Middle East uncertainties

The US and Iran seem to be have stepped back from the brink of armed conflict, after Iran fired more than a dozen missiles at two airbases housing US and coalition troops at Irbil and Al Asad, west of Baghdad, Iraq, on 8 January 2020, according to media reports. Oil prices rose above $70/b, their highest level since mid-September 2019, after the attacks, which came just hours after the burial of General Qasem Soleimani, who was killed the previous week after a US air strike on an airport in Baghdad. Safe haven assets, such as gold and the Japanese yen, also rose shortly after the attacks. Prices subsequently stabilised after markets settled.

However, uncertainties remain after the UK, France and Germany triggered a dispute resolution process a week later that could lead to United Nations sanctions being reimposed on Iran and see the collapse of the 2015 nuclear deal. It is understood the move was prompted by fears that Iran might be less than a year away from possessing the capacity to develop a nuclear bomb. The three countries said they rejected Iran’s argument that it was justified in violating the deal because the US broke the 2015 agreement by pulling out unilaterally in 2018. ‘We have therefore been left with no choice, given Iran’s actions, but to register our concerns that Iran is not meeting its commitments,’ the countries said in a joint statement.

Meanwhile, many oil and gas companies face serious decisions regarding their short and mid-term plans in Iraq, where 5,000 US troops are stationed and tensions remain high, reports Rystad Energy.

Iraqi oil production averaged more than 4.8mn b/d in 2019, of which about 1.8mn b/d stemmed from the country’s domestic and state-owned players. International oil companies (IOCs) were thus responsible for the lion’s share of production – in the region of 3mn b/d. Companies headquartered in China collectively produced more than 1mn b/d, while UK E&P companies produced beyond 630,000 b/d and Russian players had combined average output of around 330,000 b/d, according to the market analyst. PetroChina and BP had the largest working interest production for overseas companies, at 880,000 and 606,000 b/d, respectively. US-based companies collectively produced about 180,000 b/d on average last year, led by ExxonMobil with nearly 106,000 b/d.

‘ExxonMobil spent more than $250mn last year on its Iraqi upstream operations, and we have projected that this number would likely be ramped up by an additional $150mn over the next five years as the company aims to increase production through 2024. However, any spending plans in Iraq are likely to be under review given the current circumstances,’ says Matthew Fitzsimmons, Vice President Oilfield Research at Rystad Energy. He reasons that ExxonMobil could ultimately decide to divert a portion of its Iraqi spending budget to other regions where the company is investing heavily in production growth, such as Guyana’s offshore sector and the US shale industry.

Among the major oil companies in Iraq, BP has emerged as a clear leader. Before the recent flaring of tensions, BP had been expected to allocate about 4% of its annual $25.6bn global oil and gas spending budget towards projects in Iraq. The company has managed an ambitious water injection programme that is helping to boost its output and make BP the third largest producer in Iraq, but the fate of this programme could now be uncertain.  

‘Continued tensions in the region could see BP slow down their water injection programme, and limit the high-side of production for the company and for other international players in southern Iraq,’ says Fitzsimmons.

After spending nearly $1bn in 2019 on its Rumaila North and South project, BP was expected to raise its capex to $1.2bn by 2024. This would have seen BP’s onshore Iraqi oil production eclipse 725,000 b/d by 2024. ‘Putting this into context, that tally would be about 70,000 b/d higher than BP is poised to produce from the US shale sector in 2024, and Iraq would emerge as the company’s largest production of one energy resource type in a single country. Only by combining offshore, onshore and shale in the US, could BP’s working interest production in there outweigh its expected interests in Iraq,’ states Fitzsimmons.

Petroleum Review will be taking a closer look at the Middle East energy sector in its March 2020 issue.