SSIQ02 20110401 Iraq Oil and Gas... · Q2 2011 oil & Gas RepoRt issN 1748-4030 published by Business Monitor international ltd. iRaQ INCLUDES BMI'S FORECASTS

Q2 2011www.businessmonitor.com

oil & Gas RepoRt

issN 1748-4030published by Business Monitor international ltd.

iRaQINCLUDES BMI'S FORECASTS

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IRAQ OIL & GAS REPORT Q2 2011 INCLUDES 10-YEAR FORECASTS TO 2020

Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2011

Iraq Oil & Gas Report Q2 2011

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary ......................................................................................................................................... 7

SWOT Analysis ................................................................................................................................................. 9

Iraq Political SWOT .............................................................................................................................................................................................. 9 Iraq Economic SWOT .......................................................................................................................................................................................... 10 Iraq Business Environment SWOT ....................................................................................................................................................................... 11

Iraq Energy Market Overview ........................................................................................................................ 12

Global Oil Market Outlook ............................................................................................................................. 16

Balancing Act ........................................................................................................................................................................................................... 16 Oil Price Forecasts ................................................................................................................................................................................................... 17

Table: Oil Price Forecasts ................................................................................................................................................................................... 18 Short-Term Demand Outlook .................................................................................................................................................................................... 18

Table: Global Oil Consumption (000b/d) ............................................................................................................................................................ 19 Short-Term Supply Outlook ...................................................................................................................................................................................... 20

Table: Global Oil Production (000b/d)................................................................................................................................................................ 21 Longer-Term Supply And Demand ............................................................................................................................................................................ 21

Regional Energy Market Overview ............................................................................................................... 23

Oil Supply And Demand ............................................................................................................................................................................................ 23 Table: Middle East Oil Consumption (000b/d) .................................................................................................................................................... 24 Table: Middle East Oil Production (000b/d) ....................................................................................................................................................... 25

Oil: Downstream ...................................................................................................................................................................................................... 26 Table: Middle East Oil Refining Capacity (000b/d) ............................................................................................................................................. 26

Gas Supply And Demand .......................................................................................................................................................................................... 27 Table: Middle East Gas Consumption (bcm) ....................................................................................................................................................... 27 Table: Middle East Gas Production (bcm) .......................................................................................................................................................... 27

Liquefied Natural Gas............................................................................................................................................................................................... 28 Table: Middle East LNG Exports/(Imports) (bcm) ............................................................................................................................................... 28

Business Environment Ratings .................................................................................................................... 29

Middle East Region ................................................................................................................................................................................................... 29 Composite Scores................................................................................................................................................................................................. 29 Table: Regional Composite Business Environment Rating .................................................................................................................................. 29 Upstream Scores .................................................................................................................................................................................................. 30 Table: Regional Upstream Business Environment Rating.................................................................................................................................... 30 Iraq Upstream Rating – Overview ....................................................................................................................................................................... 31 Iraq Upstream Rating – Rewards ........................................................................................................................................................................ 31 Iraq Upstream Rating – Risks .............................................................................................................................................................................. 31 Downstream Scores ............................................................................................................................................................................................. 32 Table: Regional Downstream Business Environment Rating ............................................................................................................................... 32 Iraq Downstream Rating – Overview ................................................................................................................................................................... 33 Iraq Downstream Rating – Rewards .................................................................................................................................................................... 33 Iraq Downstream Rating – Risks ......................................................................................................................................................................... 33

Business Environment .................................................................................................................................. 34

Legal Framework ...................................................................................................................................................................................................... 34



Infrastructure ............................................................................................................................................................................................................ 35 Labour Force ............................................................................................................................................................................................................ 36 Foreign Investment Policy ........................................................................................................................................................................................ 37

Tax Regime .......................................................................................................................................................................................................... 38 Security Risk ........................................................................................................................................................................................................ 38

Industry Forecast Scenario ........................................................................................................................... 40

Oil And Gas Reserves ............................................................................................................................................................................................... 40 Oil Supply And Demand ............................................................................................................................................................................................ 41 Gas Supply And Demand .......................................................................................................................................................................................... 42 LNG .......................................................................................................................................................................................................................... 43 Refining And Oil Products Trade .............................................................................................................................................................................. 43 Revenues/Import Costs.............................................................................................................................................................................................. 44

Table: Iraq Oil And Gas – Historical Data And Forecasts ................................................................................................................................. 45 Other Energy ............................................................................................................................................................................................................ 46

Table: Iraq Other Energy – Historical Data And Forecasts ................................................................................................................................ 46 Key Risks To BMI’s Forecast Scenario ..................................................................................................................................................................... 46 Long-Term Oil And Gas Outlook .............................................................................................................................................................................. 46

Oil And Gas Infrastructure ............................................................................................................................ 47

Oil Refineries ............................................................................................................................................................................................................ 47 Table: Refineries In Iraq ...................................................................................................................................................................................... 49

Oil Terminals/Ports .................................................................................................................................................................................................. 49 Oil Pipelines ............................................................................................................................................................................................................. 50 LNG Terminals ......................................................................................................................................................................................................... 51 Gas Pipelines ............................................................................................................................................................................................................ 52

Macroeconomic Outlook ............................................................................................................................... 53

Table: Iraq – Economic Activity .......................................................................................................................................................................... 55

Competitive Landscape ................................................................................................................................. 56

Executive Summary ................................................................................................................................................................................................... 56 Table: Key Players .............................................................................................................................................................................................. 56

Overview/State Role .................................................................................................................................................................................................. 57 Government Policy .............................................................................................................................................................................................. 57 Hydrocarbons Law .............................................................................................................................................................................................. 58 Kurdistan ............................................................................................................................................................................................................. 60 Licensing Rounds ................................................................................................................................................................................................. 62 Table: Fields Licensed Under First Bidding Round (June 2009) ......................................................................................................................... 62 Table: Fields Licensed Under Second Bidding Round (December 2009) ............................................................................................................ 64 Table: Fields Licensed Under Third Bidding Round (October 2010) .................................................................................................................. 66 International Energy Relations ............................................................................................................................................................................ 68

Company Monitor ........................................................................................................................................... 71

China National Petroleum Corporation (CNPC) – Summary .............................................................................................................................. 71 Royal Dutch Shell – Summary ............................................................................................................................................................................. 72 Addax Petroleum – Summary ............................................................................................................................................................................... 73 DNO International – Summary ............................................................................................................................................................................ 73 Heritage Oil – Summary ...................................................................................................................................................................................... 74 Gulf Keystone Petroleum – Summary .................................................................................................................................................................. 75 BP – Summary ..................................................................................................................................................................................................... 76 Eni – Summary ..................................................................................................................................................................................................... 76



ExxonMobil – Summary ....................................................................................................................................................................................... 77 Lukoil – Summary ................................................................................................................................................................................................ 78 Gazprom Neft – Summary .................................................................................................................................................................................... 78 MOL – Summary .................................................................................................................................................................................................. 79 Pearl Petroleum – Summary ................................................................................................................................................................................ 79 Türkiye Petrolleri Anonim Ortakligi (TPAO) – Summary ................................................................................................................................... 80 Marathon Oil – Summary .................................................................................................................................................................................... 80 Murphy Oil – Summary ........................................................................................................................................................................................ 80 Repsol YPF – Summary ....................................................................................................................................................................................... 80 Others – Summary ............................................................................................................................................................................................... 81 Oil Services Companies – Summary .................................................................................................................................................................... 82

Oil And Gas Outlook: Long-Term Forecasts ............................................................................................... 84

Regional Oil Demand ............................................................................................................................................................................................... 84 Table: Middle East Oil Consumption (000b/d) .................................................................................................................................................... 84

Regional Oil Supply .................................................................................................................................................................................................. 85 Table: Middle East Oil Production (000b/d) ....................................................................................................................................................... 85

Regional Refining Capacity ...................................................................................................................................................................................... 86 Table: Middle East Oil Refining Capacity (000b/d) ............................................................................................................................................. 86

Regional Gas Demand .............................................................................................................................................................................................. 87 Table: Middle East Gas Consumption (bcm) ....................................................................................................................................................... 87

Regional Gas Supply ................................................................................................................................................................................................. 88 Table: Middle East Gas Production (bcm) .......................................................................................................................................................... 88

Iraq Country Overview ............................................................................................................................................................................................. 88 Methodology And Risks to Forecasts ........................................................................................................................................................................ 89

Glossary Of Terms ......................................................................................................................................... 90

BMI Methodology ........................................................................................................................................... 91

How We Generate Our Industry Forecasts .......................................................................................................................................................... 91 Energy Industry ................................................................................................................................................................................................... 91 Cross checks ........................................................................................................................................................................................................ 92 Oil And Gas Ratings Methodology....................................................................................................................................................................... 92 Table: Structure Of BMI’s Oil & Gas Business Environment Ratings ................................................................................................................. 94 Indicators ............................................................................................................................................................................................................. 95 Table: BMI’s Upstream Oil & Gas Business Environment Ratings – Methodology ............................................................................................ 95 Table: BMI’s Downstream Oil & Gas Business Environment Ratings – Methodology ........................................................................................ 96 Sources ................................................................................................................................................................................................................ 97





Executive Summary

BMI forecasts that Iraq will account for 10.27% of Middle East (ME) regional oil demand by 2015, while

providing 11.56% of supply. Middle East regional oil use rose to an estimated 7.40mn barrels per day

(b/d) in 2010. It should average 7.70mn b/d in 2011 and then climb to around 8.70mn b/d by 2015.

Regional oil production was 22.83mn b/d in 2001 and averaged an estimated 24.90mn b/d in 2010. After

an estimated 25.21mn b/d in 2011, it is set to rise to 27.24mn b/d by 2015. Oil exports are growing

steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was

exporting an average of 17.85mn b/d. This total eased to an estimated 17.50mn b/d in 2010 and is forecast

to reach 18.54mn b/d by 2015. Iraq has the greatest export growth potential, followed by Qatar.

In terms of natural gas, the region consumed an estimated 392bn cubic metres (bcm) in 2010, with

demand of 482bcm targeted for 2015, representing 23.0% growth. Production of an estimated 467bcm in

2010 should reach 612bcm in 2015 (+31.0%), which implies net exports rising to 130bcm by the end of

the period. In 2010, Iraq consumed an estimated 1.28% of the region’s gas, with its market share forecast

at 2.39% by 2015. It will have contributed 1.07% to estimated 2010 regional gas production and by 2015

could account for 2.94% of supply.

The 2010 full-year outturn was US$77.45/bbl for OPEC crude, which delivered an average for North Sea

Brent of US$80.34/bbl and for West Texas Intermediate (WTI) of US$79.61/bbl. The BMI price target of

US$77 was reached thanks to the early onset of particularly cold weather, which drove up demand for and

the price of heating oil during the closing weeks of the year.

We set our 2011 supply, demand and price forecasts in early January, targeting global oil demand growth

of 1.53% and supply growth of 1.91%. With OECD inventories at the top of their five-year average range,

we set a price forecast of US$80/bbl average for the OPEC basket in 2011. The unprecedented wave of

popular uprisings in the Middle East and North Africa (MENA) that followed the removal of Tunisian

President Ben Ali on January 14 has obviously fundamentally altered our outlook, particularly since the

unrest spread to Libya in mid-February.

Taking into account the risk premium that has been added to crude prices in response to actual and

perceived threats to supply, we have now raised our benchmark OPEC basket price forecast from US$80

to US$90/bbl for 2011 and from US$85 to US$95/bbl for 2012. Based on our expectations for

differentials, this gives a forecast for Brent at US$94/bbl in 2011 and US$99/bbl in 2012. We have kept

our long-term price assumption of US$90/bbl (OPEC basket) in place for the time being while we wait to

see what path events in the MENA region take. We have also retained our existing supply and demand

forecasts until the scheduled quarterly revision at the start of April.



Iraqi real GDP rose by an estimated 2.9% in 2010, and we are forecasting average annual growth of 5.7%

in 2010-2015. We expect oil demand of an estimated 700,000b/d in 2010 to rise to 893,000b/d in 2015,

depending on investment in infrastructure and the development of domestic production. International oil

companies (IOCs) have signed production sharing agreements (PSAs) with the state, which should help

accelerate the growth in oil output. Based on the efforts of national oil industry bodies, we are forecasting

average oil production of 2.54mn b/d in 2011. December 2010 production was 2.44mn b/d, with 1.92mn

b/d of exports. Further field reactivation work and the initial IOC efforts point to output of an estimated

3.15mn b/d in 2015. The government has much more ambitious targets, aiming for 0.5mn b/d annual

output expansion and a long-term goal of 6.0mn b/d. However, there are major risks involving attacks on

oil installations, Iraq’s OPEC entitlement and the success of new energy policy in stimulating IOC

investment.

Between 2010 and 2020, we are forecasting an increase in Iraqi oil production of 69.4%, with crude

volumes rising steadily to 4.15mn b/d by the end of the 10-year forecast period. Oil consumption between

2010 and 2020 is set to increase by 62.9%, with growth slowing to an assumed 5.0% per annum towards

the end of the period and the country using 1.14mn b/d by 2020. Gas production is expected to climb to

42bcm by the end of the period. With 2010-2020 demand growth of 281%, export potential should rise to

23bcm by 2020. Details of the BMI 10-year forecasts can be found in the appendix to this report.

Iraq ranks fourth, just ahead of Iran, in BMI’s composite Business Environment ratings (BERs) table,

which combines upstream and downstream scores. It occupies a respectable third place in BMI’s updated

upstream Business Environment ratings, but lags Qatar and the UAE by five points and three points

respectively. The country’s score benefits from exceptional oil and gas output growth potential, a

substantial hydrocarbons reserves base and the region’s highest reserves-to-production ratio (RPR).

Current government control of the upstream industry and a high level of country-specific risk prevent Iraq

from achieving a better overall score. Iraq is at the bottom of the league table in BMI’s downstream

Business Environment ratings, with a few high scores but further near-term progress up the rankings

unlikely. It is ranked just behind Kuwait, in spite of a reasonable showing in terms of oil demand, oil and

gas demand growth and likely refining capacity expansion.



SWOT Analysis

Iraq Political SWOT

Strengths Formation of a government after nine months of political gridlock increases the likelihood of approving key pieces of legislation.

Stated US commitment to political reconstruction over the medium term, backed by the UN and Arab states.

Weaknesses Inclusion of many political parties in the coalition will slow policy formation and enactment.

Fractured polity, with tribal groupings playing an important role in settling disputes and maintaining law and order.

Widespread opposition to the constitution among the Sunni minority.

Provincial opposition to oil and gas contracts awarded by Baghdad.

Slow policy-making process, as evidenced by parliament's ongoing failure to pass a national hydrocarbon law.

Opportunities The new constitution will strengthen democratic participation at the local level.

Most main political parties are currently committed to the political process.

Prime Minister Nouri al-Maliki's National Reconciliation Plan offers an amnesty for some insurgents, aimed at reducing the number of hardcore anti-government fighters.

Threats Widespread availability of small arms throughout the country.

Lack of consistently enforced rule of law, with the possibility of individual militias violently opposing coalition and Iraqi government forces.

Domestic and international perceptions of the legitimacy of US military, political and diplomatic presence in Iraq.

Risk of clandestine intervention by neighbouring states.



Iraq Economic SWOT

Strengths Iraq has among the largest proven oil reserves and proven gas deposits in the world.

Technical expertise in oil extraction should result in large increases in oil production as and when security improves.

Weaknesses Government employees have very little experience of an open economy, and technical expertise is limited.

The 2011 draft budget relies on highly optimistic assumptions which may not play out, resulting in greater probability of higher-than-expected fiscal deficits.

After a decade of sanctions and international isolation, the non-oil sector is decrepit.

Opportunities The economy will be liberalised over the medium term, enabling relatively free trade into most sectors.

All sectors (excluding hydrocarbons and real estate) permit 100% foreign ownership.

High levels of reconstruction aid will fund investment projects over the medium term, although total flows are uncertain.

The government is seeking foreign investment for many different types of infrastructure projects.

The 80% forgiveness agreed by Paris Club states should make debt sustainable over the medium term.

Threats Poor security environment increases insurance premiums for workers.

Uncertainty regarding the transition increases risk premiums for long-term investments.

Sabotage and smuggling frequently disrupt oil exports.



Iraq Business Environment SWOT

Strengths Any Iraqi government is likely to be pro-liberalisation, although the pace of reform will be slower than some in the US administration hope.

Iraq has the third-largest proven oil reserves and 10th-largest proven gas deposits in the world.

Much of Iraq is unexplored and the range of possible upside is 45-100bn additional barrels.

Widespread unemployment makes for a cheap and readily available labour force.

Weaknesses The success of the current political process remains uncertain at present, making any investment something of a gamble.

Low capacity to manage reconstruction projects increases the risk of corruption.

The legal framework is extremely complex, taking elements from a number of different sources across different eras and political regimes.

There are no current provisions for the recognition or enforcement of non-Arab foreign civil judgements or arbitral awards although Iraq does have civil remedies for domestic business disputes.

Opportunities US reconstruction funds of US$18.4bn are likely to be augmented by assistance from other states and multilaterals over the medium term.

Prior to the Iraqi invasion of Kuwait in 1990, the country was producing an average 2.84mn b/d – with peak output exceeding 3.5mn b/d.

The Iraqi Stock Exchange (ISE) is hoping to automate its activities, increase market capitalisation by 25-50% and attract at least 20 more companies to list, which should boost private sector growth. The government is also drafting a new securities law.

Iraq has substantial and under-utilised natural gas resources, with reserves put at a minimum of 3,170bcm – or 2% of the world total. As with oil, there is clear scope for a substantial upgrade once security and political conditions allow widespread exploration and development to resume.

Threats The targeting of foreign civilian contractors by anti-coalition forces.

Insecurity weighs on costs. US officials estimate that 25% of reconstruction funds have been spent on providing security for projects.

Nationality restrictions on the participation of firms for US-funded projects.

OPEC membership issues and any delays to IOC investment under the new production agreements could result in slower-than-expected output recovery.



Iraq Energy Market Overview

While end-2009 proven oil reserves are estimated at 115bn bbl (based on the June 2010 BP Statistical

Review of World Energy), much of Iraq is unexplored and the range of possible upside is 45-100bn

additional barrels. The government in October 2010 announced a 25% upwards revision to its oil

reserves, to 143bn bbl, possibly in preparation to argue for a higher production entitlement once it rejoins

the OPEC quota system. However, December 2010’s Oil & Gas Journal (OGJ) reserves survey continues

to suggest a total of 115bn bbl. Iraq also has substantial and underutilised natural gas resources, with

reserves put at a minimum of 3,170bcm – or 2% of the world total. As with oil, there is clear scope for a

substantial upgrade once exploration and development activity resumes. In spite of plans for a rapid

return of Iraqi production to pre-war levels, the country was, in December 2010, pumping 2.44mn b/d, of

which some 1.92mn b/d was exported.

Foreign developers have succeeded in boosting output at some of Iraq's largest southern oil fields,

enabling them to start earning profits earlier than expected. The below-ground success will help push Iraq

closer to its production goal of 3mn b/d by end-2011.

Crude oil exports from Iraqi Kurdistan will resume in February 2011, according to a government

spokesperson cited by Reuters. Ali al-Dabbagh said that a deal had been reached between the Kurdistan

Regional Government (KRG) and Baghdad providing for exports of 100,000b/d to start on February 1.

After 15 months during which no Kurdish oil has been exported, the news is a major boost to IOCs

operating in Kurdistan.

Two issues between the sides still require resolution. The first is the legal status of the 37 production-

sharing contracts (PSCs) signed with IOCs since 2007 under the KRG's own hydrocarbons law, which

Baghdad has long argued is invalid. This stance by the central government has led to IOCs that have

signed Kurdish PSCs being blacklisted from involvement elsewhere in Iraq, a situation that the Kurds are

keen to overturn.

The second is the payment mechanism for producers in Kurdistan. While exports were flowing between

June and October 2009, the Iraqi State Oil Marketing Organisation (SOMO) collected revenues from

Kurdish production. The system by which these revenues were redistributed to IOCs was complex and

opaque, however, and IOCs claim to be owed US$500mn from SOMO in unpaid revenues, according to a

December 2010 article in the Petroleum Economist. A new payment system will need to be worked out to

ensure that producers are financially equipped to sustain output and exports from Kurdistan.

Iraq’s end-2009 refining capacity is estimated at 804,000b/d (BP Review). The most recent (December

2010) OGJ estimate is 637,500b/d of capacity. Iraq has 10 refineries and topping units. The largest plant



is the 300,000b/d Baiji facility, but this could be overtaken by the expanded Daura plant, the upgrade of

which is scheduled to be completed by mid-2011. In recent years, problems with the refineries and power

supplies have forced the country to import substantial volumes of petroleum products from Iran, Jordan,

Kuwait, Syria and Turkey.

On December 21 2010, Iraq's parliament approved Nouri al-Maliki's choice for oil minister – former

deputy oil minister Abdel Karim al-Luaibi. Al-Luaibi has taken over from Hussein al-Shahristani, who

has been confirmed in a new role – deputy prime minister for energy – and will be expected to oversee all

oil, gas and electricity policy-making.

Iraq is considering a bidding round for the Nassiriya oil field later in 2011, al-Shahristani said on January

10 2011. He told visiting Japanese trade minister Akihiro Ohata that pre-qualified Japanese firms will be

invited to bid for these rights. Nassiriya has estimated proven reserves of 4.4bn bbl, according to Iraq's oil

ministry. Located north-west of the eponymous capital of Dhi Qar province, the field was not offered in

either of Iraq's two formal oil-licensing rounds in 2009. Output from Nassiriya was 10,000b/d in May

2010, and Iraq had hoped to quintuple production by year-end. Nippon Oil told Iraqi officials in early-

2010 that it could boost output from the field to 200,000b/d, while al-Shahristani said in January 2010

that the field could produce up to 520,000b/d by 2016.

