oil minister, said at a January press conference.
Over the winter, Shell had to curtail pumping from Majnoon several times because of weather-related port shutdowns, Mr. Nijkamp says. Late last month, Iraqi officials asked BP to cut the Rumaila field’s daily output by about 20%, says Mr. Hornbrook, the BP general manager. He says the Iraqis rarely give reasons for the requests. An oil ministry spokesman didn’t respond to repeated requests for comment.
“It takes days to a matter of weeks to bring all the wells back online depending on how deep the cut was,” Mr. Hornbrook says.
Infrastructure isn’t the only problem. Bureaucracy, corruption and violence are all getting in the way of increasing exports. Last year, oil-field service companies Schlumberger Ltd. and Baker Hughes Inc. temporarily suspended operations in Iraq amid widespread religious protests.
Shell’s Mr. Njikamp says equipment routinely sits for three weeks at a dock near Majnoon waiting for customs clearance. The government is using a “sort of old-fashioned approach” to clearing equipment shipments, he says, involving paperwork that can take weeks to process. Getting foreign workers into Iraq is also onerous, involving a months-long visa process and a blood test.
Corruption also slows things down, industry executives say. The watchdog group Transparency International ranks Iraq at 171 out of 177 countries in its corruption perceptions index, which ranks countries on public-sector corruption based on a composite of expert and business surveys on corruption.
“We have a really old fashioned administrative system that seriously needs to be changed,” says Ali Al Mousawi, a spokesman for Prime Minister Nouri al-Maliki, adding that “the government and the prime minister have, personally, a real will to develop the infrastructure.”
Ali Al Rikabi, the general manager for an Iraqi company that produces pipelines and oil-pumping facilities, says he struggles with immigration and customs hold-ups.
“The nature of oil-pipeline construction is that it is very fast,” says Mr. Rikabi. “If you spent three months getting your people over, how will you do the work? Of course, when you delay the oil pipeline, you delay the operations, and then you delay the exports.”