Iraq opens new refinery, but problems still remain

Iraq’s Ministry of Oil wants to increase its country’s oil capacity by building new refineries.

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By  Stuart Matthews Published  December 5, 2006

Country focus|~|iraq2.jpg|~|The new refinery has a modest capacity of 10 000 barrels per day.|~|In October, Iraq opened a new 10 000-barrel per day (bpd) oil refinery near the city of Najaf.

Although small, the opening of this facility was significant, as it is only the second refinery commissioned since April 2003. Constructed by the Ministry of Oil’s Project Implementation Company, Najaf took just nine months to build and it may be expanded at a later date.

However, Najaf’s impact on domestic product supplies will be limited until the existing sector can be modernised and more refining capacity added. For now, Iraq remains dependent on imports for at least one third of its petroleum product consumption, with the country’s outdated facilities unable to meet demand in a sector further undermined by sabotage, smuggling and lack of security.

The ministry this year unveiled a large-scale plan to expand production of petroleum products with the construction of several new refineries that will be located outside the central region of the country. This is the region most prone to violence, but also the main area of consumption due to its large population. Kirkuk in the north and Basra in the south are where the majority of Iraq’s proven crude reserves are located.

The Ministry of Oil wants to build a 70 000-bpd refinery – Koia – in the northern town of Kowsinjaq and another 150 000-bpd refinery – to be known as Nahrein – near the town of Karbala. In the south, it plans to build a 300 000-bpd plant in the city of Nasiriyah, which would process crude from oil fields around Basra. The ministry has set up a tender committee to run a bidding process for the construction of the new refineries, which are expected to cost US $1 billion. There are also plans for two smaller refineries – each with a capacity of 140 000 bpd – which could be built at a later stage at Al-Nahrein in Al-Hinddia, south of Baghdad.

The Kurdistan Democratic Party said in September that it wanted to build a new refinery. It would be located at the town of Zakho, which is on the Kirkuk-Ceyhan pipeline route, close to the border with Syria and Turkey. It has been reported that an unspecified US company would build the facility and that the design would be completed by the end of this year. Details regarding the construction time and final capacity of the refinery have not been divulged.

Iraq will require foreign assistance to build the new refineries. Unrest since the US-led invasion in 2003, coupled with more than a decade of sanctions, has left the country’s sector
deprived of access to modern technology. The issue of the nationality of companies that would be awarded contracts is of course politically charged, while the security situation may preclude the involvement of some of the usual candidates.
Iraq does have an existing co-operating agreement with the Kuwait Petroleum Company (KPC) covering technical aspects of future refining facilities, but this stops short of any form of joint venture.

The executive chairman of KPC has been quoted as saying: “Our participation will only be technical as we have not been asked to be partners in the [new] refineries.” Iraqi Ministry of Oil officials this year visited Kuwait to see its refinery operations and how they are managed.

According to the US Energy Information Administration, Iraq’s nameplate refining capacity is 700 000 bpd, but full production is only around 600 000 bpd when everything is working properly. Though in effect, most of the country’s eight refineries are operating at anywhere between 50 and 75% of full production.

The largest refinery in Iraq is north of Baghdad at Baiji, with a capacity of 310 000 bpd. The second biggest, at Basra, is capable of producing 150 000 bpd and the third largest is Daura, which produces 110 000 bpd.

In 2005 a US firm, Hydrocarbon Supply and Prokop from the Czech Republic signed contracts worth US $110 million to upgrade Daura, adding another 60 000 bpd of refining capacity.

Despite the ongoing shortage of supplies, a four month oil crisis earlier this year has not recurred. In August 2006, the Iraqi Prime Minister, Nuri Al-Maliki, said that the Ministry of Oil had adopted new measures to address the shortfall of oil supplies and contain sabotage.

The Ministry’s new strategy is centred on the establishment of new oil refineries, while at the same time increasing imports of refined products to meet demand. According to Ministry of Oil data, Iraq is producing around 10 million litres per day of refined petroleum and imports another seven million litres, while demand is 22 million litres. The country produces around 2.4 million bpd of crude.