More than 45 companies have been shortlisted for bidding in Iraq's third round of oil licences, reports

Aswat al-Iraq news agency citing Oil Minister Abdel Karim al-Luaibi. He said that the third round will be

bigger than the previously held rounds as the security situation in the country has improved. New

infrastructure construction is being undertaken to increase export capacity to more than 4.5mn b/d.

Political leaders in Iraq's western al-Anbar province have spoken out against the auction of development

rights to the Akkas field. Gas produced from the Akkas field ought to be used to sate domestic power

needs and promote local industry instead of being exported, the head of al-Anbar's provincial council,

Jassim Mohammed, told Reuters on October 12. Mohammed claimed that Iraq's federal oil ministry had

turned down an offer by a consortium of unnamed South Korean companies to invest around US$60bn in

al-Anbar's infrastructure, including in the construction of an oil refinery. Mohammed also threatened

Baghdad with violence should the auction go ahead in its existing form, and said that foreign companies

would be prevented from operating at Akkas.

Akkas, located near the Syrian border, holds estimated reserves of 113-127bcm and is the largest of three

gas fields whose development rights were made available for bidding in Iraq's October licensing round.

Thus far, 13 companies have paid fees to participate in the round, the names of which were released by

the oil ministry on October 11. With the exception of Italian major Eni, none of the lead oil project

developers have chosen to partake in the gas licensing round.



Iraqi oil minister Abdul Kareem al-Luaibi said on January 2 2011 that the government is considering

holding a fourth licensing round for new gas exploration acreage. Al-Luaibi said that the ministry is

considering 12 exploration contracts, while the head of the ministry's licensing office, Abdel-Mahdi al-

Ameedi, was quoted by Reuters as saying that the contracts would be for natural gas only, but gave no

further details. The statement comes as new plans are being drawn up for energy infrastructure expansion.

The Iraqi ministerial cabinet in June 2010 approved a landmark associated gas utilisation deal with

Anglo-Dutch major Royal Dutch Shell, clearing the way for higher national gas production. The deal

will see Shell capture gas at the Rumaila, Zubair, Majnoon and West Qurna I oil fields in the south of the

country, plus all sizeable fields in the resource-rich Basra Province, spurring the construction of gas-fired

power plants to address ongoing electricity shortages. According to a government spokesperson, newly

formed state vehicle Basra Gas Company will hold a 51% stake in the so-called South Gas Project, with

Shell holding 44% and Japan's Mitsubishi the remaining 5%. The Shell deal would significantly reduce

gas flaring and should the upcoming gas licensing round prove successful, non-associated output is also

set to grow.

The rise in gas production capacity will be supported by a large expansion of Iraq's power generation

capacity. The Iraqi Electricity Ministry is currently drawing up a tender for the installation of 20 gas

turbines it bought from Siemens and GE in 2008. Addressing electricity shortages is one of the

cornerstones of the government's reconstruction process, but a lack of funds to tackle gas flaring by

capturing associated gas has prevented plans getting off the ground.

Iraq’s cabinet approved on September 21 2010 an oil ministry request for IOCs to collaborate on a water-

injection project for the development of southern oil fields. According to an Iraqi government

spokesperson, the cabinet has backed the request for IOCs to jointly implement and operate a water-

injection project. The spokesman clarified that such a project would be eligible for cost-recovery under

existing contracts signed in Iraq's two oil licensing rounds. Iraq has said that it will compensate IOCs

through future oil revenues, but is still negotiating a repayment structure with them. Iraq's government

expects the project's cost to exceed US$10bn.

The development contracts for Iraq's southern oil fields – Rumaila, Zubair, West Qurna and Majnoon –

were all signed in 2009. However, water injection is required for the IOCs to achieve their production

targets at these fields. Platts reported on September 22 that West Qurna-1, being developed by

ExxonMobil and Shell, is most in need of water injection. In April 2010, the Iraqi government announced

that ExxonMobil had been chosen to lead the water-injection project, but this claim was subsequently

denied by company CEO Rex Tillerson. Since then, ExxonMobil has agreed to coordinate initial studies

for the project, with the understanding that IOCs will share the project costs, Reuters reported on

September 21.



In 2008, Iraq’s domestic electricity generation capacity was reported to be around 7.2 gigawatts (GW).

Power consumption and production are now broadly balanced, reducing the need for high-level electricity

imports, although the power industry is struggling to keep pace with growing demand.



Global Oil Market Outlook

The oil market activity of late 2010 was entirely as we predicted, with the result that the full-year price

outturn of around US$77.40 per barrel (bbl) for the OPEC basket was barely above the BMI assumption.

Dramatic winter scenes certainly helped provide an end-year shift in sentiment, even if actual crude

consumption levels, as 12 months earlier, end up being little changed by the heating oil effect.

BMI has long held the view that we would see further appreciation in 2011 thanks to demand growth,

moderate supply expansion and some room for inventories to ease. As of mid-January 2011, BMI

assumptions were that global growth in GDP would exceed 3% in the current year and through to 2014,

with a likely 3.2% rise in 2011 accelerating to a 3.7% rate of growth in 2012 and 2013. While this has no

direct correlation with oil prices and, in fact, little real relevance to oil consumption trends, it supported

our view at the start of the year of a steady increase in crude prices in 2011, reflecting an improved

supply/demand balance, greater OPEC influence and falling inventories.

The unprecedented wave of popular uprisings in the Middle East and North Africa (MENA) that followed

the removal of Tunisian President Ben Ali on January 14 has obviously fundamentally altered our

outlook, particularly since the unrest spread to Libya in mid-February.

Taking into account the risk premium that has been added to crude prices in response to actual and

perceived additional threats to supply, we have now raised our benchmark OPEC basket price forecast

from US$80 to US$90/bbl for 2011 and from US$85 to US$95/bbl for 2012. Based on our expectations

for differentials, this gives a forecast for Brent at US$94/bbl in 2011 and US$99/bbl in 2012. We have

kept our long-term price assumption of US$90/bbl (OPEC basket) in place for the time being while we

wait to see what path events in the MENA region take. We have also retained our existing supply and

demand forecasts until the scheduled quarterly revision at the start of April.

Balancing Act

Oil demand in 2011 will almost certainly increase from 2010 levels. Growth in absolute volumes and in

percentage terms is likely to be appreciably lower but should still be significant. This growth is dependent

on prices and underlying economic activity.

Countering this positive factor is a list of negatives. First is the fragility of the energy-intensive developed

economies where, as in 2008, substantial and sustained fuel cost inflation can cause great harm in terms

of oil consumption and economic growth. Much of 2011’s projected oil demand growth can be attributed

to the non-OECD states, which may prove more robust. Even here, however, removal or reduction of

price subsidies could lead to demand disappointment in a high-price environment.



Inventories of crude oil and refined products are still healthy. During 2010, in spite of much higher

demand, there was little improvement in the global stock position. In spite of the weather and tax-related

end-year crude stock draw in the US, inventories at the end of 2010 were still some 75mn bbl above the

five-year average, with refined product stocks almost 50mn bbl in excess of the seasonal norm. Europe

and Japan actually reported late-year stock builds, so the inventory overhang is substantial. This year

needs a widening of the supply/demand gap in order to ensure a meaningful stock drawdown, which is the

most necessary step towards sustainable oil price growth.

Excluding Libya, supply is on the rise, with a useful increase in non-OPEC oil production forecast in

2011. This alone could offset much of the forecast demand growth and leave inventories close to current

levels. In addition, OPEC members, long frustrated with inadequate quotas, had already begun to place

more oil on the market prior to the outbreak of political unrest in MENA. The removal of Libyan crude

volumes from the market prompted Saudi Arabia to boost volumes, with reports in March that Nigeria,

Kuwait and the UAE were preparing to follow suit. There remain question marks over the likes of Iran

and Iraq, but the overall picture is likely to be one of reduced quota compliance and increased volumes.

So far, OPEC has decided against holding an emergency meeting prior to its scheduled summit in June.

The more hawkish members of the producers’ club oppose raising quotas, arguing that the oil market

remains well supplied despite the lost Libyan volumes, while also enjoying the surge in export revenues

that higher prices provide. If the unrest in MENA spreads to other oil producing countries, however, and

prices look likely to push beyond US$120/bbl, we expect a meeting to be called urgently and quotas to be

raised. No OPEC member wants to see a repeat of the crude price collapse in H208, which crushed the

cartel’s revenues. A second half quota increase should not therefore be ruled out.

While the extraordinary rise in prices in January and February has skewed the average price outlook for

the year, in order for the oil price gains to be sustained, it is surely necessary for demand to rise more

quickly than supply, thus reducing stocks and narrowing the safety margin. Too much oil price strength

too early in the recovery will clearly weaken the demand trend, while encouraging suppliers. Bold

speculators and charging bulls alone may not manage to create the conditions needed for crude to prosper

in the long term.

Oil Price Forecasts

In terms of the OPEC basket of crudes, the average price in Q410 was about US$83.75/bbl, up from the

US$73.76 recorded during the previous three months. This was an encouraging, if unsurprising outcome,

given the intervention of Arctic weather and growing macroeconomic optimism. In Q409, the OPEC

price averaged US$74.32/bbl, so the most recent quarter saw a year-on-year (y-o-y) gain of 12.7%. The

2010 full-year average works out at around US$77.40, compared with about US$60.90/bbl in 2009

(+27.1%).



In terms of other marker prices, North Sea Brent averaged around US$86.50/bbl during Q4, with WTI

achieving a surprisingly low US$85.10. This is another indication that WTI is much more prone to

speculative activity and market sentiment than the other crudes, reducing its usefulness as a barometer of

underlying fundamentals. Urals (Mediterranean delivery) in Q4 averaged US$85.30/bbl and Dubai

realised US$83.40. These averages have been calculated using OPEC data and monthly prices from the

International Energy Agency (IEA). The 2010 full-year outturn was US$77.45/bbl for OPEC crude,

US$80.34/bbl for Brent and for US$79.61/bbl for WTI.

Taking into account the risk premium that has been added to crude prices in response to the unrest in

MENA, we have raised our benchmark OPEC basket price forecast from US$80 to US$90/bbl for 2011

and from US$85 to US$95/bbl for 2012. Based on our expectations for differentials, this gives a forecast

for Brent at US$94/bbl in 2011 and US$99/bbl in 2012. We have kept our long-term price assumption of

US$90/bbl (OPEC basket) in place for the time being while we wait to see what path events in the MENA

region take. The WTI, Brent, Urals and Dubai assumptions are US$92.20, US$92.60, US$91.10 and

US$90.70/bbl, respectively. We have also retained our existing supply and demand forecasts until the

scheduled quarterly revision at the start of April.

Table: Oil Price Forecasts

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Brent (US$/bbl) 96.99 61.51 80.34 94.00 99.00 92.33 92.33 92.33

Urals - Med (US$/bbl) 94.49 61.04 78.45 90.98 96.04 91.22 91.22 91.22

WTI (US$/bbl) 99.56 61.68 79.61 85.00 91.00 92.32 92.32 92.32

OPEC basket (US$/bbl) 94.08 60.86 77.45 90.00 95.00 90.00 90.00 90.00

Dubai (US$/bbl) 93.56 61.69 78.11 90.65 95.70 89.19 89.19 89.19

e/f = estimate/forecast. Source: BMI.

Short-Term Demand Outlook

The BMI oil supply and demand assumptions for 2011 and beyond have once again been revised for all

72 countries forming part of our detailed coverage, reflecting the changing macroeconomic outlook and

the impact of environmental initiatives. Investment in exploration, development and new production has

continued to rise as a result of relatively stable crude prices, but deepwater activity has been set back by

events in the Gulf of Mexico (GoM). Costs associated with oil field development and

exploration/appraisal drilling are rising again with commodity and labour prices. Deepwater programmes



remain particularly vulnerable thanks to equipment shortages, lack of personnel and the post-Macondo

regulatory environment.

We have once again made some changes to forecast oil production levels, in line with OPEC output (prior

to the MENA unrest) and known project delays, with no clear evidence of large-scale spending changes

by international oil companies (IOCs) or national oil companies (NOCs). Even in the US, the backlash

from BP’s Macondo disaster has led to only minor revisions to the production outlook. Other deepwater-

focused regions appear to be re-examining procedures and legislation, but continuing with most

exploration and development programmes.

Table: Global Oil Consumption (000b/d)

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Africa 3,762 3,810 3,877 3,959 4,062 4,197 4,333 4,479

Middle East 6,864 7,146 7,395 7,698 7,973 8,230 8,442 8,699

NW Europe 13,545 12,964 13,021 13,051 13,097 13,204 13,197 13,177

N America 21,785 20,881 21,385 21,400 21,420 21,535 21,649 21,763

Asia/Pacific 25,994 26,343 27,547 28,077 28,756 29,511 30,259 31,012

Central/Eastern Europe 6,121 5,792 6,086 6,256 6,381 6,550 6,757 6,929

Latin America 7,724 7,631 7,875 8,070 8,238 8,401 8,555 8,693

Total 85,744 84,510 87,122 88,459 89,868 91,564 93,121 94,678

OECD 43,399 41,509 42,171 42,106 42,017 42,179 42,275 42,394

non-OECD 42,345 43,001 44,950 46,353 47,851 49,385 50,847 52,284

Demand growth % (0.32) (1.44) 3.09 1.53 1.59 1.89 1.70 1.67

OECD % (3.55) (4.35) 1.59 (0.16) (0.21) 0.38 0.23 0.28

Non-OECD % 3.23 1.55 4.53 3.12 3.23 3.21 2.96 2.83

e/f =estimate/forecast. Source: Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI.

According to the BMI model, 2011 global oil consumption will increase by 1.53% from the 2010 level.

The 2011 forecast represents slight lower OECD demand (-0.16%) and a revised non-OECD increase of

3.12%. The overall increase in demand is estimated at 1.34mn b/d. North America is now expected to see

expansion of just 15,000b/d, with OECD European demand set to recover by 30,000b/d. Non-OECD

gains are expected to be 1.92% in Asia, 2.48% in Latin America, 2.79% in Central/Eastern Europe, 4.10%

in the Middle East and 2.41% in Africa.



The International Energy Agency (IEA) is slightly more bullish in its January 2011 Oil Market Report

(OMR), predicting a rise in 2011 oil demand of 1.6%, or 1.4mn b/d. The organisation’s assumptions

suggest a 0.4% decline in 2011 OECD consumption, plus a 3.8% increase in non-OECD oil usage.

January 2011 Energy Information Administration (EIA) estimates suggest that world demand will rise

from 86.6mn b/d in 2010 to 88.0mn b/d in 2011, with the 1.4mn b/d increase amounting to a gain of

1.6%. Non-OECD demand is predicted to increase by 3.6% (1.5mn b/d), while OECD demand is

expected to slip by 10,000b/d to 45.9mn b/d. Consumption in the US is expected to increase by

160,000b/d (0.8%). With Canadian demand 1.3% higher and that of Europe 0.7% lower, it is in Japan that

the US energy body sees the greatest risk of a decline – forecasting a fall of 3.4%.

OPEC’s January 2011 report suggests a likely increase in 2011 global oil consumption of 1.2mn b/d, or

1.4%. OECD demand is forecast to rise by 180,000b/d (0.4%). Non-OECD demand is expected to

average 41.2mn b/d, compared with 40.2mn b/d in 2010 (+2.5%).

Short-Term Supply Outlook

According to the revised BMI model, 2011 global oil production will rise by 1.91%, representing an

OPEC increase of 2.87% and a non-OPEC gain of 1.19%. The overall increase in supply is estimated at

1.75mn b/d in 2011. We assume that the current OPEC production ceiling will be retained for the first

half of 2011, but that actual output will exceed the Q410 level. There is scope for an increased OPEC

production ceiling in H2, dependent on demand and prices, but quota adherence is expected to deteriorate

even if the theoretical ceiling is retained.

The EIA was in January 2011 forecasting a 170,000b/d y-o-y rise in non-OPEC oil output, representing a

gain of just 0.3%. World oil production is predicted to be 87.73mn b/d in 2011, up from 86.40mn b/d

(+1.33mn b/d) in 2010. The US organisation expects a 1.2mn b/d (3.3%) upturn in OPEC oil and natural

gas liquids (NGLs) output.

OPEC itself sees 2011 non-OPEC supply rising by 410,000b/d to 52.67mn b/d. In 2011, OPEC NGLs and

non-conventional oils are expected to increase by 460,000b/d over the previous year to average 5.25mn

b/d. The January 2011 OPEC monthly report argues that the call on OPEC crude is expected to average

29.4mn b/d, representing an upwards adjustment of 200,000b/d from its previous assessment and an

increase of 400,000b/d from the previous year.

The IEA’s 2011 assumption for non-OPEC oil supply is 53.4mn b/d, representing a rise of 1.1%. This

view is based on higher estimated Chinese oil production offset by marginally lower output in the OECD

Pacific, the former Soviet Union, Latin America and global biofuels. OPEC production of natural gas

liquids (NGLs) is expected to rise sharply from 5.29mn b/d to 5.84mn b/d. Increased biofuels supply



(+9.9%) and a slight increase in processing gains implies a need for OPEC crude volumes of 29.9mn b/d

in 2011. This is above OPEC’s estimated Q410 output of 29.5mn b/d.

Table: Global Oil Production (000b/d)

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Africa 10,197 9,679 9,982 10,372 10,691 11,028 11,409 11,922

Middle East 26,229 24,406 24,901 25,221 25,553 25,966 26,576 27,240

NW Europe 4,912 4,657 4,438 4,288 4,040 3,833 3,693 3,503

N America 11,668 11,912 12,365 12,250 12,450 12,750 13,190 13,750

Asia/Pacific 8,689 8,568 8,827 9,090 9,095 9,174 9,029 8,847

Central/Eastern Europe 13,045 13,417 13,828 14,005 14,126 14,346 14,684 15,075

Latin America 9,857 9,749 10,028 10,288 10,442 10,783 11,220 11,662

OPEC NGL adjustment 4,600 4,660 5,260 5,870 5,970 6,109 6,301 6,553

Processing gains 2,084 2,290 2,200 2,230 2,275 2,320 2,366 2,414

Total 91,274 89,331 92,009 93,762 94,752 96,446 98,626 101,12

5

OPEC 35,568 33,076 33,924 34,439 35,027 35,845 36,971 38,445

OPEC inc NGLs 40,168 37,736 39,184 40,309 40,998 41,954 43,272 44,998

Non-OPEC 51,106 51,595 52,825 53,452 53,755 54,492 55,354 56,127

Supply growth % 1.55 (2.13) 3.00 1.91 1.06 1.79 2.26 2.53

OPEC % 3.15 (6.05) 3.84 2.87 1.71 2.33 3.14 3.99

Non-OPEC % 0.33 0.96 2.38 1.19 0.57 1.37 1.58 1.40

e/f =estimate/forecast. Source: Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI.

Longer-Term Supply And Demand

The BMI model predicts average annual oil demand growth of 1.68% between 2011 and 2015, followed

by 1.42% between 2015 and 2020. After the assumed 3.09% global demand recovery in 2010, we are

assuming 1.53% growth in 2011, followed by 1.59% in 2012, 1.89% in 2013, 1.70% in 2014 and 1.67%

in 2015.

OECD oil demand growth is expected to remain relatively weak throughout the forecast period to 2020,

reflecting market maturity, the ongoing effects of price-led demand destruction and the greater

commitment to energy efficiency. Following the 1.59% rise in 2010 OECD oil consumption, we expect to



see a decrease of 0.16% in 2011. On average, OECD demand is forecast to rise by 0.11% per annum in

2011-2015, then fall by 0.19% per annum in 2015-2020.

For the non-OECD region, the demand trend in 2011-2015 is for 3.07% average annual market

expansion, followed by 2.66% in 2015-2020. Demand growth is forecast to ease from 4.53% in 2010 to

3.12% in 2011.

BMI is forecasting global oil supply increasing by an average 1.91% annually between 2011 and 2015,

with an average yearly gain of 1.53% predicted in 2015-2020. We expect the trend to be at its weakest

towards the end of the 10-year forecast period, with gains of just 0.75% and 0.62% predicted in 2019 and

2020.

Non-OPEC oil production is expected to rise by an annual average of 1.22% in 2011-2015, then just

0.34% in 2015-2020. OPEC volumes are forecast to increase by an annual average of 2.81% between

2011 and 2015, rising to 2.95% per annum in 2015-2020.

In 2012, the EIA is predicting world oil demand growth of 1.6mn b/d. Its current base case sees the world

consuming 89.7mn b/d during the year, up around 1.9%. OECD consumption is expected to edge ahead,

but the non-OECD countries are tipped to deliver 3.7% growth.



Regional Energy Market Overview

The Arabian Gulf states will continue to dominate oil supply, backed by huge and largely untapped

reserves. Gas is another important export product for the region, mainly in the form of liquefied natural

gas (LNG). The Gulf plays a growing role in the supply of the world’s gas. Large parts of the region

remain off limits to IOCs, thanks to state control in the major Gulf countries. Iraq is formulating oil laws,

however, that may result in foreign partnerships. Investment in Iran by IOCs has come under increasing

pressure thanks to the nuclear standoff. Refinery investment opportunities do exist for IOC partners, with

the region building a substantial surplus with which to meet demand growth in Asia, Europe and North

America.

Oil Supply And Demand

Thanks to the Gulf producers, this remains the key region in terms of supply, and has an increasingly

significant role to play as a consumer of oil. Oil- and gas-based wealth creation has stimulated regional

economies, triggering a surge in fuel demand that could ultimately have a negative impact on the export

capabilities of Iran and others. OPEC policy and a relatively high level of quota adherence meant a

meaningful downturn in 2009 regional supply, but there was noticeable growth in 2010 thanks to quota-

busting activities of certain members. We have assumed an unchanged OPEC ceiling for H111, but with

quota compliance potentially falling below 50%.

Iraq remains the region’s ‘wild card’, having medium-term production potential of at least 3.15mn b/d (by

2015), with the government still targeting longer-term supply of up to 6mn b/d. For the immediate future,

volumes look set to continue recovering slowly in spite of the uncertain political climate. New deals with

IOCs should result in high-level investment in developing new reserves. For the region as a whole, we

expect to see output reach 27.24mn b/d by 2015, representing a gain of 9.4% over 2010. Apart from likely

growth in Iraq, the big supply winner will be Qatar. With regional consumption set to reach 8.70mn b/d in

2015, the growing export capability is clearly vast. Some 18.54mn b/d is likely to be exported in 2015, up

from an estimated 17.51mn b/d in 2010.



Table: Middle East Oil Consumption (000b/d)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Bahrain 44 39 42 43 45 46 47 49

Iran 1,761 1,741 1,731 1,790 1,844 1,899 1,956 2,015

Iraq 616 660 700 735 772 810 851 893

Israel 251 250 254 258 261 265 269 273

Kuwait 370 419 423 429 435 450 460 475

Oman 63 64 67 71 74 78 82 86

Qatar 198 209 218 231 245 259 275 291

Saudi Arabia 2,390 2,614 2,794 2,964 3,105 3,214 3,278 3,376

UAE 475 455 470 480 492 504 517 530

BMI universe 6,168 6,451 6,698 7,000 7,272 7,526 7,735 7,988

Other ME 696 695 696 698 700 704 707 711

Regional Total 6,864 7,146 7,395 7,698 7,973 8,230 8,442 8,699

e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI.

Middle East regional oil use of 4.98mn b/d in 2001 rose to an estimated 7.40mn b/d in 2010. It should

average 7.70mn b/d in 2011 and then rise to around 8.70mn b/d by 2015. Iraq accounted for 9.47% of

estimated 2010 regional consumption, with its market share expected to be 10.27% by 2015.



Table: Middle East Oil Production (000b/d)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Bahrain 48 49 55 58 65 75 82 90

Iran 4,327 4,216 4,190 4,210 4,275 4,300 4,340 4,450

Israel na na na na na na na na

Kuwait 2,782 2,481 2,490 2,505 2,575 2,630 2,700 2,785

Oman 754 810 865 900 920 900 880 854

Qatar 1,378 1,345 1,639 1,714 1,712 1,750 1,821 1,865

Saudi Arabia 10,846 9,713 9,875 9,915 10,000 10,130 10,300 10,450

UAE 2,936 2,599 2,640 2,695 2,740 2,805 2,900 3,015

BMI universe 23,071 21,213 21,754 21,998 22,288 22,590 23,023 23,509

Iraq 2,423 2,482 2,450 2,535 2,610 2,750 2,950 3,150

Syria 398 376 365 354 343 326 310 294

Yemen 304 298 289 280 272 258 251 243

Other ME 33 37 38 39 40 42 43 44

Regional Total 26,229 24,406 24,896 25,206 25,553 25,966 26,576 27,240

e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI.

Regional oil production was 22.83mn b/d in 2001 and averaged an estimated 24.90mn b/d in 2010. After

an estimated 25.21mn b/d in 2011, it is set to rise to 27.24mn b/d by 2015. Iraq accounted for 9.84% of

estimated regional oil supply in 2010 and its market share is expected to be 11.56% by the end of the

forecast period.

Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In

2001, the region was exporting an average of 17.85mn b/d. This total eased to an estimated 17.50mn b/d

in 2010 and is forecast to reach 18.54mn b/d by 2015. Iraq has the greatest export growth potential,

followed by Qatar.



Oil: Downstream

Table: Middle East Oil Refining Capacity (000b/d)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Bahrain 262 262 262 262 262 262 262 302

Iran 1,805 1,860 1,900 2,000 2,000 2,000 2,250 2,400

Iraq 779 804 825 850 1,000 1,150 1,300 1,300

Israel 220 220 220 220 320 320 320 320

Kuwait 931 931 936 990 990 1,150 1,150 1,415

Oman 85 85 85 205 205 205 205 290

Qatar 240 380 380 520 520 520 586 586

Saudi Arabia 2,100 2,100 2,100 2,200 2,200 2,600 3,000 3,250

UAE 673 673 773 773 974 974 1,041 1,041

BMI universe 7,095 7,315 7,481 8,020 8,471 9,181 10,114 10,904

Other ME 778 817 765 765 803 843 886 930

Regional Total 7,873 8,132 8,246 8,785 9,274 10,024 11,000 11,834


Refining capacity for the region was 6.88mn b/d in 2001, rising gradually to an estimated 8.25mn b/d in

2010. Oman, Iraq, Saudi Arabia and the UAE are all expected to increase significantly their domestic

refining capacity, with the region’s total capacity forecast to reach 11.83mn b/d by 2015. Iraq’s share of

regional refining capacity in 2010 was an estimated 10.00%, and its market share is set to rise to 10.09%

by 2015.



Gas Supply And Demand

Table: Middle East Gas Consumption (bcm)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Bahrain 12.7 12.8 13.2 14.0 14.8 15.7 16.7 17.7

Iran 119.3 131.7 133.0 135.0 138.4 140.0 142.8 145.7

Iraq 4.0 4.8 5.0 5.5 7.0 8.0 9.0 11.5

Israel 1.0 2.3 2.7 3.5 4.5 6.0 7.0 7.0

Kuwait 12.8 13.4 13.9 14.5 15.4 16.3 17.2 18.1

Oman 13.5 13.8 15.0 16.5 18.0 19.0 20.3 21.0

Qatar 20.2 21.1 24.5 28.9 31.3 34.9 37.6 40.0

Saudi Arabia 80.4 77.5 78.6 78.9 79.5 80.2 86.2 87.0

UAE 59.5 59.1 62.1 64.9 68.0 71.3 74.6 78.2

BMI universe 323.4 336.5 348.0 361.7 376.9 391.5 411.3 426.2

Other ME 39.7 41.7 43.8 46.0 48.3 50.7 53.2 55.9

Regional Total 363.1 378.2 391.8 407.7 425.2 442.2 464.5 482.0


Table: Middle East Gas Production (bcm)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Bahrain 12.7 12.8 13.2 13.5 14.2 15.2 15.9 16.7

Iran 116.3 131.2 140.0 147.0 153.0 165.0 185.0 185.0

Iraq 4.0 4.8 5.0 6.0 8.0 10.0 11.0 18.0

Israel 1.0 1.0 1.0 1.0 2.0 7.0 7.0 7.0

Kuwait 12.8 12.5 13.2 13.5 14.8 16.1 16.4 17.8

Oman 24.1 24.8 26.5 29.0 31.0 32.0 33.5 35.0

Qatar 77.0 89.3 135.0 150.0 155.0 158.0 167.0 175.0

Saudi Arabia 80.4 77.5 78.6 78.9 79.5 80.2 86.2 87.0

UAE 50.2 48.8 49.0 50.5 52.0 58.0 60.0 61.5

BMI universe 378.5 402.7 461.6 489.4 509.5 541.5 582.0 603.0

Other ME 4.5 4.9 5.4 6.0 6.6 7.2 7.9 8.7

Regional Total 383.0 407.6 467.0 495.4 516.0 548.7 589.9 611.7




In terms of natural gas, the region consumed an estimated 392bcm in 2010, with demand of 482bcm

targeted for 2015, representing 23.0% growth. Production of an estimated 467bcm in 2010 should reach

612bcm in 2015 (+31.0%), which implies net exports rising to 130bcm by the end of the period. In 2010,

Iraq consumed an estimated 1.28% of the region’s gas, with its market share forecast at 2.39% by 2015. It

will have contributed 1.07% to estimated 2010 regional gas production and by 2015 could account for

2.94% of supply.

Liquefied Natural Gas

Table: Middle East LNG Exports/(Imports) (bcm)

Country 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Iran na na na na na 5.0 10.0 14.0

Iraq na na na na na na na 5.0

Kuwait na (0.9) (1.0) (2.0) (1.5) (0.6) (2.1) (1.0)

Oman 10.9 11.5 11.5 12.0 12.0 12.0 12.0 13.0

Qatar 39.7 49.4 92.0 101.1 103.7 103.1 104.4 105.0

UAE 7.5 7.0 7.0 6.0 6.0 6.0 6.0 6.0

Regional Total 58.1 67.0 109.5 117.1 120.2 125.5 130.3 142.0


The leading LNG exporter by 2015 will be Qatar (+14.3% from 2010). Iran has significant longer-term

gas export potential, although the first volumes have yet to flow. The country is signing gas supply deals,

which point to rising LNG sales from 2013/14. Kuwait took its first deliveries of imported LNG from the

summer of 2009. The UAE is balancing LNG imports, growing domestic gas demand and LNG exports in

an effort to meet supply commitments. Iraq in theory could deliver its first exports in 2015.



Business Environment Ratings

Middle East Region

The regional business environment scoring matrix is broken down into upstream and downstream

segments, providing a detailed analysis of the growth outlook, risk profile and market conditions for both

major elements of the oil and gas industry.

The Middle East region comprises nine countries, including all major Gulf states. State influence remains

very high, with limited privatisation activity. Oil production growth for the period to 2015 ranges from a

negative 1.3% for Oman to a positive 63.6% in Bahrain, while oil demand growth ranges from 7.7% to

33.8% across the region. Increases in gas output range from 10.7% to 600% during the period to 2015.

The spread of gas demand growth estimates ranges from 7.8% to 130%. The political and economic

environment varies, depending partly on market maturity and specific factors such as the uncertainty in

Iraq and the nuclear-inspired standoff in Iran.

Composite Scores

Composite Business Environment scores are calculated using the average of individual upstream and

downstream ratings. The UAE occupies the top slot of the regional league table, but is only one point

above Qatar and Israel. Kuwait is at the bottom, although only just behind Saudi Arabia. The highest

composite upstream and downstream combined score is 58 points and the lowest is 44, out of a possible

100. This represents a particularly narrow spread for the Middle East region, thanks to the similar risk

profiles. Iraq has the potential to challenge the leaders, while Iran is at risk of falling back towards the

foot of the table.

Table: Regional Composite Business Environment Rating

Upstream Rating Downstream Rating Composite Rating Rank

UAE 66 49 58 1

Qatar 68 46 57 2=

Israel 55 58 57 2=

Iraq 63 41 52 4

Iran 49 53 51 5

Bahrain 54 46 50 6=

Oman 47 52 50 6=

Saudi Arabia 38 51 45 8

Kuwait 44 44 44 9

Source: BMI. Scores are out of 100 for all categories, with 100 the highest.



Upstream Scores

Qatar and Saudi Arabia remain the best and worst performers in this segment, showing that the overall

pecking order is quite different from that for combined scores. The UAE has remained just behind Qatar,

but has remained well clear of Iraq and has a score of 66 against the 68 of Qatar. Israel continues to

squabble with Bahrain over fourth and places, with respective scores of 55 and 54 points. Iran’s

worsening risk profile will probably push it in further down the table, although it may be able to keep

ahead of Kuwait. Saudi at the foot of the table has accumulated 56% of the points allocated to Qatar.

Table: Regional Upstream Business Environment Rating

Rewards Risks

Industry Rewards

Country Rewards Rewards

Industry Risks

Country Risks Risks

Upstream Rating Rank

Qatar 65 85 70 65 59 63 68 1

UAE 60 75 64 75 62 71 66 2

Iraq 78 65 74 45 22 37 63 3

Israel 34 70 43 95 66 85 55 4

Bahrain 36 65 43 85 64 78 54 5

Iran 70 35 61 15 34 22 49 6

Oman 26 60 35 90 54 77 47 7

Kuwait 61 15 50 10 68 30 44 8

Saudi Arabia 56 10 45 10 50 24 38 9

Scores are out of 100 for all categories, with 100 the highest. The Upstream BE Rating is the principal rating. It comprises two sub-ratings ‘Rewards’ and ‘Risks’, which have a 70% and 30% weighting respectively. In turn, the ‘Rewards’ Rating comprises Industry Rewards and Country Rewards, which have a 75% and 25% weighting respectively. They are based upon the oil and gas resource base/growth outlook and sector maturity (Industry) and the broader industry competitive environment (Country). The ‘Risks’ rating comprises Industry Risks and Country Risks which have a 65% and 35% weighting respectively and are based on a subjective evaluation of licensing terms and liberalisation (Industry) and the industry’s broader Country Risks exposure (Country), which is based on BMI’s proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, with the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix. Source: BMI



Iraq Upstream Rating – Overview

Iraq occupies a respectable third place in BMI’s updated upstream Business Environment ratings, but lags

Qatar and the UAE by five points and three points respectively. The country’s score benefits from

exceptional oil and gas output growth potential, a substantial hydrocarbons reserves base and the region’s

highest reserves-to-production ratio (RPR). Current government control of the upstream industry and a

high level of country-specific risk prevent Iraq from achieving a better overall score.

Iraq Upstream Rating – Rewards

Industry Risks: On the basis of upstream data alone, Iraq ranks an unrivalled first in the ME region, well

ahead of Iran. The country ranks second in terms of oil and gas output growth potential, third by proven

oil reserves, while its oil and gas RPR are the highest in the region.

Country Risks: Contributing to Iraq’s first place (ahead of Qatar) in the Rewards section is the joint

fourth-placed country rewards rating, alongside that of Bahrain. Iraq ranks equal fifth by the number of

non-state operators in the upstream sector and equal third in terms of state ownership of assets.

Iraq Upstream Rating – Risks

Industry Risks: Iraq is ranked sixth in the Risks section of our ratings, well ahead of Kuwait. Its sixth

position for industry risks is due to an as yet under-developed licensing environment and limited

privatisation progress.

Country Risks: Its broader country risks environment is extremely unattractive, ranking Iraq last, behind

even Iran. The best, but still unacceptably low, score is for long-term policy continuity. Would-be

investors are also faced with desperately low scores for physical infrastructure, corruption and Iraq’s rule

of law.



Downstream Scores

Israel and Iraq bracket the remaining six ME states in the downstream rankings, with the former driven by

the favourable country risk profile, privatisation moves and the competitive landscape. Israel is now five

points ahead of Iran, which performs well in spite of its country risks profile. Saudi Arabia has now fallen

from a share of second place to outright fourth, while Qatar has the potential to overtake Bahrain and

challenge the UAE above it. There is little to choose between Kuwait and Iraq near the foot of the table,

although the latter arguably has greater long-term promotion potential.

Table: Regional Downstream Business Environment Rating

Rewards Risks

Industry Rewards

Country Rewards Rewards

Industry Risks

Country Risks Risks

Downstream Rating Rank

Israel 37 74 46 100 68 87 58 1

Iran 66 62 65 10 46 24 53 2

Oman 52 44 50 60 49 55 52 3

Saudi Arabia 61 52 59 10 64 31 51 4

UAE 50 50 50 50 54 52 50 5

Bahrain 39 44 40 60 62 61 46 6=

Qatar 54 34 49 20 66 39 46 6=

Kuwait 51 40 48 15 48 28 42 8

Iraq 53 40 50 10 35 20 41 9

Scores are out of 100 for all categories, with 100 the highest. The Downstream BE Rating comprises two sub-ratings ‘Rewards’ and ‘Risks’, which have a 70% and 30% weighting respectively. In turn, the ‘Rewards’ Rating comprises Industry Rewards and Country Rewards, which have a 75% and 25% weighting respectively. They are based upon the downstream refining capacity/product growth outlook/import dependence (Industry) and the broader socio-demographic and economic context (Country). The ‘Risks’ rating comprises Industry Risks and Country Risks which have a 60% and 40% weighting respectively and are based on a subjective evaluation of regulation and liberalisation (Industry) and the industry’s broader Country Risks exposure (Country), which is based on BMI’s proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, with the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix. Source: BMI



Iraq Downstream Rating – Overview

Iraq is at the bottom of the league table in BMI’s downstream Business Environment ratings, with a few

high scores but further near-term progress up the rankings unlikely. It is ranked just behind Kuwait, in

spite of a reasonable showing in terms of oil demand, oil and gas demand growth and likely refining

capacity expansion.

Iraq Downstream Rating – Rewards

Industry Rewards: On the basis of downstream data alone, Iraq actually ranks fourth among the region’s

nine countries, just behind Qatar. This score reflects the region’s fourth-highest current oil consumption

and highest oil demand growth, plus the fourth-highest refining capacity expansion and gas demand

growth.

Country Rewards: Iraq ranks joint third with Oman and the UAE in terms of the Rewards section,

although its country rewards rating shares seventh place in the region with Kuwait. Population and

nominal GDP rank the country third and seventh respectively, while growth in GDP per capita is second-

highest. State ownership of assets and competition attract equal lowest scores with Iran.

Iraq Downstream Rating – Risks

Industry Risks: In the Risks section of our ratings, Iraq is ranked last, well behind even Iran. Its equal

lowest score for industry risks, alongside Saudi Arabia and Iran, reflects the current regulatory regime and

virtually zero progress in terms of privatisation of government-held assets.

Country Risks: Iraq’s broader country risks environment is extremely flawed, ranked last behind Iran.

The best (and only adequate) score is short-term economic external risk, followed by short-term economic

growth risk and short-term policy continuity. Operational risks for private companies are increased

further by the state’s physical infrastructure, rule of law and legal framework.



Business Environment

Legal Framework

Iraq’s legal system is similar to others in the Middle East in that it mixes European and Islamic legal

concepts. The Iraqi Civil Code, enacted in 1951 and implemented in 1953, is currently the basis of all

commercial law, particularly contract law. However, the current laws governing the country have been

augmented over the years as a result of Iraq’s recent history. The commercial law of 1984 added some

regulations that are still relevant today. In addition, the Coalition Provisional Authority (CPA), in an

effort to liberalise the business environment and create a legal system that complied with international

standards, passed a number of new regulations and suspended some laws such as those governing tariffs

and trade.

The legal framework is therefore extremely complex, as it takes elements from a number of different

sources. The enforcement of certain CPA orders has been irregular and the laws remain largely untested

by the Iraqi court system. In addition, in some cases there is an absence of a suitable legal framework, as

there are no competition or consumer protection laws and no building code. There are also no current

provisions for the recognition or enforcement of non-Arab foreign civil judgments or arbitral awards,

although Iraq does have civil remedies for domestic business disputes. That said, the commercial law

framework is comprehensive and sophisticated as it covers a number of essential areas, including dispute

resolution, company formation and contract arrangement.

Foreign investors or companies with any level of foreign participation cannot own land or property in

Iraq. However, they are able to rent or lease the land for up to 50 years. The duration of any licence to use

property, which is renewable, is determined by the duration of operations related to the foreign

investment. The US government advises companies to proceed very cautiously prior to entering into a

lease, particularly a long-term one, and to utilise qualified and experienced legal professionals before

engaging in any transaction.

Foreigners have some protection from expropriation under Iraqi law as it is currently prohibited under

Article 23 of the constitution, unless it is ‘for the purpose of public benefit in return for just

compensation’. However, the provision is skeletal and the law has yet to be discussed by parliament.

International arbitration is not sufficiently supported by Iraqi law.

The government is in the process of developing a new intellectual property rights (IPR) law in line with

the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), but the exact

structure of this and related legislation is still under negotiation. IPR functions are spread across several

ministries; the patent registry and industrial design registry remain a part of the Central Organisation on



Standards and Quality Control (COSQC), copyrights are controlled by the Ministry of Culture and

trademarks by the Ministry of Industry and Minerals.

Iraq is also a member of several international intellectual property conventions and of regional or bilateral

arrangements which include; the Paris Convention for the Protection of Industrial Property (1967 Act),

the World Intellectual Property Organisation’s (WIPO) Convention, the Arab Agreement for the

Protection of Copyrights and the Arab Intellectual Property Rights Treaty.

Under Saddam Hussein, corruption was widespread and the former regime has left a legacy of heavy state

procurement. Indeed, even seven years since the US-led invasion, corruption remains a significant

problem and Iraq scored a dismal 1.5 out of 10 in the latest Transparency International Corruption

Perceptions Index, coming 178th out of the 180 countries measured. Investors still may have to contend

with requests for bribes or kickbacks from government officials at all levels.

However, work is being done to address the problem. The Commission of Public Integrity (CPI) – now

known simply as the Commission on Integrity – was created by the CPA in 2004, to promote the rule of

law and the message that no one is above the law. The CPI is an independent, autonomous governmental

agency responsible for countering corruption, law enforcement and crime prevention, as well as public

education on these topics. It acts as an enforcement arm of Iraq's anti-corruption laws and performs its

duties in conjunction with the Board of Supreme Audit and the Inspector General from each ministry.

That said, the number of corruption cases brought to a successful conclusion remains quite small and the

statutory and regulatory provisions intended to control corruption will require substantial revision to be

effective. Indeed, a number of laws need to be addressed by parliament such as the process for

administering bids for government contracts and appointments to public positions.

Infrastructure

The US-led invasion of 2003 severely damaged Iraq's already poor physical infrastructure and, in spite of

efforts to improve the situation as part of the post-war recovery, the infrastructure remains dilapidated and

in need of investment. Investors must be prepared to deal with an unreliable delivery of essential sewer,

water and electrical services. Electricity provision is a particularly large problem, with supply into the

national still only around 60% of estimated demand.

On a positive note, the telecommunications infrastructure is currently being repaired extensively under

direction from the United States Agency for International Development (USAID). USAID is overseeing

the repair of switching capability and the construction of mobile and satellite communications facilities.