As well as the dilapidated state of the Iraqi oil sector, sabotage and smuggling continue to undermine the Ministry’s efforts to ensure regular supplies and create the right security environment for construction of new refining capacity.

Sabotage brought oil production in the north of the country to a stop in July this year after an attack on the pipeline linking the Bayji refinery and the Al-Dura refinery in Baghdad. These two refineries account for 80% of Iraq’s current petroleum product output. When operating normally the facilities produced around 20 million litres of gasoline per day, but this is now around 3 million litres per day – as long as operations are not affected by technical problems or further sabotage.

To meet current demand ahead of any new capacity, Iraq is planning to increase imports from neighbouring countries. These are expected to reach 11 million litres per day by the end of 2006, compared to 8 million litres per day in September. However, supplies from its neighbours have not been without their problems. In particular, relations have become strained with Turkey following attacks on the Kirkuk-Ceyhan pipeline. This has forced the Iraqi Ministry of Oil to use truck convoys to take crude out of the country for refining in Turkey then re-import it – making the exercise costly and inefficient.

Other potential suppliers include Syria and Iran; agreements have been signed in principle with both countries. A memorandum of understanding (MOU) has been agreed covering a swap deal whereby 100 000 bpd of Iraqi crude will be refined in Iran, the latter receiving paraffin in exchange. In 2005, the two countries signed another MOU to build a pipeline between Abadan and Basrah.

Under this agreement, Iraq would swap crude with Iran in exchange for a range of refined products. The status of both projects is unclear. A further MOU was signed in August, with Jordan, for the construction of a pipeline between Iraq and Al-Aqabah on the Jordanian coast.

The need to import oil is undermining the already fragile economy. Inflation has been running at more than 50% this year, with a lack of revenues from crude exports and mounting import bills for refined products cited as a major factor for the increase. According to government data, Iraq is expected to spend around over US $2 billion this year on oil imports. Monthly import bills are averaging between US $200-$250 million. Meanwhile, a recent US government report said Iraq has lost up to US $16 billion in oil export revenues over the last two years.

Further costs are due to the government’s high subsidisation of gasoline prices – currently at less than 10 cents per gallon. Attempts to change this system and increase prices have proved deeply unpopular – in December 2005 they led to violent protests. The fuel subsidy system is estimated to cost the Iraqi government US $8 billion per year.

Subsidies have also encouraged the smuggling of oil out of the country – particularly rife around Basra – reducing supplies even further. Iraq ultimately wants to achieve self-sufficiency in petroleum product output. However, to make this happen it will need to ensure sufficient crude supplies and that sector is also operating at way below its potential. The Ministry of Oil is reportedly working on a draft investment law for foreign oil companies to work in the country, which should be completed by the end of this year.

Deputy Prime Minister, Barham Salih, was quoted as saying in October that given appropriate levels of investment, the Iraqi oil sector could be producing as much as 6 million bpd by 2012. Before Iraq’s invasion of Kuwait, output was as much as 3.5 million bpd and is currently around 2 million bpd.
How soon international oil companies will enter Iraq remains to be seen. However – security concerns aside – there is obvious foreign interest. At the end of October, Japan’s ministry of Trade and Industry (MITI) announced a loan of US $17.5 million to upgrade the 150 000-bpd refinery at Basra. Japan’s news followed a visit by Iraq’s Oil Minister Hussain Al-Shahristani, where the two countries discussed other forms of co-operation and investment in Iraq’s oil sector.

Part of the new production from Basra will be exported to Japan. The country is concerned about future oil supplies, given the strong demand from some of its Asian neighbours and after Iran’s decision to remove the majority holding held by Japan’s Inpex Holdings in the Azedegan field. As MITI’s director of oil and gas division, Shin Hosaka, was quoted as saying: “We don’t want to miss a boat that leads to vast oil reserves in Iraq.”||**||

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