Landlines now exceed pre-war levels: in 2008 the number of main telephone lines per 100 inhabitants

was 4.8, up from 2.9 in 2001. That said, there are limited international phone services and local calls are



often limited to a neighbourhood network. In addition, the cellular telephone service is limited and there

are no public telephones in cities.

Before Saddam Hussein's regime was overthrown, internet access was tightly controlled and very few

people were allowed online: in 2002 an estimated 25,000 Iraqis used the internet. However, since 2003,

internet access has become commonplace and Uruklink, originally the sole Iraqi internet service provider

(ISP), now faces competition from a number of other ISPs. In 2008 there were over 416,000 internet

users, a massive gain since the fall of Saddam Hussein, and the number of users is continuing to grow.

All forms of road travel in Iraq are extremely dangerous as there have been numerous attacks on military

convoys and civilian vehicles mainly on major supply routes and near big cities. Both the US Government

and British Foreign and Commonwealth Office (FCO) advise travel only at times when it is absolutely

necessary and if so, during daylight and in a convoy of at least four vehicles. Further risks for drivers

come from other road users in Iraq, as many drive at excessive speeds, tailgate, force other drivers to

yield the right of way and ignore pedestrians and traffic lights. Buses run irregularly, frequently change

routes and accidents are common as they are very poorly maintained.

Labour Force

Iraq’s labour force stands at 7.4mn, with the unemployment rate estimated to be 18%, though another

10% of the labour force is employed part-time and wanting to work more. The public sector plays a

prominent role in the labour market and now accounts for 60% of full-time jobs, offering higher wages

than private companies, especially in the education sector. Iraq is party to both International Labour

Organization (ILO) Conventions related to youth employment, including child labour abuse.

Iraqi labour law is weak at promoting a business-friendly employment environment and the existing

Saddam-era law includes regulations that require revisions on benefit clauses, working conditions for

foreign expatriate workers and rules governing working hours. Indeed Iraq scores a high 59 out of 100 in

NationMaster's Rigidity of Employment Index, coming 19th out of 167 countries measured. However, the

Iraqi Government has drafted a new labour law, which is under review by the prime minister's cabinet.

The Iraqi government passed a new investment law in October 2006 which included a number of

provisions that affect Iraq's labour legislation. According to the new law, priority in employment and

recruitment shall be given to Iraqis, although no exact quotas have been established. Furthermore, foreign

investors are expected to help train Iraqi employees as well as to raise their efficiency, skill and

capabilities. Separate from the new law, there are existing labour-related requirements for foreign

companies employing Iraqi or foreign workers. All employers must provide some level of transport,

accommodation, and food allowances for each employee although allowance amounts are not fixed by

law.



Foreign Investment Policy

Investment Law No. 13, 2006, effectively revokes previous legislation implemented by the CPA in 2003.

As per the new law, the government has set up the National Investment Commission (NIC), which is

responsible for establishing national investment policies and establishing and monitoring investment rules

and regulations. In addition, Provincial Investment Commissions (PICs) have been established in every

province. The NIC and PICs are intended to function as 'one-stop shops' that can provide information,

sign contracts and facilitate registration for new domestic and foreign investors.

The investment law significantly opens the Iraqi market by permitting complete foreign ownership and

management of Iraqi companies, except in the natural resources sectors, notably the oil industry, and

banking and insurance companies. In addition, there is no limit on the amount of foreign participation in a

new or existing business entity, which can be wholly owned by a foreign investor or owned jointly with

an Iraqi investor. Investors must obtain an investment licence from the NIC. Foreign investors are

allowed to establish a branch office, manage the company and transfer abroad all funds associated with

the investment, including profits and proceeds from the sale of the investment.

However, regulation of foreign investment is not an exclusive federal power and the Kurdistan Regional

Government (KRG) operates under a different investment policy, after it passed its own investment

promotion law in March 2004. The main difference between the national and regional laws is that under

the KRG rules, foreigners are allowed to own land. Under the current system there is a potential for

overlap between the KRG's investment policy and the national strategy. This problem has already come to

light in the awarding of oil contracts to foreign companies, as the KRG is awarding rights that the federal

government believes are its to give.

Foreign investors are able to exchange shares and bonds listed on the Iraqi Stock Exchange (ISX) but the

antiquated system makes this difficult. At the moment, most orders and transactions are written by hand

on grease boards in trading sessions which can result in confusion over transactions. However, the ISX is

beginning to automate its activities and the government is drafting a new securities law. That said, given

the complexity of existing laws, regulations and administrative procedures, significant hurdles in

understanding the basic steps for starting and operating a business in Iraq remain.

The Free Zone Authority Law signed in 1998 permits investment in Free Zones (FZ) through industrial,

commercial and service projects with income and capital gains from investments exempt from all taxes

and fees. In addition, the incomes of non-Iraqi employees working in the zones are tax free, but Iraqis are

exempt from income tax for only 50% of their earnings. Imports and exports are exempt from tariffs and

other taxes unless they move into the Iraqi domestic market. Although both Iraqis and foreigners can

apply to operate in a free zone, foreigners must provide 'Arab Boycott of Israel' certification. There are

currently four Free Zones; the Basra/Khor al-Zubair Free Zone 40 miles south-west of Basra on the Arab



Gulf at the Khor al-Zubair seaport, the Ninewa/Falafel Free Zone in the North, the Sulaymaniyah Free

Zone in the northern Kurdish area and the al-Qayam Free Zone near the Iraqi-Syrian border. However,

none of these areas has yet established itself as a significant focal point for investment and trade.

Iraq is a member of the Great Arab Free Trade Agreement (GAFTA), which was signed in 1997 and has

substantially reduced tariffs on manufactured products in trade between its members. In January 2005,

tariff rates under the GAFTA initiative were eliminated allowing for zero tariff trade with GAFTA

members. Iraq has also signed agreements with Egypt and Syria providing for the liberalisation of trade

through the elimination of trade restrictions and the granting of tariff and tax exemptions: trade in goods

and products covered by these agreements are considered domestic trade rather than foreign trade for

local tax purposes. In July 2005, Iraq and the US signed a Trade and Investment Framework Agreement

(TIFA) as a first step to liberalising trade between the two, but the Iraqi parliament is yet to ratify this

agreement.

Tax Regime

The CPA established the 2004 Tax Strategy and with effect from May 1 2004 lifted the suspension of the

corporate and individual income taxes that had been in effect for the previous year. The CPA introduced a

flat 15% tax on all income earned by Iraqi and foreign companies. The new law also extended the 15%

tax rate to expatriated dividends and suspended the 25% levy on company profits. All employees must

pay 5% of their salary as a mandatory contribution to the social security system and the employers’

contribution is 12% of the same salary base. A flat sales tax of 10% is applied to ‘excellent and first class’

hotel and restaurant accommodations, real property is subject to a 10% tax and there is a limited fee

chargeable on car sales.

There are a number of tax incentives offered by the government based on the type of economic activity

and sector. In the manufacturing sector, there are exemptions from income tax and other taxes for

companies for five years starting from the date of the registration certificate. Foreign tax credits are also

supplied to companies in order to alleviate double taxation. Foreign employees and contractors are

therefore not liable ‘to pay any tax or similar charges on income from foreign sources’ or on income paid

from or on behalf of foreign governments. The amount of the credit may not exceed the amount of tax

generated on the income earned in the foreign country. Despite these tax incentives, however, investors

should be aware that the Iraqi tax system is not fully functional at present.

Security Risk

Iraq remains extremely dangerous although the situation is gradually improving following the US

government's surge in 2007. Indeed, violence is now predominantly confined to the central provinces of

Iraq, while the south is relatively stable, and Kurdistan is by and large safe. Nonetheless, both the US



Department of State and British FCO warn strongly against travel to Iraq. There is a high risk of

terrorism, and attacks from insurgents and terrorists are an everyday occurrence.

Western-flagged organisations, non-governmental organisations and contractors working – or perceived

to be working – in support of them are at high risk of attack and targets have included hotels, restaurants,

police stations, checkpoints, foreign diplomatic missions and international organisations. Furthermore,

there have even been attacks within Baghdad's International (or Green) Zone. Foreigners are advised by

the UK FCO to avoid large gatherings and exercise extreme vigilance, especially on Fridays after weekly

prayers as ceremonies to mark Islamic and Christian festivals have been targeted, including those in

churches or holy areas.

There is a high threat of kidnapping across Iraq and kidnappers often do not discriminate on the basis of

nationality, religion, gender, age or profession. Since April 2006, many people have been kidnapped in a

number of high-profile cases, of which some resulted in the death of hostages. The UK FCO advises all

travellers to Iraq to ensure they have close security protection, especially if they are operating in and

around Baghdad. However, this does not completely remove the threat and a number of those who have

been kidnapped include individuals who had security arrangements in place.

Other crimes are also common across the country, such as petty theft including thefts of money,

jewellery, or valuable items left in hotel rooms and pick-pocketing in busy places such as markets. In

addition, carjacking by armed thieves is widespread, even during daylight hours, and particularly on the

highways from Jordan and Kuwait to Baghdad.



Industry Forecast Scenario

Oil And Gas Reserves

There is a wide variation in Iraqi oil reserves estimates, although we are using the June 2010 total from

the BP Statistical Review of World Energy. This suggests 115bn bbl of proven oil. However, as only

about 10% of the country has been explored, there could be anywhere between 45bn and 100bn additional

barrels available. The government stated in October 2010 that it was upgrading its oil reserves estimate by

25%, to 143bn bbl. We are forecasting a rise in proven oil reserves to 140bn bbl by 2012. According to

the latest BP study, Iraq contains 3,170bcm of proven gas reserves. There are also believed to be an

estimated 4,250bcm in probable reserves. About 70% of Iraq’s gas reserves are associated with oil fields.

As a result, progress on increasing the country’s oil output will directly affect the gas sector. Our estimate

is for 4,389bcm of proven gas reserves by 2015.

According to Iraqi estimates, 15bn bbl of crude oil will be depleted by 2017, and a further 30bn will be

depleted over the seven-year plateau period. In order to tackle the rapid depletion of the southern fields'

reservoirs, ExxonMobil is advancing a US$10bn water-injection project, the need for which will become

more pressing in the coming years, given the ageing nature of these reservoirs.

UK-listed explorer Gulf Keystone Petroleum (GKP) announced in January 2010 that independent

evaluation of its Shaikan-1 well in Iraqi Kurdistan has raised in-place oil estimates to 1.9-7.4bn bbl. The

well evaluation was carried out in accordance with the guidelines issued by Petroleum Resources

Management System (PRMS), using SPE definitions. The evaluation of the well was carried out by

independent consultancy Dynamic Global Advisors. In January 2011, the company said that it

discovered 220mn bbl of probable reserves with the Shaikan-3 well.



Oil Supply And Demand

December 2010 oil production was

2.44mn b/d, with around 1.92mn b/d of

exports, according to the IEA. However,

foreign developers have succeeded in

boosting output at some of Iraq's largest

southern oil fields, enabling them to start

earning profits earlier than expected.

This should help push Iraq closer to its

production goal of 3mn b/d by end-

2011, although BMI believes output will

remain below this level.

BP and CNPC have succeeded in

boosting output by more than 10% at the Rumaila field, BP said on January 11 2011. The two companies

had agreed to boost output at the field to an initial production rate of 1.07mn b/d when the development

contract was signed in December 2009. According to Abdul Mahdi al-Ameedi, the head of Iraq's

Petroleum Contracts and Licensing Directorate, BP and CNPC have now reached a production rate of

1.28mn b/d at the field.

Al-Ameedi said that he expected Rumaila to produce 1.5mn b/d by end-2011, while BP and its partners

had agreed on a plateau target of 2.85mn b/d within seven years of the signing of the field development

agreement (ie by 2016).

Eni has succeeded in boosting production at the nearby Zubair field to 265,000b/d, al-Ameedi said. The

figure represents a 45% increase on the agreed baseline rate of 184,000b/d. Eni announced on December

5 2010 that production at Zubair had reached a sustained rate of 201,000b/d, thus pushing it past the 10%

mark qualifying it for the US$2/bbl remuneration fee. Eni is targeting a plateau rate of 1.2mn b/d, also by

2016.

ExxonMobil has succeeded in boosting output at Phase 1 of the West Qurna field by 11,000b/d. In

November 2010, ExxonMobil raised West Qurna-1's production plateau target to 2.825mn b/d from

2.325mn b/d, owing to an agreement to add four undeveloped reservoirs, a member of the field's

management committee told Reuters. At the time, the field was producing around 230,000-240,000b/d,

the official said. The company is targeting 750,000b/d from West-Qurna-1 by end-2012.

Iraq Oil Production, Consumption And Exports

2002-2015

e/f = estimate/forecast; Source: Historical data - BP Statistical Review of World Energy June 2010; Forecasts - BMI



Success in boosting output at Iraq's southern fields has helped push Iraq's total crude production past

2.7mn b/d, oil minister Abdel Karim al-Luaibi said on January 2. An official with SOMO said on January

12 that Iraq was now exporting 2.1mn b/d.

Domestic oil consumption is extremely difficult to predict, given the upsurge in civil unrest and the

likelihood of further infrastructure damage. Iraq has been absorbing some 550,000b/d of its production,

with some of this oil being used for field reinjection and up to 470,000b/d going through the refining

system. There is potential for demand to reach 893,000b/d by 2015, assuming steady economic recovery

and sufficient infrastructure investment.

Gas Supply And Demand

BMI expects total gas exports to reach

6.5bcm by 2015. Domestic gas

consumption should also increase with

the recovering economy and

infrastructure. We are therefore

forecasting demand rising from an

estimated 5.0bcm in 2010 to 11.5bcm in

2015.

The Iraqi ministerial cabinet in June

2010 approved a landmark associated

gas utilisation deal with Shell, clearing

the way for higher national gas

production. The deal will see Shell capture gas at the Rumaila, Zubair, Majnoon and West Qurna I oil

fields in the south of the country, plus all sizeable fields in the resource-rich Basra Province, spurring the

construction of gas-fired power plants to address ongoing electricity shortages. It is unclear when the final

deal is to be signed. A newly formed state vehicle, Basra Gas Company, will hold a 51% stake in the so-

called South Gas Project, with Shell holding 44% and Japan's Mitsubishi holding the remaining 5%.

The Shell deal would significantly reduce gas flaring and should the upcoming gas licensing round prove

successful, non-associated output is also set to grow. However, as of February 2011, the Basra gas deal

remains unsigned, amid legal problems.

Iraq held a gas licensing round in October 2010, where the development rights to the onshore Akkas,

Mansuriyah and Siba fields were sold. The final contract for the Akkas field remained unsigned as of

February 2011, as Baghdad seeks to ameliorate tribal concerns that the development plans did not

sufficiently take into account al-Anbar province’s energy and employment needs.

Iraq Gas Production, Consumption And Exports

2002-2015

e/f = estimate/forecast; Source: Historical data - BP Statistical Review of World Energy June 2010; Forecasts - BMI



LNG

The Shell/Southern Gas JV is considering exporting any gas left over from supplying domestic demand.

The gas would be exported as LNG that could be shipped from Iraqi Gulf ports or sent via pipeline to

other Gulf LNG export terminals. Shell has been linked for some time with a possible LNG export

terminal, plus accompanying pipelines and gas field development work. The company is believed to have

held talks with Iraqi officials in late January 2008 to propose a gas pipeline that would link the Basra

region to a new terminal on the country’s coast. The LNG terminal could handle up to 6bcm per annum,

potentially supplying Kuwait and the UAE.

Refining And Oil Products Trade

Iraq’s refining sector is owned and controlled by the state. Overall, the country has 10 refineries and

topping units, with total capacity estimated at 804,000b/d at end-2009 by the BP Statistical Review of

World Energy, June 2010. The KRG inaugurated a new oil refinery in July 2009 that has a current

capacity of 40,000b/d, which is expected to rise to75,000b/d by 2011. The refinery is operated by Kar

Group.

Midland Refining Company in October 2009 received two of the three components for the second

70,000b/d expansion of its 140,000b/d Daura refinery, according to the company. This was the second in

a series of three upgrades at the refinery, which are intended to increase its total capacity to 280,000b/d

by mid-2011. This would make the Daura refinery the second biggest in the country after the 300,000b/d

Baiji facility.

Iraqi oil minister Hussain al-Shahristani has announced that Iraq is looking for investors to build and

operate four planned refineries. The refineries are to be built as part of a government project designed to

make Iraq self-sufficient in petroleum products and to allow it to export fuels. While the cost of the

projects is likely to deter all but the largest investors, they are likely to prove of interest to national oil

companies (NOCs) such as CNPC and Libya's National Oil Corporation.

Speaking at a Baghdad conference on June 26, Shahristani reiterated that Iraq was offering incentives to

companies interested in the projects, such as a 5% discount on crude oil purchases and exemption from

state taxes. In addition the government will not set prices for refined products from the plants, increasing

the potential profits. Reuters cited the minister as saying that the total cost of the four plants would be

US$20bn, while Bloomberg reported that the minister said US$23bn. The reason for the discrepancy

appears to be that Shahristani said that the refineries will each cost US$5bn, but also said that the

Nassiriya refinery will cost US$8bn.



In January 2009, Iraq handed out contracts to international engineering companies to design four new

refineries in the country as part of the government’s goal to tackle fuel shortages by boosting domestic

capacity. The design contract for the Nassiriya plant was awarded to US-based Foster Wheeler in

January 2009. France’s Technip won the contract for a 140,000b/d plant that will be built at Hindeyah in

central Iraq, near the main road between Kerbala and Najaf, south of Baghdad. The third and fourth

refineries, each with 150,000b/d of capacity, will be built in the oil-rich Kirkuk province in the north and

the Missan province in the south. US engineers Stone & Webster (part of the Shaw Group) won the

FEED contracts for both these plants. No estimates for the projected costs of the refineries have been

revealed.

Turkey's Genel Enerji has revived a refining project in the Kurdistan region of Iraq owing to the ongoing

ban on crude exports from the region. Exports from the Taq Taq field, which Genel operates jointly with

Chinese-owned Addax Petroleum, were halted earlier in 2010 in reaction to ongoing contract

disagreements between the KRG and the federal authorities in Baghdad.

Faced with limited commercialisation options, Genel has decided to make the best of the situation by

building a 20,000b/d refinery in the region. The US$500mn refining project is back on the agenda,

Genel's general manager Orhan Duran told Reuters on September 30, without elaborating further. The

decision appears to indicate that Genel is not optimistic about a near-term resolution of the KRG-Baghdad

oil export dispute.

Revenues/Import Costs

Petroleum revenues in 2011 should amount to US$59.3bn, using an average OPEC crude price of

US$90/bbl. Based on US$95/bbl in 2012 and US$90/bbl in 2013-2015, Iraqi oil and gas export revenues

should reach an estimated US$76.53bn by 2015.



Table: Iraq Oil And Gas – Historical Data And Forecasts

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Proven Reserves, bn barrels 115.0 115.0 115.0 125.0 140.0 140.0 140.0 140.0

Oil Production, 000b/d 2,423 2,482 2,450 2,535 2,610 2,750 2,950 3,150

Oil Consumption, 000b/d 616 660 700 735 772 810 851 893

Oil Refinery Capacity, 000b/d (EIA/BMI) 779 804 825 850 1,000 1,150 1,300 1,300

Oil Exports, 000b/d (BMI) 1,807 1,822 1,750 1,800 1,838 1,940 2,099 2,257

Oil Price, US$/bbl, OPEC basket 94.1 60.9 77.4 90.0 95.0 90.0 90.0 90.0

Value of Oil Exports, US$mn (BMI base case)

62,048

40,475

49,424

59,306

64,114

64,423

69,662

76,534

Value of Petroleum Exports, US$mn (BMI base case)

62,048

40,475

49,424

59,130

63,741

63,718

68,957

74,129

Value of Oil Exports at constant US$50/bbl – US$mn

32,978

33,252

31,938

32,850

33,548

35,399

38,309

41,183

Value of Oil Exports at constant US$100/bbl – US$mn

65,956

66,503

63,875

65,700

67,096

70,798

76,619

82,366

Value of Petroleum Exports at constant US$50/bbl – US$mn

32,978

33,252

31,938

32,948

33,744

35,791

38,701

42,295

Value of Petroleum Exports at constant US$100/bbl – US$mn

65,956

66,503

63,875

65,896

67,488

71,582

77,403

84,590

Refined Petroleum Products Imports, 000b/d (BMI)

32

17

40

55

(28)

(110)

(189)

(147)

Gas Proven Reserves, bcm 3.17 3.17 3.17 3.50 4.00 4.40 4.40 4.39

Gas Production, bcm 3,170 3,170 3,170 3,500 4,000 4,400 4,400 4,389

Gas Consumption, bcm 4.0 4.8 5.0 6.0 8.0 10.0 11.0 18.0

Gas Exports, bcm (BMI) 4.0 4.8 5.0 5.5 7.0 8.0 9.0 11.5

Value of Gas Exports, US$mn (BMI base case) na na na

0.5

1.0

2.0

2.0

6.5

Value of Gas Exports at constant US$50/bbl – US$mn na na na

176

372

706

706

2,405

Value of Gas Exports at constant US$100/bbl – US$mn na na na

98

196

392

392

1,112

LNG exports, bcm na na na 196 392 784 784 2,224

LNG price, US$/mn BTU 94.1 60.9 77.4 90.0 95.0 90.0 90.0 90.0

LNG revenues in US$mn (BMI) 62,048 40,475 49,424 59,306 64,114 64,423 69,662 76,534

e/f = estimate/forecast; na = not applicable. Source: Historical data, BP Statistical Review of World Energy June 2010, Forecast: BMI.



Other Energy

Operational generating capacity is thought to be in excess of 9GW. The World Bank has estimated that

US$20bn-US$25bn is needed to ensure reliable electricity supply and increase available capacity to

approximately 24GW by 2015. Reportedly, 40% of existing infrastructure is diesel, fuel oil, or crude-

fired, while 22% is hydro-power and 38% is gas-fired.

Table: Iraq Other Energy – Historical Data And Forecasts

2008 2009 2010e 2011f 2012f 2013f 2014f 2015f

Electricity Generation, TWh 35.1 39.5 44.4 50.0 56.2 61.8 68.0 74.8

f = forecast; na = not applicable. Source: Historical data, BP Statistical Review of World Energy June 2010, Forecast: BMI.

Key Risks To BMI’s Forecast Scenario

Considerable risks exist both in terms of volumes and value. Early signs are encouraging that IOC

involvement is bearing fruit with higher output from existing fields. Oil prices will also play a part. Too

much Iraqi oil may soon undermine OPEC efforts to manage prices. At a flat US$50.0/bbl OPEC basket

price, Iraqi oil export revenues should be US$42.30bn in 2015. At an average US$100.0/bbl oil price,

revenues would be US$84.59bn.

Long-Term Oil And Gas Outlook

Details of the BMI 10-year forecasts can be found in the appendix to this report. Between 2010 and 2020,

we are forecasting an increase in Iraqi oil production of 69.4%, with crude volumes rising steadily to

4.15mn b/d by the end of the 10-year forecast period. Oil consumption between 2010 and 2020 is set to

increase by 62.9%, with growth slowing to an assumed 5.0% per annum towards the end of the period and

the country using 1.14mn b/d by 2020. Gas production is expected to climb to 42bcm by the end of the

period. With 2010-2020 demand growth of 281%, export potential should rise to 23bcm by 2020.



Oil And Gas Infrastructure

Oil Refineries

Iraq’s refining sector is owned and controlled by the state. Overall, the country has 10 refineries and

topping units, with total capacity estimated at 804,000b/d at end-2009 by the BP Statistical Review of

World Energy, June 2010 and at 598,000b/d in January 2009 by the Oil & Gas Journal. We calculate

Iraq’s total nameplate refining capacity at 766,000b/d. Before the US-led invasion in 2003, it was

believed that Iraq needed to refine 560,000b/d of crude in order to produce 400,000b/d of refined

products for domestic consumption. At present, problems with the refineries and power supplies force the

country to import substantial volumes of petroleum products from Iran, Jordan, Kuwait, Syria and

Turkey.

Baiji Refinery

Baiji, located in Salahuddin province, north of Baghdad, is Iraq’s largest refinery, with a capacity of

around 250,000-300,000b/d. The refinery is operated by North Refineries Company, which operates

under the aegis of the Ministry of Oil.

An oil pipeline that runs between the northern Kirkuk fields and Baiji has frequently been subject to

terrorist attacks. Following the Iraq War of 2003, fuels produced at the Baiji refinery were funnelled onto

the black market, with one US military official calling Baiji the ‘money pit of the insurgency’ in 2008. In

February 2011, a terrorist attack resulted in a partial shutdown of operations at Baiji. At the time of

writing, an oil ministry spokesman said that the facility would be operational by early-March 2011.

Daura Refinery

The Daura refinery, located in the south of Baghdad, was built in 1953 and started operations in 1955. It

suffered missile damage during the 1990-1991 Gulf War and, as a result of looting and gradual decline,

was producing only 90,000b/d by 2003. In 2005 the refinery signed a deal with Czech firm Prokop

Engineering for the construction of the first of two 70,000b/d crude distillation units, which was installed

in January 2009 at a cost of US$43mn. Although this temporarily brought the capacity to 160,000b/d,

capacity was subsequently reduced by the transfer of two 10,000b/d units to other refineries. The deal for

the second unit was signed with Prokop in 2007. The refinery is now owned by Midland Refining

Company.

In October 2009, Upstream reported that Midland Refining Company had received two of the three

components for the second 70,000b/d expansion to its refinery. According to the company’s director-

general Darthar al Khashab, the new unit should be commissioned in early-2010. The crude distillation

unit will be installed by Prokop in January 2010 at a cost of US$54mn. Two of the unit’s components are



already installed on site. The third part of the unit, the furnace, was scheduled for delivery in December

2009.

The statement indicates progress towards the second in a series of three upgrades at the refinery, which

are intended to increase its capacity to 280,000b/d by 2011. This would make the Daura refinery the

second biggest in the country after the 300,000b/d Baiji facility.

Erbil Refinery

In pursuit of greater security of refined products supply, the KRG has launched a new refinery near the

city of Erbil. The plant had an initial capacity of 25,000b/d, which rose to its full capacity of 75,000b/d at

the end of 2009. The refinery is operated by private Kurdish investors Kar Group. The Erbil refinery is

the first of the several facilities planned for the area, which will jointly process 200,000b/d of oil.

According to the Erbil refinery’s director quoted by Reuters, the feedstock will initially come from

Khurmala oil field (part of the giant Kirkuk oil field), which produces 50,000b/d of crude. Output at

Khurmala will be boosted to a 100,000b/d plateau to feed the future plants.

Planned Refineries

In January 2009 Iraq handed out contracts to international engineering companies to design four new

refineries in the country as part of the government’s goal to tackle fuel shortages by boosting domestic

capacity. The largest of the four planned refineries, with a capacity of 300,000b/d, will be built near the

city of Nassiriya in southern Iraq. The design contract for the plant was awarded to US-based Foster

Wheeler. The second contract was awarded to France’s Technip for a 140,000b/d plant that will be built

at Hindeyah in central Iraq, near the main road between Kerbala and Najaf, south of Baghdad. Iraq’s oil

ministry said in January 2011 that the blueprint for this refinery had been readied. The third and fourth

refineries, each with 150,000b/d of capacity, will be built in the oil-rich Kirkuk province in the north and

the Missan province in the south. US engineers Stone & Webster won the design contracts for both these

plants. No estimates for the projected costs of the refineries have been revealed.

In September 2010, Turkey's Genel Enerji announced that it had revived a US$500mn refining project in

Kurdistan owing to the ongoing ban on crude exports from the region. Exports from the Taq Taq field,

which Genel operates jointly with Chinese-owned Addax Petroleum, were halted earlier in 2010 in

reaction to ongoing contract disagreements between the KRG and Baghdad. Faced with limited

commercialisation options, Genel has decided to make the best of the situation by building a 20,000b/d

refinery in the region. The decision appears to indicate that Genel is not optimistic about a near-term

resolution of the KRG-Baghdad oil export dispute.

Iraqi deputy prime minister for energy Hussein al-Shahristani told a Brazilian newspaper in February

2011 that Iraq was keen to receive an investment from Petrobras in its refining segment, for which it

would be willing a grant a 3% discount on crude feedstock.



Table: Refineries In Iraq

Refinery Capacity

(b/d) Owner Completion

Date Details

Erbil 40,000 Kar Group 2009 Expansion to 75,000b/d by 2011

Daura 112,000 Midland Refining 1953 Expansion to 280,000b/d by 2011

Baiji 300,000 North Refining 1980 -

Khanaqin 12,000 North Refining - -

Samawah 5,000 Midland Refining - -

Najaf 30,000 Midland Refining - -

Diwaniyah 5,000 Midland Refining - -

Sinniyah 30,000 North Refining - -

Qaiyarah 6,000 North Refining - -

Koy Sanjaq 10,000 North Refining - -

Kirkuk 30,000 North Refining - -

Kasik 10,000 North Refining - -

Haditha 16,000 North Refining - -

Qui Dar 5,000 South Refining - -

Mufthia 5,000 South Refining - -

Basra 150,000 South Refining 1948 -

Total capacity 766,000

Planned additional capacity

Nassiriya 300,000 Foster Wheeler 2014-15 US$4.5-5bn

Hindeyah/Karbala 140,000 Technip 2014-15 US$2-5bn

Missan 150,000 Stone & Webster 2014-15 US$2-5bn

Kirkuk 150,000 Stone & Webster 2014-15 US$2-5bn

Total additions 740,000

Source: BMI

Oil Terminals/Ports

Although Iraq has access to the Persian Gulf via the Shatt al-Arab waterway as well as a short stretch of

coastline, the limited number of suitable ports in the area mean that most Iraqi oil is exported via two

floating oil terminals in the Persian Gulf, known as the al-Basra (formerly Mina al-Bakr) and Khor al-

Amaya terminals. Between them, the two facilities have a total export capacity of 1.7mn b/d and account

for 90% and 10% respectively of all oil exports by sea. Iraq’s oil export capacity is currently limited to

the volumes that can be exported through the al-Basra and Khor al-Amaya terminals.



In May 2010, SOC invited contractors to submit bids to install new valve stations and associated

pipelines in an effort to upgrade the facilities. Foster Wheeler's engineering and construction group was

awarded a contract by South Oil Company to develop the Iraq Crude Oil Export Expansion Project in

Iraq. The project management consultancy (PMC) services contract will include the installation of a

central manifold and metering platform, three single-point moorings, and two new onshore and offshore

pipelines. The project is scheduled to be completed by July 2013 and is expected to increase Basra's

export capacity to 4.5mn b/d by 2014.

Planned Floating Oil Terminals

Iraq is planning to build four new floating oil terminals and three subsea oil pipelines in the south of the

country, with the aim of boosting export capacity from 1.9mn b/d to 8mn b/d. South Oil Company’s

CEO, Dhiya Jaafar, told Reuters in November 2009 that efforts were currently under way to prepare for

the pipeline and terminal projects, with a view to completing the work by H211. With oil output expected

to rise significantly in the medium and long term, the need to repair and upgrade Iraq’s battered export

infrastructure is pressing. Nearly 80% of Iraq’s oil exports are sent via the southern province of Basra, so

we expect to see significant investment in that region, particularly as Iraq’s other export route, the

northern pipeline from Kirkuk to Ceyhan in Turkey, continues to be targeted by saboteurs.

Oil Pipelines

With the prolonged closure of the country’s 300,000b/d Banias pipeline through Syria, a result of damage

sustained in the 2003 war, as well as the mothballed 1.7mn b/d Iraq-Saudi Arabia pipeline, the only other

export route has been the Kirkuk-Ceyhan pipeline. Exports along this route have been shut in, however,

following a dispute between the Iraqi central government and the Kurdistan Regional Government (KRG)

over contracts signed by the KRG with international oil companies.

Iraq-Turkey Pipeline

The 970km pipeline runs from Kirkuk to the Turkish town of Yumurtalık, near Ceyhan. Despite its

nameplate capacity of 1.6mn b/d, the pipeline pumped only 450,000b/d into Turkey in Q110. In addition

to maintenance problems, the pipeline has been subject to a growing number of attacks from the Kurdish

separatist group PKK, resulting in frequent production shut-downs throughout the summer of 2010.

Kirkuk-Turkey Pipeline (Planned)

Iraq’s oil minister announced in late summer 2006 that Baghdad was considering building a new crude oil

pipeline for exports from the northern Kirkuk field through Turkey. No further progress has been made on

this mooted pipeline in the intervening years.

Basra-Abadan Pipeline (Planned)

Iraq and Iran were nearing an agreement to build a long-mooted oil pipeline between the southern Iraqi

city of Basra and the Iranian city of Abadan, an Iranian embassy official in Baghdad told Reuters in April



2010. Ali Heidari, Iran's trade attaché to Baghdad, also told Reuters that the draft agreement had been

submitted to the Iraqi government and was in the 'final stages' of a review process.

Iran and Iraq first signed an MoU in February 2004 to build the Basra-Abadan pipeline and three

subsequent agreements were signed by the two governments between 2005 and 2007, all of which

proposed, in various forms, a twin pipeline system conveying around 150,000b/d of Iraqi crude to Iran's

largest refinery at Abadan and sending Iranian refined products back to Basra. An official at the state-run

National Iranian Oil Refining and Distribution Company (NIORDC) stated in October 2006 that the

engineering design of the pipeline had been finalised and another official at the state-run South Oil

Company stated in November 2007 that the company had already started work on the pipeline.

Notwithstanding these statements and agreements, no tangible progress appears to have been made.

Iraq-Jordan Pipeline (planned)

Iraq has agreed to build new pipelines to export crude oil to Jordan's Zarqa refinery, Iraqi state minister

Ali al-Dabbagh said on January 3. Iraq currently exports about 10,000 barrels per day (b/d) of crude to

Jordan by truck.

Iraq-Syria Pipelines (existing and planned)

Iraq signed a memorandum of understanding (MoU) with Syria for the construction of two crude oil

export pipelines and a gas export pipeline, an Iraqi oil official said on September 16 2010. Subsequent

government statements indicate that the oil pipelines would run from Iraq's northern oil fields near Kirkuk

to the Syrian port of Banias, and would have maximum capacities of 1.5mn b/d (for heavy crude) and

1.25mn b/d (for light crude). In February 2011, Syria’s oil minister said that the two countries had agreed

on setting up technical teams for the pipelines project.

LNG Terminals

The Shell/Southern Gas JV is considering exporting any gas left over from supplying domestic demand.

The gas would be exported as LNG that could be shipped from Iraqi Gulf ports or sent via pipeline to

other Gulf LNG export terminals. Shell has been linked for some time with a possible LNG export

terminal, plus accompanying pipelines and gas field development work. The company is believed to have

held talks with Iraqi officials in late January 2008 to propose a gas pipeline that would link the Basra

region to a new terminal on the country’s coast. The LNG terminal could handle up to 6bcm per annum,

potentially supplying Kuwait and the UAE.

Japan's Mitsubishi and Anglo-Dutch major Royal Dutch Shell are in discussions over building a floating

liquefied natural gas (LNG) facility in southern Iraq, Ahmed al-Shamma, the deputy ministry for refining

and gas processing at the Iraqi oil ministry said in January 2011.



Gas Pipelines

Iraq has a large gas pipeline network as well as international export routes to Kuwait and Syria. Domestic

pipeline routes generally transport associated gas from oil fields. The main gas pipeline axis runs from

fields in the Kurdistan region to the large Baiji refinery and the al-Haditha mini refinery. From the two

refineries the gas pipelines run south via two separate routes, one of which links to Baghdad and then to

the Nassiriya oil field, while the other links to Basra in the south, near to the Rumaila oil field.

Rumaila-Ahmadi Pipeline

Gas was exported to Kuwait via the 170km Rumaila-Ahmadi pipeline until the 1990-1991 Gulf War. The

pipeline, which has a capacity of 4.13bcm, was subsequently mothballed. Talks were started in 2005 to

restart exports of 0.36bcm, rising to 2.07bcm, although no progress has since been made.

Nabucco Pipeline (Planned)

The Nabucco pipeline is designed to transport 31bcm at full capacity along a 3,300km route from Turkey

to southern and western Europe, bypassing Russia. Progress at the project has been slow, primarily

because it has so far failed to agree concrete supply deals. While Azerbaijan’s Shah Deniz phase-two

development has long been earmarked as the foundation source of Nabucco’s gas, a lack of progress on

that front has meant that the pipeline developers are looking to Kurdistan to supply the route.

In an August 27 2010 press release, RWE announced that it had signed a cooperation agreement with the

KRG in which it agreed to assist the KRG in developing gas export infrastructure. More importantly, the

deal 'foresees' negotiations on a supply agreement to export gas to Europe through Nabucco. In a press

release announcing the deal, the KRG's energy minister Ashti Hawrami said that up to 20bcm of gas

could be exported annually in this manner. Nabucco consortium head, Reinhard Mitschek, said in October

2009 that Iraqi Kurdistan could supply 8bcm to Nabucco in 2015.

In response to the deal, the Iraqi oil ministry released a statement on August 29 2010 reaffirming

Baghdad's monopoly over gas exports and asserting that any agreements struck outside the current oil and

gas legal framework were 'illegal'. It seems unlikely that Baghdad would agree to the construction of a

pipeline to connect to Nabucco that would allow the KRG to supply the pipeline. Further, whether

Turkey, the strategic transit country of Nabucco, would agree for the KRG to become the main source of

gas supply for the pipeline, considering Turkey’s long-standing ethnic tensions with its own Kurdish

minority, remains to be seen.

Akkas-Syria Pipeline (Planned)

Iraq plans to develop the Akkas gas field on its own and to export the gas via a pipeline to Syria. In

January 2009, it was announced that the Iraqi ministry had already reached an agreement with an

unnamed company over the pipeline’s construction. According to an EU spokesperson, European and

Iraqi officials have discussed the possibility of transporting gas from Iraq to Syria and then via the Arab

Gas Pipeline to Turkey, where it could be connected to Nabucco.



Macroeconomic Outlook

Growth To Depend On Continued Gains In Oil Sector

BMI View: Iraq's economy will grow an average 6% per year in real terms through to 2015, with rapid

expansion in the oil and infrastructure sectors underpinning our view. We warn that an unstable security

situation and volatility in oil prices and output pose downside risks to our forecasts.

We maintain our positive view on Iraq's economic growth prospects, and we project real GDP to

accelerate from 5.5% in 2011 to 7.6% in 2014. While the current government, formed in December 2010,

certainly faces formidable challenges, we believe its establishment bodes well for the country, particularly

in relation to attracting foreign investment and establishing a basic level of political stability. Below, we

highlight our expectations on key sectors which will drive the country's economy forward, which will

surely be dominated by the oil sector, but increasingly supported by other areas of the economy as well.

The oil sector comprises over half of Iraq's GDP, and ongoing progress in that area will contribute

significantly to the country's growth potential. Several IOCs that won service contracts during the two oil

field licensing rounds in 2009 have reported better-than-expected results thus far. For example, BP and

China National Petroleum Corporation (CNPC) announced a rise in output of over 10% at the

Rumaila field in January 2011, and Eni stated in December 2010 that it had accomplished the same feat at

its Zubair field. Crude oil production averaged 2.40mn b/d between November 2010 and January 2011

according to US congressional reports, and we expect output to average 2.54mn b/d in 2011 and 2.61mn

b/d in 2012. The government announced plans in early January to conduct a fourth licensing round to

award oil and gas exploration contracts, which we expect to keep oil-related foreign investment flowing

into the country over the medium term.

Outside the oil sector, we maintain our optimistic outlook on the power sector, which we believe will

experience strong growth. We previously highlighted Baghdad's plans to invest in electricity generation

and transmission, and we maintain our optimistic view on power projects. According to local media

sources, Baghdad is continuing to tender for power contracts, having awarded a US$219mn contract to

Hyundai Engineering and Construction to build a power station near Baghdad on January 27 and

tendering for the supply of equipment at a Mosul power station on February 2.

Another area in which we see strong growth is the residential construction industry, as years of war and

underinvestment have created a severe housing shortage. Indeed, media sources quoted the Kurdistan

Regional Government (KRG)'s Ministry of Housing and Reconstruction as saying that the number of

reconstruction projects in the semi-autonomous region during 2010 rose 24% y-o-y, and amounted to

around US$334mn. Furthermore, large-scale housing projects totalling nearly US$300mn have been

announced in recent weeks in both the north and south of the country. BMI forecasts the construction

industry to achieve real growth rates of 15.2% in 2011 and 8-10% from 2012 to 2015. Thus, ongoing



progress in, and the prioritisation of, the infrastructure sector supports our positive outlook on Iraq's

economy.

Both Baghdad and Erbil (the capital of the semi-autonomous Kurdistan region) have expressed their

intention to hire many more workers into the public service in order to fight high unemployment,

providing another potential source of growth. Although the 2011 budget has not received final approval,

both governments have announced their plans to hire large numbers of additional workers. The Iraqi

parliament voted in favour of creating 171,000 new jobs on January 19 as part of its budgetary

proceedings, with the majority to be employed in the security forces and the remainder to be placed

within ministries, according to media sources. KRG Prime Minister Barham Salih was quoted on

February 2 as saying that the northern region could employ an additional 25,000 people in 2011, with

priority to be given to the ministries of education and interior. Should the current-year budget receive

approval in its current form (or one similar to it), the added employment opportunities would certainly

give a boon to private consumption.

Risks To Outlook

The biggest risks to our growth forecast rest on oil prices. Both the economy and the fiscal budget are

highly dependent on oil revenues, and a downturn in oil prices would cause significant harm to both. The

latest version of the Iraqi budget assumes oil prices will average US$76.50/bbl in 2011, which is a lofty

assumption by public budgeting standards. We forecast the OPEC basket price to average US$90/bbl in

2011, so under that scenario Iraq will be more than comfortable, but we also acknowledge the risks of a

substantial price correction, particularly if unrest in the MENA region pushes prices beyond US$120/bbl

for any sustained period of time.

Another critical factor is the security situation. We noted that violent attacks have increased in 2011 and a

continuation of such attacks will likely have negative implications in several areas. Foreign investment

into Iraq will continue to remain subdued owing to extremely high risks to property and personnel.

Attacks on oil infrastructure could reduce oil output and exports, boding poorly for both economic output

and the public budget, which relies on optimistic output assumptions.



Table: Iraq – Economic Activity

2006 2007 2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f

Nominal GDP, IQDbn 1 95588 107829 155636 139330 155695 171541 191320 215910 239383 261828

Nominal GDP, US$bn 2 65.3 86.0 131.0 119.1 133.1 146.6 163.5 184.5 204.6 223.8

Real GDP growth, % change y-o-y 3 11.2 0.4 10.8 4.9 2.9 5.5 5.2 6.6 7.6 6.4

GDP per capita, US$ 2 2236 2871 4266 3780 4120 4430 4824 5318 5763 6163

Population, mn 4 29.2 29.9 30.7 31.5 32.3 33.1 33.9 34.7 35.5 36.3

Unemployment, % of labour force, eop 5 17.5 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0

e/f = estimate/forecast. Sources: 1 CBI/BMI. 2 OPEC/CBI/BMI; 3 IMF/BMI; 4 World Bank/BMI calculation/BMI; 5 COSIT/UN.



Competitive Landscape

Executive Summary

State-owned and controlled oil and gas industry. All production, refining, distribution and marketing activities are

under state control.

At the end of August 2008, CNPC and Iraq signed a 20-year agreement for the development of the Ahdab oil field

for US$3bn. Once onstream, the field is expected to produce 110,000b/d.

Shell has been the early entrant in post-Saddam Hussein Iraq, and is involved in the country through the stalled

Basra gas project, a minority stake in West Qurna-I oil development and operatorship of the Majnoon field.

A consortium of BP and CNPC in 2009 received the only contract under the first Iraq bidding round winning the

South Rumaila contract. BP and CNPC plan to invest approximately US$15bn over the 20-year lifetime of the

contract with the intention of increasing plateau production to 2.85mn b/d in the second half of the next decade.

In October 2009, Italy’s Eni signed a deal to develop the Zubair field as part of the consortium which includes

Kogas and Oxy. The consortium plans to spend US$10bn to raise output to 1.2mn b/d by mid-2010s.

The Kurdish Taq Taq and Tawke fields, operated by Addax and Norway’s DNO respectively, have initial capacity

of some 70,000b/d combined. Both companies started exporting oil from their respective fields via Baghdad’s

pipeline to Turkey in June 2009, but exports were halted in October 2009. Tawke began re-exporting in January

2011 following a deal between Baghdad and Erbil.

The KRG announced the award of two new PSCs to UK-based explorer Gulf Keystone in July 2009. It granted

Gulf Keystone PSCs for the Sheikh Adi and Ber Bahr Blocks, located near the city of Dohuk, in the vicinity of

Mosul.

ExxonMobil leads the West Qurna-I development, which is estimated to contain 8.7bn bbl of reserves.

Table: Key Players

Company 2008 Sales

(US$mn) % share of total sales

No. of employees

Year established

Total Assets

(US$mn) Ownership

Iraqi oil ministry/INOC na 100 na 1987 na 100% state

na = not available. Source: BMI



Overview/State Role

Iraq has a wholly state-run oil and gas industry run by regional entities. Major state vehicles include

Northern Oil, Southern Oil Company, Midland Oil Company, Maysan (Missan) Oil Company,

Southern Gas Company, State Organisation for Oil Marketing (SOMO) and Oil Exploration

Company (OEC), with additional companies charged with operating the country’s pipeline network,

refineries, providing drilling services and LPG filling sites. Foreign companies participate in the oil

segment under service contracts obtained through bidding rounds and bilateral awards. More generous

provisions exist for gas projects.

Basra-headquartered Southern Oil accounts for the bulk of the country’s current output. Key fields

include North Rumaila (800,000b/d), South Rumaila (500,000b/d), West Qurna-I (250,000b/d) and

Zubair (200,000b/d). The company also signed a preliminary agreement with Shell in September 2008 for

the commercialisation of gas in southern Iraq.

The Kirkuk-based Northern Oil operates the northern fields, and, until February 2010, was in charge of

the central fields as well. Its key asset is the Kirkuk oil field, the site of up to 8.7bn bbl of remaining

reserves. The field is currently capable of producing between 550,000b/d and 700,000b/d of crude.

Ammarah-based Missan Oil Company (established in 2008) is in charge of the south-east, while the

newly established Midland Oil Company will operate in the greater Baghdad region.

All Iraqi oil marketing is carried out by SOMO. The company also owns a 25% stake in a JV alongside

CNPC (75%) for the development of the Ahdab oil field.

Government Policy

On December 21 2010, Iraq's parliament approved Nouri al-Maliki's choice for oil minister – former

deputy oil minister Abdel Karim al-Luaibi. Al-Luaibi takes over from Hussein al-Shahristani, who has

been confirmed in a new role – deputy prime minister for energy – and will be expected to oversee all oil,

gas and electricity policy-making.

Reassuringly for investors in the oil and gas industry, Maliki's cabinet choices strongly suggest policy

continuity. Al-Shahristani is believed to have demanded a greater say on the issue of bidding round

contracts, Reuters quoted an unnamed Iraqi official as saying on December 20. It is also expected that he

will take broader responsibility for other energy-related sectors such as electricity. Ultimately, we believe

al-Shahristani will retain final authority over all oil and gas-related matters.

Al-Luaibi, a technocrat, oversaw Iraq's oil licensing rounds in 2009 and has held overall government

responsibility for the upstream segment. He is also perceived as having a strong working relationship with



Iraq's Kurdish leaders – a useful asset given Iraqi Kurdistan's oil-related demands for parliamentary

support of the Maliki-led coalition.

One of the top matters to be tackled by al-Luaibi and al-Shahristani is the long-running series of

disagreements between the federal and Kurdish regional governments. Kurdish leaders have demanded

that parliament pass the long-delayed hydrocarbons law in early 2011, with passage of the revenue-

sharing law to follow thereafter. The Kurdish alliance has made amendments to these laws, which were

never made public. The demands were originally made in August 2010, according to a communiqué by

Kurdistan Regional Government (KRG) President Massoud Barzani obtained by Iraq Oil Report. The

eventual passage of the hydrocarbons law, as agreed in 2007, will create a federal council which would

determine the legality of Iraqi Kurdistan's oil contracts – long a sticking point between Erbil and

Baghdad. Further flashpoints between the two sides in 2011 include the authorisation of oil exports from

Iraqi Kurdistan and an audit of revenues that the KRG legally owed Baghdad over the period 2004-2010.

The renewed strength of Moqtada al-Sadr in the government is likely to present new challenges in 2011.

Having won 39 parliamentary seats, the so-called 'Sadrists' have been rewarded with eight cabinet

portfolios. On December 20, al-Sadr issued a fatwa claiming it was not permissible for Iraqis to work for

foreign oil companies in the Maysan governorate – the site of the Missan and Halfaya fields. We do not

believe al-Sadr intends to bar Maysan's residents from accepting employment at foreign company–

operated oil sites in the governorate, but rather believe that the statement was designed to signal al-Sadr's

newfound political power and possible influence over local conditions, particularly security.

The new cabinet must also tackle a host of challenges left unresolved by the previous government. These

include the formal initiation of the Basra gas JV and the Akkas gas field contract, as well as longer-term

problems relating to infrastructure, logistics, refining and electricity. In an interview with Reuters soon

after being sworn into his new position, al-Luaibi talked up progress at the southern Rumaila field and

said that his priority was the expansion of oil infrastructure. He also asserted that oil export rehabilitation

work at the Basra port would be complete by end-2011 and that the proposed Syria pipeline project would

begin in early-2011.

Hydrocarbons Law

In late July 2009, Iraq’s cabinet approved a law that would allow the re-establishment of a national oil

company. The law was passed for approval to parliament where it has been languishing since. The setting

up of a national oil company had previously been included in the proposed Hydrocarbons Law that has

been stalled in parliament since 2007, with few immediate signs of a breakthrough. However, with the

pressure on Baghdad to speed up the development of its energy riches clearly increasing, the government

will be hoping to make headway by introducing a new law for the establishment of a state oil company

independent of progress on the hydrocarbons law.



State-owned Iraqi National Oil Company (INOC) operated between 1964 and 1987. A re-established

INOC would function as the parent company of four existing regional operators. The company would

consist of a board of directors that would be headed by a chairman with ministerial powers. The new law

does not specify which fields the company would operate in order to avoid disputes in parliament, as

earlier proposals were rejected by Kurdish officials who argued that the company’s powers and

operations were too far-reaching. Instead, a federal oil and gas council would be set up that would

determine which fields would be operated by the company. It is likely that the setting up of such a council

would present another major hurdle in the government’s attempt to speed up the development of its oil

reserves. Further details of the law have not been revealed.

The passage and implementation of the hydrocarbons law, which was first presented to the upper house of

Parliament for review in February 2007, is central to the development of Iraq’s oil and gas industry. The

draft law focuses on upstream development and lays out the conditions for investment and international

participation in the sector. The law also details a governance model, which includes the re-establishment

of the umbrella operations company that was the INOC and a central regulatory body, such as a Federal

Oil and Gas Council, to review contracts.

The original draft law laid out a proposed plan for domestic control of oil and gas fields and a framework

for revenue sharing among governorates. Initially, four annexes to the law proposed which fields would

be centrally managed and which would be under local/regional control, and thus opened to foreign

investment at the governorate’s discretion. Annexes I and II – which listed currently producing, partially

developed or mothballed fields – included some 93% of proven reserves. Annex III, listing the

‘undeveloped’ fields, and Annex IV, listing 65 exploration blocks, were to fall under regional

development authorities. Upstream development privileges based on the aforementioned thresholds are

the subject of ongoing negotiations. Following discussions between cabinet members, parliament and

other groups in July 2007, the annexes are reported to have been removed from the current version draft

law and will be considered at a later date by the yet-to-be established regulatory body.

In May 2009, in a bid to improve its deteriorating state finances, Baghdad approved an increase in the

corporation tax levied on oil companies operating in Iraq. The Iraqi cabinet approved a bill, announced on

May 20, which will see oil companies pay a minimum of 35% corporation tax under Iraq’s draft oil law.

Foreign corporations operating in Iraq currently pay a flat tax rate of 15%, according to the finance

ministry’s general commission for taxes. With limited foreign investment in other sectors, however,

Iraq’s lawmakers appear to have turned to the country’s main revenue stream once again.

In May 2010, the Iraqi Council of Ministers approved a deal to clarify the payment policy to companies

producing oil in the KRG, allowing for the resumption of oil exports from the region. Baghdad agreed to

guarantee initial cost-recovery payments to contractors active at two Kurdish fields – Tawke and Taq Taq



– from which exports of about 100,000b/d will now be restarted. The payments will be made after

mutually agreed audits are completed.

The oil ministry told Reuters on July 20 2010 that BP and CNPC had been asked to convert their

US$500mn signature bonus for the Rumaila field contract, which was made as a recoverable soft loan, to

a US$100mn unrecoverable payment. It attributed the request to the fact that a soft loan structure would

require government approval, which was not possible owing to the absence of a government in Baghdad.

In April 2010, Iraq slashed signature bonuses paid for its West Qurna Phase One and Zubair oil field

development projects by 75% and 66%, respectively. These, too, were converted to unrecoverable

payments.

Kurdistan

The KRG, which governs the semi-autonomous Kurdish region of northern Iraq, passed its own

hydrocarbons law in August 2007. The law stipulates that the contract formula is based on a PSA, in

which it is mentioned that exploration should not exceed five years, extendable to seven. Development

after discovery is allowed for 25 years.

Baghdad and the Kurdish government have come to an agreement over how Iraq’s oil revenues will be

distributed and shared. However, territorial disputes over the oil-rich city of Kirkuk, which is estimated to

hold the second largest oil field in the world, as well as how much authority over reserves the INOC will

have, have yet to be solved.

The Kurdish oil and gas minister Ashti Hawrami has called for the reclassification of several fields in the

Annexes, particularly ‘boundary fields’ with unclear borders or those that have been contracted to or

negotiated with foreign companies, including Kor Mor, Demir Dagh, and Taq Taq. It was reported in late

June 2008 that the government of Iraq and the Kurds had come to an agreement on the revenue-sharing

portion of the law, considered an important step forward for the passage of the bill. Following ministry

approval in early July 2007, parliament has been considering the law in an amended form.

In December 2008, Shahristani said that the government in Baghdad and the KRG were in serious

discussions about several issues but that ‘the position on the contracts that were signed without the

approval of the central government remains unchanged’, stating that the contracts had no standing within

Iraqi law. Baghdad, which controls all export licences, and the KRG have been at loggerheads over the

region’s unilateral granting of licences to IOCs. The KRG has signed nearly 20 PSCs with IOCs after

drafting its own oil and gas law in mid-2007. Owing to the lack of export licences, IOCs are forced to sell

crude produced in the KRG on the local market at a lower price than they would realise on the

international market.



Significant steps to resolve the Baghdad-KRG feud appeared to be made in November 2008, when the oil

ministry indicated that exports from two oil fields in Kurdistan could be permitted via the Kirkuk-Ceyhan

pipeline. Exports of Kurdish oil from the Taq Taq and Tawke fields via the pipeline started in June 2009.

However, by September 2009, the companies operating the fields had still not received any payments for

the oil exports from Baghdad and in early October 2009, the KRG stopped all exports via the pipeline

until Baghdad starts paying the companies producing the oil in Kurdistan. The problem was resolved

when Baghdad and the KRG reached an agreement in May 2010 that saw Iraq’s finance ministry

guarantee initial cost-recovery payments to contractors active at Tawke and Taq Taq. The agreement

allowed for the export of about 100,000b/d to be restarted.

In early February 2009, South Korea’s state-controlled KNOC agreed to develop an oil exploration

project in the Kurdistan region of Iraq on its own, having failed to secure consortium partners. KNOC

will operate the Qush Tappa and Sangaw South oil fields and will own interests of 15-20% in six further

fields, including the low-risk Bazian Block, the only one that will be managed by a consortium (which

includes SK Energy and Daesung). The Korean company will provide US$2.1bn of infrastructure

funding to the KRG. In return, KNOC will be paid back by the KRG for the projects and will receive

additional payments from profits made from the fields.

The eight blocks that KNOC has been awarded, five of which are near Erbil and three near Suleimaniyah,

contain estimated reserves of 7.2bn bbl, of which the South Korean companies will have rights to 1.9bn

bbl. KNOC plans to launch the US$600mn first stage of the infrastructure project shortly and will offer a

further US$1.5bn once the potential for crude exports from Kurdistan is clearer.

Underlining an increasingly confident energy policy, the KRG on July 20 2009 inaugurated a new oil

refinery near the city of Erbil. The plant has an initial capacity of 25,000b/d, which will rise by 50,000b/d

by end-2009 and to a full capacity of 75,000b/d at a later date. The refinery will be operated by private

Kurdish investors Kar Group. The Erbil refinery is the first of the several facilities planned for the area,

which will jointly process 200,000b/d of oil. According to the Erbil refinery’s director, quoted by Reuters,

the feedstock will initially come from Khurmala oil field (part of the giant Kirkuk oil field), which

produces 50,000b/d of crude. Output at Khurmala will be boosted to a 100,000b/d plateau to feed the

future plants.

Crude oil exports from Iraqi Kurdistan recommenced in February 2011 for the first time since late-2009.

Oil flowed from the DNO-operated Tawke field at a rate of 10,000b/d, rising gradually to 50,000b/d.

However, there appears to have been no broader resolution of the underlying differences between

Baghdad and Erbil on operator payments or the legal status of the KRG’s production-sharing agreements.

Prime Minister Nouri al-Maliki briefly raised hopes that the latter issues were resolved, after suggesting

that Baghdad had accepted the legality of the KRG’s contracts in a February 2011 interview. Immediately

afterwards, however, deputy prime minister for energy Hussain al-Shahristani said that the prime minister



was misquoted, and reiterated Baghdad's longstanding demand that the Kurdish oil contracts be converted

from the PSC model to the technical service contract (TSC) model.

Licensing Rounds

First Bidding Round

Following an April 2008 decision to null and void all of the oil contracts signed during the Saddam

Hussein era, Oil Minister al-Shahristani formally opened the country’s first round of oil and gas licensing

since the 2003 US-led invasion to 35 pre-approved foreign companies in October 2008. Al-Shahristani

met executives from major oil companies, and set out the conditions of 20-year service contracts to

develop six oil fields already in production and two new gas fields. The deals outlined were TSCs, which

ensure that Iraqi state-run entities retain 51% stakes in the projects, leaving foreign companies 49% as

fee-based service providers. To gain operating rights, the IOCs were required to pay a total of US$2.6bn

with interest over a five-year period starting in August 2011, two years after the expected award of the

contracts.

Baghdad’s first bidding round ended very disappointingly, with only one oil block having been awarded

to international investors in June 2009. It has been widely suggested that during the first round the only

reason the one bid for the Rumaila field was finalised was that it was the first field on offer and that the

bidders, BP and CNPC, only halved their service fee bid from US$3.99 to US$2/bbl because they

expected other bidders to capitulate and revise their offers similarly. With other bidders having already

offered service fees below their comfort level, however, the result was a mass withdrawal of bids.

Table: Fields Licensed Under First Bidding Round (June 2009)

Contract Area

Reserves (mn bbl) Awarded to**

Plateau output pledge (b/d)

Fee/bbl (US$)

Rumaila 17,000 BP (50.5%), CNPC (49.5%) 2.85mn 2

West Qurna-I* 8,700 Exxon (80%), Shell (20%) 2.33mn 1.9

Zubair* 3,870 Eni (39.75%), Oxy (31.25%), Kogas (30%) 1.23mn 2

*Awarded outside the round in December 2009; ** excludes 25% carried state interest

Second Bidding Round

Following the disappointment of its first bidding round, Iraq pressed ahead with its second licensing

round, which was held in December 2009. Baghdad put 10 groups of fields, covering a total of 15 fields,

on offer in the second tender: Najmah, Qaiyarah, East Baghdad (Central and North), the Eastern Fields

(Gilabat, Khashem Al-Ahmar, Nau Doman, Qumar), Badra, Middle Furat (Kifl, West Kifl, Merjan),



Halfaya, Garraf, Majoon and West Qurna-II. Importantly, as in the first licensing round, all contracts

were 20-year TSCs.

The government has said that developing the fields could add another 2.6mn b/d to Iraqi oil output. The

fields on offer under the second round held extra attraction for foreign investors as they were

undeveloped. This means that significant additional reserves and production potential could be available,

and that the fields have not been subject to the poor reservoir management techniques that have damaged

the productivity and longevity of the pre-developed fields on offer in the first round. According to Sabah

Abdul Kadhim from Iraq’s oil ministry, of the 45 companies that had pre-qualified for the licensing

round, 40 companies paid the US$250,000-500,000 participation fees.

Despite the added attraction of the second round fields, the government recognised the need to amend

contract terms in order to avoid a repetition of the embarrassing result of the first round. According to

Dow Jones Newswires, Iraq’s Petroleum Contracts and Licensing Directorate (PCLD) set two main

bidding requirements: the remuneration fee and production plateau target, with 80% of the weighting in

the awarding of the contracts to be put on the remuneration fee. The service fee paid to foreign companies

were reported to be higher than in the first bidding round when it was US$1.90-2.00/bbl, because the

fields are undeveloped, but no further details were released.

Another change to the bidding terms was that signature bonuses to be paid by IOCs were been reduced.

During the first round, IOCs were required to pay a total of US$2.6bn in signature bonuses. According to

reports, in the second round the bonuses ranged from US$100mn to US$150mn, depending on the field.

Reports also indicated that under the terms of the second licensing round, IOCs were permitted to operate

fields won in the round, whereas first round fields were to be operated by Iraqi state companies. Beyond

these changes, the contracts were quite similar. All contracts were TSCs, with pre-qualified companies

required to have a 10% stake in any consortium. Each company was limited to participating in up to four

bids. In addition, fields were split 75:25 between the IOC and the Iraqi government, which will pay fees

to IOCs in oil rather than cash.

Iraq had announced in early October 2009 that Sinopec would not be allowed to bid in the country’s

second licensing round following its purchase of Addax Petroleum, which operates in the semi-

autonomous region of Kurdistan. Nonetheless, according to media reports Sinopec tried to pay the

participation fees to participate in the tender. KNOC and SK Energy were barred from the licensing

round.

The second round proved to be a hit, with seven out of 10 fields attracting successful bids. Majnoon was

awarded on the first day of bidding to a venture led by Shell in partnership with Malaysia's state-

controlled Petronas, while the West Qurna-II contract was granted on December 12 to a venture of Lukoil

and Statoil.



The next largest field to be awarded, Halfaya, with 4.1bn bbl of reserves, was won by a consortium led by

CNPC in partnership with Petronas and French major Total. The Garraf field, with 863mn bbl of

reserves, was won by Petronas with its Japanese partner Japex, while Angolan NOC Sonangol was

awarded the Najmah and Qaiyarah fields with 800mn and 858mn bbl of reserves respectively. Finally, the

109mn bbl Badra field was awarded to a consortium of state-controlled companies led by Russian gas

giant Gazprom, alongside Petronas, Turkey’s TPAO and South Korea’s Kogas.

Not only were there many more NOCs than IOCs among the winners but also notable was the fact that

not a single US company bid in the second round. In the first licensing round, ExxonMobil won the first

phase of the West Qurna field development and independent Occidental Petroleum was in the winning

consortium for the Zubair field. The fact that US companies shied away from the second round was

received with surprise among some commentators, who had predicted that US majors would come out as

the biggest winners. No US companies have explained their absence but security concerns may well have

played a role, in our view, along with political risk aversion and possibly financial difficulties stemming

from the global economic crisis.

Sonangol is looking to farm in international partners at the Najmah and Qaiyarah fields, which it operates,

a company official said on July 18 2010. A Sonangol executive in Baghdad told Reuters that it would be

willing to offer up to a 30% stake in the fields by reducing its existing 75% stakes. The executive also

said that potential partners at Najmah and Qaiyarah include US independent Occidental Petroleum and

Indonesia's state-run oil producer Pertamina, and that Sonangol expects to have a field development plan

ready by August 2010.

Table: Fields Licensed Under Second Bidding Round (December 2009)

Contract Area Discovered

Area (sq km) Location

Reserves (mn bbl) Awarded to*

Plateau Output

Pledge (b/d) Year of plateau

Majnoon 1976 900 60km NW of

Basra 12,580 Shell (56.25%),

Petronas (43.75%) 1.8mn 2020

West Qurna-II 1973 288

65km NW of Basra 12,900

Lukoil (75%), Statoil (25%) 1.8mn 2017

Halfaya 1976 300 35km SE of

Amara 4,100 CNPC (50%), Petronas

(25%), Total (25%) 535,000 2023

Garraf 1984 96.25 85km N of Nassiriya 863

Petronas (60%), Japex (40%) 230,000 2023

Najmah 1934 49.5 50km S of

Mosul 800 Sonangol (100%) 120,000 2019

Qaiyarah 1928 40 70km S of

Mosul 858 Sonangol (100%) 110,000 2019

*excludes 25% carried state interest



Third Licensing Round (Gas)

Iraq formally launched the country's third bidding round on May 6 2010, offering 20-year technical

service contracts (TSCs) to foreign investors to develop the discovered but untapped Akkas, Mansuriyah

and Siba gas fields. 45 companies that had prequalified for previous licensing rounds were invited to take

part in the round, which is aimed at bringing the fields onstream as quickly as possible to help Iraq meet

rising domestic power demand.

Under the terms of the round, bidders offered a fee per incremental barrel of oil equivalent produced

above an agreed production plateau target. The Iraqi state will retain a 25% stake in each of the three

fields. These terms were structured along the same lines as those for the oil field development contracts

awarded in the two oil licensing rounds in 2009.

All three of the fields on offer were part of previous bidding rounds. Akkas, located in Western Anbar

province, is the largest of the fields with estimated reserves of 158bcm. The field was put up for tender in

the country's first bidding round, but only attracted one bid from a consortium led by Italy's Edison,

which fell through as a result of pricing disagreements. Though all the fields are being developed to meet

domestic energy needs, there are plans in place to connect the Akkas field to Syria via pipeline.

The Mansuriyah field, located in eastern Diyala province, was also included in the first bidding round but

it failed to attract any bids. The Siba gas field, located in Basra near the Iraq-Iran border, is the smallest of

the fields with estimated reserves of around 34bcm. The field was listed in the second bidding round but

was dropped owing to a lack of interest.

The round closed on October 20 2010. The largest field, Akkas, was awarded to state-run energy

firms Korean Gas (Kogas) and Kazakhstan's KazMunaiGaz, whose 50-50 joint bid defeated an offer by

France's Total and Turkey's Türkiye Petrolleri Anonim Ortaklığı (TPAO). The US$5.50/boe fee that

Kogas and KazMunaiGaz accepted contrasts markedly with the original US$38/boe fee first proposed by

Italy's Edison, which led an unsuccessful consortium bid for Akkas in the June 2009 licensing round.

Mansuriyah was awarded to a consortium comprising TPAO, Kuwait Energy and Kogas, with theirs

being the only bid received for the field. Of the three fields on offer, Mansuriyah was seen as the least

desirable owing to the security risk environment of Diyala province. In spite of this, Iraq managed to

force the consortium to reduce its US$10/boe fee by 30% in order to secure a deal.

In line with BMI's expectations, the Siba field was awarded to Kuwait Energy (with TPAO as a junior

partner), defeating a solo offer by KazMunaiGaz. We expect Kuwait Energy saw export potential from

Siba, given its proximity to Kuwait and the latter's growing gas shortage. TPAO's stakes in the

Mansuriyah and Siba fields could lead to Turkish gas imports from Iraq.



Future gas exports and associated revenues are certainly on the minds of Iraqi officials as well. In

September 2010, Iraq signed an MoU with Syria for proposed gas export pipeline to the Mediterranean.

Additionally, Iraq's Prime Minister, during an October 20 meeting with Egyptian President Hosni

Mubarak, proposed a pipeline link between Iraq and the Arab Gas Pipeline – thus opening Iraq to the

Mediterranean gas market. Finally, RWE has repeatedly pointed to Iraq as a potential source of gas for its

Nabucco pipeline to Europe.

Export plans, however, have to take a back seat to other priorities. Iraqi officials have stated that the goal

of the gas licensing round is to boost feedstock gas for electricity turbines. Iraq intends to boost its gas-

derived electricity generation capacity from 5 gigawatts (GW) to 12GW by 2015, as domestic energy

consumption continues to soar. In order for the gas field development plans to come to fruition, Iraq will

need to make significant investments in its neglected gas processing facilities and transmission network.

The relative lack of industry interest in the round reflects the challenges associated with Iraqi gas

commercialisation but the winning bidders appear to be focused on long-term export potential from the

fields. In addition, Iraq ultimately made several concessions to win investors over. Signature bonuses

were eliminated and financial commitments for training Iraqi nationals were reduced by 80%.

Furthermore, the Iraqi government dropped a 50% export requirement (originally offered as an incentive),

conceding the absence of a gas export infrastructure and ready markets. Developers were likely highly

assured by Iraq's acceptance of take-or-pay (TOP) terms, thus guaranteeing them compensation.

Companies will not be responsible for the construction of a gas transmission network, and will be

financially compensated should gas be made available for a pipeline network that is not ready to receive

it.

Table: Fields Licensed Under Third Bidding Round (October 2010)

Field Discovered

Area (sq km) Province

Reserves (bcm) Awarded to*

Plateau Output Pledge

(bcm) Bid fee

(US$/boe)

Akkas 1993 360 Anbar 158 Kogas (50%), KazMunaiGaz (50%) 4.1 5.50

Mansuriyah 1979 60 Diyala 127

TPAO (50%), Kuwait Energy (30%), Kogas (20%) 3.3 7.00

Siba 1969 126 Basra 34 Kuwait Energy (60%), TPAO (40%) 1.03 7.50

*excludes 25% carried state interest. Final contract for Akkas unsigned at time of writing.



Fourth Licensing Round

Iraqi oil minister Abdul Kareem al-Luaibi said on January 2 2011 that the government was considering

holding a fourth licensing round for new exploration acreage. Al-Luaibi said that the ministry was

considering 12 exploration contracts, while the head of the ministry's licensing office, Abdel-Mahdi al-

Ameedi, was quoted by Reuters as saying that the contracts would be for natural gas only, but gave no

further details. Al-Ameedi was quoted in February 2011 as saying that the round would be in Q411.

In our view, interest in any future gas licensing round will be contingent on progress with ongoing gas

deals, which remains slow. At the time of writing, Iraq had yet to sign a formal development deal for the

Akkas gas field with Korea Gas and KazMunaiGaz, after the companies won the rights to the field in

October 2010. The oil ministry's Al-Ameedi was quoted as saying that the final deal for Akkas would be

completed by end-February 2011. Similarly, Iraq has yet to ink a final deal with Shell relating to the

Basra Gas JV, which seeks to monetise associated gas that is currently flared from the southern oil fields.

While some Iraqi officials have suggested that legal problems could delay the signing of the Basra Gas

contract for months, Hussein al-Shahristani declared himself satisfied with progress on related talks on

February 23 2011.

Other Major Contracts

Iraq finalised a development agreement with China National Offshore Oil Corporation (CNOOC) and

TPAO to develop the Missan (Maysan) oil fields complex on May 17 2010. CNOOC originally bid for

the Missan fields in Iraq's first licensing round in 2009 in partnership with fellow Chinese state-run

company Sinochem but the relatively low remuneration fee of US$2.30/bbl led Sinochem to exit the deal,

providing an entry opportunity for TPAO. Under the new deal, CNOOC will hold a 63.75% in the

venture, with TPAO holding 11.25% and an Iraqi state company holding the remaining 25%.

The end of August 2008 saw China and Iraq sign a US$3bn oil service contract for the development of

the Ahdab oil field, according to a statement from Iraq’s Embassy in Beijing. CNPC originally signed a

PSA for the field in 1997. This is the first deal from the Saddam Hussein era to be honoured by the new

Iraqi regime, but under what seem to be very different terms, with China due to receive only fees for its

work rather than gaining a long-term stake in the profits from the Adhab field. The deal was finalised in

November 2008.

In February 2009, it was reported that British JV Mesopotamia Petroleum Company (MPC) will sign a

contract with Iraq to drill 60 wells per year in oil fields in the southern part of the country. According to

Reuters, MPC, which is a JV between Ramco Energy and Midmar Energy established with the sole

purpose of operating in Iraq, will be awarded a deal for 60 wells per year, beginning with oil fields around

the southern city of Basra.



Basra’s state-run South Oil announced a tender in February 2009 to cover the drilling of 40 wells in two

oil fields. According to Reuters, IOCs have been invited to drill 10 oil wells in the Nahr bin Omar field

and 30 others in the Majnoon field. Bids had to be submitted by March 1. The company in January 2009

announced plans to increase the country’s oil output by 300,000-400,000b/d over 2009 and 2010. The

company’s director general, Kifah Numan, told Reuters that his company was aiming to boost production

to 3.5mn b/d within three years.

The latest round of talks between the Iraqi government and a consortium of Japanese companies led by

Nippon Oil over a technical contract for the development of the Nassiriya (Nasiriyah) field have failed to

produce an agreement, oil minister al-Shahristani told reporters in January 2009. Having made a bid for

the Nassiriya contract in April 2009, the Japanese JV comprising Nippon Oil, Inpex and JGC has still

not clinched a deal after a series of near misses. ‘The last negotiations ended without reaching a

conclusive result, but we decided to continue talks’, al-Shahristani told Reuters. While the obstacles in

negotiations have not been disclosed, the Japanese companies’ alleged reluctance to leave Baghdad

airport while executives of world’s largest oil companies braved the security risks to visit the oil ministry

in December 2009 were unlikely to be conducive to amiable deal-making.

The Nassiriya tender is part of Iraq’s ‘fast-track process’ of developing selected oil fields outside the

country’s licensing rounds. In April 2009, South Oil Company issued a tender for the field, which is

located in the southern province of Dhi Qar. Nassiriya is estimated by the Iraqi oil ministry to hold 4.4bn

bbl of oil and, according to officials, could produce 100,000b/d within 18 months of the start of drilling,

with volumes reaching 1mn b/d at peak production. Spain’s Repsol YPF and Italian major Eni have

pulled out of the tender, leaving only the Nippon Oil consortium in the running.

In February 2011, Iraq’s oil ministry said that the developers of Nassiriya would be required to build a

nearby refinery. He said that current field output was 10,000-15,000b/d.

International Energy Relations

Relations With Middle East

Kuwait's oil minister Sheikh Ahmad al-Abdullah al-Sabah told journalists on August 25 2010 that a joint

committee representing Iraq and Kuwait has agreed 'in principle' on how to share the two countries'

border oil fields. As per the concord, a 'unified international oil company' will drill for oil in common oil

fields and IOCs will be able to drill on both sides of common fields simultaneously. The minister did not

clarify whether the 'unified' company would involve participation from either Kuwaiti or Iraqi state-run

oil companies. Sheikh Ahmad said that the new agreement will prevent future accusations of field over-

utilisation by either side. The joint fields’ development agreement underscores growing cooperation

between Kuwait and Iraq, which is certain to help speed up development plans for the latter's southern oil



fields, such as Rumaila and Zubair. The two countries have held discussions on the creation of a special

border post to hasten the delivery of energy-related equipment and materials currently slowed by

congestion at Iraq's Umm Qasr port. On July 19, Iraq reported that Kuwait had given its initial approval to

use existing roads via Safwan that pass through Rumaila.

On August 12 2010, oil minister Hussein al-Shahristani confirmed Baghdad's willingness to allow a

pipeline conveying Iranian gas to Syria to pass through Iraqi territory. An Iraqi oil ministry spokesperson

confirmed that the two sides would establish a committee to study the technical feasibility of the project.

The Iraqi confirmation follows a statement by Iran's deputy oil minister Javad Oji on August 8 that

Baghdad had issued a permit for the transit of Iranian gas to Syria, which was reported by Iran's semi-

official ISNA news agency. Oji said Iran would use its sixth transnational gas pipeline network, segments

of which are still under construction, for the exports. The pipeline has a capacity of 40bcm, of which

about 18bcm is earmarked for domestic consumption. The energy relationship between Iran and Iraq is

likely to develop further should a planned oil pipeline between Abadan and Basra come to fruition.

Syria’s ambassador to Iraq, Nawaf Aboud al-Sheikh Faris, and Hussain al-Shahristani met in Baghdad in

January 2009 to discuss greater cooperation in the energy sector. Al-Shahristani’s spokesperson, Asim

Jihad, has said that the Iraqi oil ministry is in the process of launching the construction of a gas pipeline

from the Akkas gas field to Syria. He told Reuters that the ministry has already reached an agreement

with an unnamed company over the pipeline’s construction. Iraq and Syria are also planning to reopen an

oil pipeline that would transport Iraqi oil to the Syrian port of Banias, from where it could be shipped on

to European and world markets. These developments form part of Iraq’s efforts to diversify its oil and gas

export routes and signify another step in the country’s relations with Syria, with both sides having been

keen to restore diplomatic ties since the fall of Saddam Hussein.

Relations With Asia

South Korea signed a non-binding deal with Iraq to provide Baghdad with US$3.55bn worth of

infrastructure investment in return for interests in oil fields in Basra province in southern Iraq, according

to the South Korean energy ministry. News of the deal appears to represent a lessening of tensions

between Baghdad and Seoul over the KNOC US$2.1bn deal with the KRG. The details of the deal are

unclear, but in return for access to unspecified oil fields in Basra, South Korea will help build energy

infrastructure, including power plants, in Iraq. South Korean President Lee Myung-bak and his Iraqi

counterpart Jalal Talabani signed the deal in February 2009, with a final agreement due to be signed later.



Relations With Europe

The EU and Iraq signed a memorandum of understanding (MoU) on a Strategic Energy Partnership in

January 2009. The MoU provides a political framework to enhance the two sides’ energy relations,

covering different areas of cooperation that include ‘identifying sources and supply routes for gas from

Iraq to the EU’ and ‘assessing the Iraqi hydrocarbon transit and supply network… enhancing safety and

reliability of the pipelines’. While the MoU is a general document and does not mention any specific

projects, a spokesperson for the EU Energy Commissioner has told New Europe that Iraq could become a

source for the ambitious EU-backed Nabucco gas pipeline project.

Rumours have been circulating that Kurdistan could become a source for Nabucco since Hungary’s MOL

and Austria’s OMV acquired a 10% stake each in Pearl Petroleum – which is currently developing two

gas fields in Kurdistan – in May 2009. The central government in Baghdad has not reacted positively to

such reports and has since said that it could supply the pipeline. On August 27 2010, RWE announced

that it had signed a cooperation agreement with the KRG in which it agreed to assist the KRG in

developing gas export infrastructure. More importantly, the deal 'foresees' negotiations on a supply

agreement to export gas to Europe through Nabucco. In a press release announcing the deal, the KRG's

energy minister Ashti Hawrami said that up to 20bcm of gas could be exported annually in this manner.

In response to the deal, the Iraqi oil ministry released a statement on August 29 reaffirming Baghdad's

monopoly over gas exports and asserting that any agreements struck outside the current oil and gas legal

framework were 'illegal'.



Company Monitor

China National Petroleum Corporation (CNPC) – Summary

State-run CNPC holds a 37.5% interest in the Halfaya field, a 75% interest in the al-Ahdab field and a

37% interest in the Rumaila field.

CNPC and BP won the rights to the super giant South Rumaila field in July 2009. The field has estimated

reserves of 7.3bn bbl. The Chinese firm increased its stake in the field from 25% to 37% in October 2009,

at the expense of BP’s share, while the share held by the Iraqi government remained unchanged at 25%.

The two companies have succeeded in swiftly ramping up output from the field over the course of 2009-

10. In January 2011, BP said that Rumaila’s output was more than 10% higher than its pre-investment

levels, producing at 1.275mn b/d in that month. BP and CNPC are targeting output of 2.85mn b/d by

2016.

The final contract for Halfaya was signed in January 2010. Halfaya has proven reserves of about 4.1bn

bbl. The company is developing the field alongside Total (18.75%) and Petronas (18.75%). In August

2010, CNPC said that it would start drilling new wells in September in order to boost the field’s output to

70,000b/d in 2011, with a long-term goal of 535,000b/d in 2016. The company had received bids to drill

three appraisal wells, CNPC said.

Development of the al-Ahdab field has been slow. CNPC said in January 2011 that it had finalised an

initial development plan, nearly two years after its ‘inauguration’. China and Iraq signed a US$3bn oil

service contract for the development of Ahdab in 2008, after having altered the terms of the original

contract signed in 1997. Under the original PSA, CNPC agreed to explore the field in a contract worth

US$700mn over 23 years, with a planned output of 90,000b/d. The revised contract, in the form of a

services contract, will run over 20 years with production due to begin in three years’ time. The targeted

output has been increased to 110,000b/d.

CNPC and Sinopec signed an MoU with Shell in May 2009 in preparation for a joint bid for the

development of the Kirkuk oil field in Iraq, according to an unnamed source cited by Dow Jones

Newswires. According to the source quoted by Dow Jones, the consortium would take a 75% stake in the

Kirkuk field if its bid is successful, with the remaining 25% going to an Iraqi state-owned company.

However, no deal regarding the Kirkuk field has been signed till date.



Royal Dutch Shell – Summary

Shell has a 45% interest in the onshore Majnoon oilfield and a 15% interest in the onshore West Qurna-1

field. Additionally, Shell holds a 44% stake in the proposed South Gas joint venture, alongside the Iraqi

state and Mitsubishi.

Majnoon, which holds about 12.8bn bbl, is being developed by Shell (45%) and Petronas (30%). The

companies awarded Halliburton a contract in November 2010 for the establishment of operation centres

to drill 15 new wells at the field by end-2011. In 2009, the companies envisaged building two new crude

processing facilities with a capacity of 50,000b/d each, as well as increasing capacity from 100,000b/d to

120,000b/d at an existing processor.

Early November 2009 saw the Iraqi government award a contract to develop West Qurna-I to a

consortium of majors ExxonMobil and Shell. Exxon and Shell beat off competing bids from three rival

consortia led by Lukoil, Total and CNPC to win the 20-year TSC for the field. In May 2010, the initial

development plan for the first phase of development of the West Qurna field in southern Iraq was agreed

by Shell, ExxonMobil and SOC. Iraq hopes to boost output at West Qurna-1 from the current 225,000b/d

to 2.325mn b/d within seven years and several opportunities exist for service companies to assist Iraq in

this goal.

An official on the joint management committee (JMC) of West Qurna-1 stated that eight new wells would

be drilled and up to 50 others overhauled in 2010. Four of the new wells will be drilled by state-run Iraqi

Drilling Company, while foreign service companies will be invited to drill the other four through a

tender process. A workover programme is being planned for the overhaul of 45-50 wells by the end of

2010, he said. The programme's tenders, to be discussed by the West Qurna-1 JMC, are expected to be

open to all major international service companies, including Weatherford and Fluor, he said.

In January 2011, senior Iraqi oil official Abdel Mahdi al-Ameedi said that ExxonMobil and Shell had

succeeded in boosting output at the field by 11,000b/d. The company is targeting 750,000b/d by end-

2012, compared with early-2011 output of around 230,000-240,000b/d.

The end of September 2008 saw Shell sign a preliminary agreement with Iraq’s state-run Southern Gas

Company to set up a JV to capture and commercialise natural gas, which is currently flared, and supply it

to the Basra region of southern Iraq. The initial agreement only covered a feasibility study and set out the

commercial principles for the JV. The Iraqi cabinet approved the Basra Gas JV in June 2010. Under the

terms of the agreement, Shell will hold a 44% stake in the JV with Southern Gas owning a majority 51%

stake and Mitsubishi 5%. Mitsubishi’s participation was announced in February 2009.



Shell’s agreement with SOC to form a JV to capture and commercialise natural gas has faced increased

scrutiny. Iraqi MPs, local politicians, trade unions and IOCs have all expressed concerns about the

agreement that was reached in September without a competitive bidding process. MEES, having seen a

copy of the deal, says the agreement goes further than initially thought. The contract also allows for the

development of non-associated gas fields and ‘any other [geographical] areas as may be agreed between

the parties’, contrary to the perception that it covers the Basra region only. According to MEES the terms

effectively give the JV a 25-year gas production monopoly in Basra and the option to extend its

geographical remit. The tax terms of the South Gas Deal have also come in for criticism. The 15% tax

rate is well below the 35% rate outlined in the oil contracts of the Iraqi oil ministry’s previous licensing

rounds, although it is the same rate that CNPC will pay to develop the al-Ahdab field, and is in line with

current Iraqi legislation.

Addax Petroleum – Summary

Addax operates the Taq Taq field, 60km north of Kirkuk, in partnership with Turkey’s Genel Enerji. In

June 2009, China’s Sinopec agreed to acquire Addax in a US$7.2bn deal. The deal has been approved by

the Chinese government and it became effective on October 5 2009. As a result of the acquisition Sinopec

was barred from taking part in Baghdad’s second bidding round.

Like DNO International, Addax became snared in the contract and payments dispute between Erbil and

Baghdad, resulting in an export shutdown from Taq Taq in October 2009. Following an agreement

reached after the December 2010 formation of a new government in Baghdad, however, exports restarted

from DNO’s Tawke field in February 2011, although not from Taq Taq at the time of writing.

In July 2005, Addax signed a farm-in agreement with Genel for a 30% interest in the PSC for Taq Taq.

Addax subsequently increased its equity position in the Taq Taq field to 45% when it acquired an

additional 15% participating interest, subject to KRG back-in rights, from Genel by way of a revised PSC

in November 2006. The revised PSC entered into by Addax and Genel with the KRG also expanded the

geographic scope of the original PSC to include the Kewa Chirmila prospect. The PSC was revised again

in February 2008 in order to conform to the model PSA published by the KRG and gave the KRG the

right to require that at a future date a government nominated entity is assigned a 20% interest, which

would reduce Addax Petroleum’s interest to 36%.

DNO International – Summary

Norwegian independent DNO International’s Iraqi operations are limited to Iraqi Kurdistan. It operates

the Tawke oil field (with a 55% stake) and has 40% stakes in the Dohuk and Erbil licences. DNO was the

first foreign company to start drilling in Iraq after the fall of Saddam Hussein. However, disputes between

Erbil and Baghdad over the legality of the Kurdish PSCs and responsibility for operator payments led to a



shutdown of exports of Kurdish crude in 2009. Therefore, until end-2010, Tawke was producing below

capacity for the local refining market.

However, in January 2011, Iraq announced that it would once again authorise the export of oil from the

Tawke field via the Kirkuk-Ceyhan pipeline. DNO confirmed on February 3 2011 that export production

tests had begun, at an initial rate of 10,000b/d. This increased over the subsequent weeks to 50,000b/d.

In September 2010, DNO released test results from the Bastora-1 well in the Erbil licence. While the first

two tests from the well flowed water, the third flowed 500-600b/d of 16-18° API oil. In May 2010, DNO

announced that its P50 (proven plus probable) reserves decreased by 8% in 2009 to 149.4mn boe. The fall

was caused by a drop in reserves at the company's three licences in Iraqi Kurdistan.

Early October 2009 saw Kurdistan’s energy ministry lift the suspension it had imposed on DNO’s

operations in the Kurdish region of Iraq. The KRG suspended the company’s operations and threatened

that DNO could lose its licence to operate in Kurdistan after the Oslo Stock Exchange (OSE) released

details of an investigation into the 5% stake sale in DNO to Genel in October 2008. The KRG has

concluded that DNO’s ‘internal disagreements with the OSE were exploited by the media beyond DNO’s

control’, thereby clearing DNO of any wrongdoing in the matter.

In May 2009, DNO began exporting oil from the Tawke field via the Kirkuk-Ceyhan pipeline to Turkey.

Exports of crude oil from the Tawke field started on June 1 2009, following the receipt of central

government approval, but were halted months later.

Heritage Oil – Summary

UK-listed explorer Heritage Oil has a 100% operating stake in the 1,015sq km Miran Block, which is

situated west of the city of Suleimaniah in Iraqi Kurdistan. Its subsidiary Heritage Energy Middle East

was one of the first companies to be awarded a PSA by the KRG, in October 2007. Heritage and

Turkey’s Genel Enerji discussed a possible merger in 2009, but talks ended after Heritage sold off its

Ugandan assets in November of that year.

In 2011, Heritage reported that deepening and testing of Miran West-2 had led to a discovery of a gas

field with estimated gas-in-place of 192-258bcm, in addition to 42-71mn bbl of condensate and 53-75mn

bbl of oil. The fact that Miran West-2 had struck large volumes of gas and not crude oil contradicted

earlier assertions by Heritage that the prospect held oil reserves of 3.4-4.2bn bbl. Heritage is now

targeting a 2015 start-up for Miran West’s gas production, with a third appraisal well scheduled for Q211

and a second rig to commence drilling in Autumn 2011. Additionally, Heritage intends to drill a well at

Miran East in 2012.



In 2010, Heritage announced that the Miran West-2 appraisal well drilled to a total depth of 4,426m

encountered hydrocarbons across three geological zones, against an initial target of just the shallower

Cretaceous depths. Fieldwork studies and 3D seismic will establish the company’s future drilling

locations at the block.

In May 2009, Heritage announced that it had discovered up to 4.2bn bbl of oil in the Miran West field.

The company said that the Miran West-1 well has an estimated gross oil-bearing interval of 710m. Oil

produced during testing was of medium gravity, measuring approximately 27º API. Heritage believes the

field’s development will be straightforward and that the success of the Miran West-1 well lowers the

exploration risks of the adjacent Miran East structure. In a press statement, the company said that the

Miran West field could be producing 10,000-15,000b/d by end-2009. Heritage also said that it was

planning to transport the oil by truck until a connection to Iraq’s northern export pipelines was approved

by the central government.

Gulf Keystone Petroleum – Summary

AIM-listed explorer Gulf Keystone Petroleum (GKP) has stakes in four exploration blocks in Iraqi

Kurdistan. Of these, the most important to the company's prospects is the Shaikan block, in which GKP

has a 75% operating stake (alongside partners MOL of Hungary with 20% and Texas Keystone with the

remaining 5%). GKP also holds an operating stake in the Sheikh Adi block (80%), as well as non-

operating stakes in the Akri-Bijeel (20%) and Ber Bahr (40%) blocks, located near the city of Dihok, in

the vicinity of Mosul.

GKP hit a large oil column at the Shaikan block with its Shaikan-1 exploration well in June 2009, which

initially tested at 5,000-8,000b/d of 21-22º API crude. According to the company’s preliminary estimates,

the discovery held 300-500mn bbl of oil in place. That figure has subsequently been raised several times

as new formations were penetrated, reaching 1.9-7.4bn bbl by January 2010, with a further upside of 18bn

bbl, according to an evaluation by independent consultants Dynamic Global Advisors. GKP envisions a

total of seven appraisal wells at Shaikan, with the final appraisal well expected by mid-2012.

In May 2010, GKP announced that it had raised GBP114mn through a share placement to fund drilling

costs in Kurdistan. It said the money would be spent on drilling the Sheikh Adi exploration well and three

appraisal wells near Shaikan, conducting an extended well test at the Shaikan-1 multi-pay oil and gas

discovery, and acquiring 3D seismic data on the Shaikan and Sheikh Adi licences in 2010 and early-2011.

In August 2010, GKP released drilling test results from the Shaikan-1 well, whose estimated flow rates

were 20,000b/d of oil.



In September 2010, Gulf Keystone's CEO Todd Kozel claimed the company had sufficient cash to

undertake planned drilling activity through to mid-2011. At the time, he claimed that Gulf Keystone had

US$91.9mn in cash, after having raised about US$189mn from investors in H110 to fund drilling costs.

GKP then raised GBP109mn (US$175mn) through the placing of 78mn new common shares at GBP1.40

per share on October 16 2010. The company said that the funds would be used to accelerate drilling

activity in its four Iraqi Kurdish blocks. At the Shaikan block, Gulf Keystone intends to complete drilling

two previously -delayed appraisal wells (Shaikan-2 and 3) and add three more to the drilling programme.

The company now expects full appraisal of Shaikan to be complete by end-H112.

On January 5 2011, GKP announced that the Shaikan-3 appraisal well, which it spudded in September

2010, had identified oil in place of 220mn-2.2bn bbl. The news pushed the company’s share price, which

has more than doubled since July 2010, up 8%. The well flowed 9,800b/d of oil in February 2011,

following an acid treatment to eliminate formation plugging around the well bore.

Outside the Shaikan block, GKP announced a discovery at Bijeel-1 in March 2010, having started drilling

in late-2009.

BP – Summary

CNPC has a 37% stake in the Rumaila field, which is operated by BP (38%). The super-giant field was

the only one awarded in Iraq’s first bidding round in July 2009. The field was the second largest on offer

in the round, with officially estimated reserves of 7.3bn bbl. Its close proximity to export infrastructure at

the port of Basra was also a factor in its attractiveness to BP and CNPC. Despite this, the conditions

imposed during the round have made it only marginally profitable.

BP said in January 2011 that it had succeeded in boosting output at Rumaila by more than 10% to

1.275mn b/d. In order to achieve this target, BP said that it mobilised 20 new rigs, drilled 41 wells and

laid 122km of flowlines in 2010. Al-Ameedi said that he expected Rumaila to produce 1.5mn b/d by end-

2011, while BP and its partners had agreed on a plateau target of 2.85mn b/d within seven years of the

signing of the field development agreement (ie by 2016).

Eni – Summary

The Zubair field, which has reserves estimated at 4bn bbl, was awarded to a consortium led by Eni in

October 2009. The three other partners are Occidental Petroleum (Oxy), Korea Gas (Kogas) and Maysan

Oil (formerly part of Southern Oil). Eni holds a 32.81% stake, with Oxy holding 23.44%, Kogas 18.75%

and Maysan 25%. An earlier consortium included Sinopec but Baghdad made it a condition for the

contract to drop the banned Chinese company.



Having initially rejected the US$2/bbl Zubair service fee, the consortium accepted it after Baghdad

improved other terms. Details on which of the contract terms were changed were not revealed but it

appears that the US$300mn soft loan signature bonus was dropped, while operational control of fields by

investors was also improved and the 20-year contract term gained a five-year optional extension. The

consortium plans to invest around US$20bn to raise production at the field from 200,000b/d in late-2009

to the agreed 1.23mn b/d by 2016.

Eni began awarding service contracts for the Zubair field’s development in September 2010. As per the

terms of a July 2010 agreement, Eni has agreed to secure the participation of state-run Egypt General

Petroleum Corporation (EGPC) in either Zubair or the company’s Gabonese assets.

In November 2010, Eni announced that it had achieved the initial production aim of more than

220,000b/d of oil at Zubair. Senior Iraqi oil official Abdel Mahdi al-Ameedi said in January 2011 that Eni

had succeeded in boosting production at Zubair to 265,000b/d, a 45% increase on the agreed baseline rate

of 184,000b/d.

In October 2009, Oxy said it was in talks with Abu Dhabi to allow the country’s investment fund

Mubadala Development Company to buy in to Oxy’s Zubair stake to split capex. Oxy’s chairman, Ray

Irani, also raised the possibility of additional investors buying into the stake.

ExxonMobil – Summary

November 2009 saw the Iraqi government award a contract to develop the first phase of the West Qurna

field near Basra to a consortium of majors ExxonMobil and Shell. Exxon and Shell beat off competing

bids from three rival consortia led by Lukoil, Total and CNPC to win the 20-year TSC for the field.

Exxon will act as the lead contractor with 60% interest; Shell will hold only 15% owing to its

commitments elsewhere in the country. The mandatory 25% carried state interest will be held by Oil

Exploration Company. Reserves at West Qurna-I are estimated at 8.7bn bbl.

In November 2010, ExxonMobil and its partners announced an increase in the output target for the West

Qurna field to 2.83mn b/d, up 21.74% from the original target of 2.3mn b/d, in six to seven years. The

higher output target followed the addition of new reservoirs in the region. The consortium is planning to

increase output from the field to around 750,000b/d within three years under a rehabilitation programme.

The output will be bolstered by overhaul of existing wells, drilling of new wells and several water

injection projects. Senior Iraqi oil official Abdel Mahdi al-Ameedi said in January 2011 that ExxonMobil

had succeeded in boosting output at West Qurna-1 by 11,000b/d.



Lukoil – Summary

After more than a decade of lobbying, Russian producer Lukoil finally clinched a contract for the second

phase of the giant West Qurna project in December 2009, winning a TSC for the second phase of its

development in partnership with Statoil. Under the final contracts signed with the government Lukoil will

hold 56.25% in the project, Statoil will hold 18.75% and the state will be represented by South Oil

Company (25%).

West Qurna-II is estimated to hold reserves of 12.9bn bbl oil. The field development plan provides for

additional seismic data gathering and the drilling of over 500 wells, with the aim of achieving a

production plateau of 1.8mn b/d by 2017 and maintaining it until 2040.

Lukoil plans to start drilling 70 new wells in the field in 2011, with first production from the second

phase expected in late 2012. The Russian company hopes to achieve oil production of 150,000b/d by

January 2013, reported Dow Jones Newswires in December 2010, and expects to produce 500,000b/d

from the field by January 2014. In January 2010, Statoil said that it planned to invest US$1.4bn in the

project over the next four to five years.

In November 2010, Lukoil awarded a contract to geophysical data acquisition services provider Terra

Seis Trading (TSTL) to carry out a seismic survey at West Qurna Phase 2. The contract will include

540sq km of 3D seismic acquisition and is scheduled to start in early-December 2010, with completion

due in August 2011. The financial terms of the contract were not revealed.

It was reported in February 2011 by MEED that Lukoil has set a March 30 2011 deadline for bidding

firms to submit commercial proposals for early production facilities at West Qurna-II. Lukoil issued four

tenders for engineering, procurement and construction deals in September 2010, covering oil gathering

systems, processing facilities and water supply system along with an oil export pipeline, storage facilities,

a power station and associated gas processing plant.

Gazprom Neft – Summary

Gazprom Neft, the oil arm of Russian gas giant Gazprom, signed a deal with the Iraqi government in

January 2010 to develop the Badra oil field in Wasit Province, which holds an estimated 3bn bbl of in-

place reserves. Gazprom Neft will operate the field with a 30% stake, working alongside Kogas (22.5%),

Petronas (15%) and TPAO (7.5%), while the government will hold a 25% interest.

In November 2010, Gazprom Neft awarded Gulf Mine Action a contract to provide mine clearance

services at the Badra field. The contract is valid until May 2011. Gazprom has also awarded a contract to



Iraq's Oil Exploration Company (OEC) to carry out a 3D seismic survey of the field. The contract is

valid until April 2011. The financial terms of the contracts were not revealed.

Sonangol – Summary

State-run Angolan oil company Sonangol won 75% operating stakes in the onshore Najmah and Qaiyarah

fields in 2009, after accepting a per-barrel remuneration fee of US$6 for Najmah and US$5 for Qaiyarah.

It agreed to plateau production targets of 110,000b/d and 120,000b/d respectively by 2018. In July 2010,

a company executive suggested a possible farm-in by Occidental Petroleum or Indonesia’s Pertamina.

Sonangol said that it would have a field development plan ready by August 2010.

MOL – Summary

Hungarian oil company MOL is exploring at two blocks in Iraqi Kurdistan: the Akri-Bijeel Block, which

it operates with an 80% stake, and the Shaikan Block, in which it has a 20% non-operated working

interest. In May 2009 MOL bought a 10% stake in Pearl Petroleum, the sole licence holder of two major

gas condensate fields, Khor Mor and Chemchemal. Khor Mor is already producing and supplying gas to

local power plants and is undergoing further development, while Chemchemal is at the exploration stage.

The projects will meet local demand in the near term but MOL expects a substantial surplus to be

available for export in future.

In November 2010 MOL released drilling test results from its Bijeel-1 discovery well in the Akri-Bijeel

Block. The company said the well produced 2,700b/d of oil. Following completion of flow rate testing,

MOL plans to develop an appraisal programme.

Pearl Petroleum – Summary

Pearl Petroleum holds the upstream interests of UAE-based companies Dana Gas and Crescent

Petroleum in Kurdistan and, since mid-2009, also includes MOL and OMV, each with 10% stakes.

Unlike export-oriented Western firms operating in Iraq, Pearl is seeking to meet domestic demand

through an integrated gas-to-power project. Should field development proceed to plan, however, the

companies may be able to export excess gas to Europe later on.

On October 5 2010, Dana and Crescent announced in press statements that the gas production and

processing capacity at their gas-to-power Gas City project had reached an annualised rate of 2.1bcm. The

project is fed by the Khor Mor gas field, supplying power plants in Erbil and Chemchemal. Further

production growth potential is provided by the Chemchemal gas field, which is currently being appraised.



Since signing contracts with the KRG in April 2007, Dana and Crescent claim to have invested

US$850mn in Gas City. The project already meets the bulk of Kurdistan's electricity needs and gas output

is expected to rise to an annualised 3.1bcm by 2012, while condensate production will reach 14,000b/d.

Gas City stands out from the majority of new oil and gas Iraqi projects by its focus on meeting domestic

needs. The project is located in the 40sq km free zone, where Dana and Crescent hope to lease out

acreage to related heavy industries such as fertilisers, steel and construction materials. By putting local

priorities first, the two companies may be in a better position to negotiate a gas export contract with the

KRG once production starts to take off.

Türkiye Petrolleri Anonim Ortakligi (TPAO) – Summary

Turkish state-run upstream oil company Türkiye Petrolleri Anonim Ortakligi (TPAO) and its

consortium partners are set to invest US$3.2bn in Iraq, Turkish Energy and Natural Resources Minister

Taner Yildiz announced in October 2010. The investment will be directed towards the Mansuriyah and

Siba gas fields, which hold respective reserves of 128bcm and 43bcm. The consortium includes TPAO,

Salmiya-based independent Kuwait Energy Company (KEC) and Kogas.

Marathon Oil – Summary

In October 2010, US independent Marathon Oil acquired four stakes in Iraqi Kurdish exploration blocks.

Marathon now operates 80% stakes in two PSCs in the Harir and Safen blocks, located north-east of

Erbil, in addition to 20% and 25% respective working interests in the Atrush and Sarsang blocks, north-

west of Erbil. No exploration timeline has been announced.

Murphy Oil – Summary

US independent Murphy Oil announced in November 2010 that it had finalised an agreement with the

KRG to acquire a 50% operating stake in the Central Dohuk block. Murphy intends to shoot seismic at

the block in 2011 and is planning an exploration well in 2012. The block covers around 619sq km and is

located in Iraq's northern Dohuk governorate, close to the Turkish border.

Repsol YPF – Summary

Spain’s Repsol YPF is considering entering Kurdistan, according to a Reuters report in November 2010.

The firm is considering either buying a stake in a block or acquiring a new exploration licence from the

KRG, according to unnamed sources cited in the article. Repsol did not participate in any of Iraq's gas oil

and licensing rounds in 2009-2010. An investment in Iraqi Kurdistan would certainly make the Spanish

major the highest-profile investor in the region’s oil and gas sector.



Others – Summary

Garraf's two developers – Petronas and Japex – have selected a contractor to drill 11 wells at the field,

industry journal Upstream reported in February 2011. At the time of writing, the firms were waiting for

approval from the Iraqi government for their choice of an EPC contractor for early oil production

facilities. It was reported the previous year that Petronas and Japex were looking to drill two appraisal

wells at Garraf by November 2010. In February 2011, Japan’s JOGMEC said that it would provide

financing to Japex for Garraf’s development.

In July 2010, Calgary-based Vast Exploration farmed in to Iraqi Kurdistan’s Qara Dagh Production

Sharing Contract (PSC) operated by the KRG. Under the terms of the farm-in agreement, Vast

Exploration received an additional 10% stake in the PSC through the payment of 30% royalties on future

output at Qara Dagh. The company now holds a 37% stake in the PSC.

South Korea’s Yonhap news agency reported on August 10 2010 that KNOC made oil discoveries at the

Bazian and Sangaw North blocks in the KRG region, according to an unnamed source at South Korea’s

Ministry of Knowledge Economy. Yonhap did not cite reserves estimates, but South Korea's Maeil

Business newspaper reported that the blocks' estimated total reserves were 2bn bbl.

General Exploration Partners (GEP) announced in December 2010 that oil shows were encountered in

its Atrush-1 exploration well in the Atrush block in the Kurdistan region. According to initial analysis,

consolidated net pay of the Jurassic Barsarin-Sargelu-Alan-Mus (BSAM) and Butmah reservoirs is about

200m with 8% porosity and a 40% oil saturation cutoff. Comprehensive results are expected by early-

2011. GEP, a JV between US-based Aspect with a 66.5% stake and Kurdistan-focused oil

developer ShaMaran Petroleum with the remaining 33.5%, is the operator of the block with an 80%

stake, working alongside partner Marathon Oil's wholly owned subsidiary Marathon Petroleum.

Explorer WesternZagros Resources announced on 14 October 2010 that it had completed well control

operations at its second exploration well in Kurdistan, Kurdamir-1. No further drilling is currently

expected at the well, which has been plugged and cemented up to its 2,500m approximate depth.



Oil Services Companies – Summary

Company Activities

Baker Hughes Two-year contracts, worth about US$100mn, have been awarded for the supply and installation of electrical submersible pumps and associated services to Baker Hughes subsidiary Centrilift and Saudi-based al-Khorayef Petroleum

Cameron Contract for the provision of trees and wellheads to Baker Hughes' Centrilift for its BP/CNPC Rumaila contract

Daqing Oilfield Svcs A share of the US$500mn BP/CNPC March 2010 Rumaila contract for three rigs and 21 wells

Halliburton Contracts secured with South Oil Company. Fifteen-well contract awarded for the Majnoon field and ‘multimillion-dollar’ contract for Zubair field development

Awarded integrated services contract for West Qurna 1 field by ExxonMobil October 2010.

US$100mn expenditure in 2010

600 Iraqi workers by end-2010

Leighton Offshore Awarded US$733mn EPC contract in November 2010 for dredging work, laying of subsea pipelines and commissioning onshore metering as part of Iraq’s Crude Oil Export Expansion Project

Petrofac Contract won to build two new crude processing plants at Majnoon, each with a capacity of 50,000b/d. Petrofac has also been tasked with rehabilitating the field's existing crude processing facility

Schlumberger Awarded a share of the US$500mn BP/CNPC March 2010 Rumaila contract for three rigs, alongside Iraqi Drilling Co, and 21 wells

Taqa (Saudi Arabia) Taqa is planning on investing in Iraq through the provision of pipelines and offshore platforms, Reuters reported in July 2010

Technip Awarded FEED contract for onshore Badra oil field by Gazprom Neft in February 2011. Production start for expansion phase expected in 2013

Weatherford Seven-well contract for Rumaila field awarded by BP/CNPC

WorleyParsons Won Rumaila FEED contract December 2010

Won an US$800mn US Army Corps of Engineers contract in 2004, alongside Parsons Engineering and Construction (E&C), to rehabilitate the northern infrastructure as part of the Restore Iraqi Oil (RIO) project

The CEO of Schlumberger, Andrew Gould, said in April 2010 that he expected the oil field services

market in Iraq to be worth US$3-4bn per year. Schlumberger is hiring staff and has installed mobile

barracks near Basra where 300 workers will be in place by July 2010 and 600 by year-end, according to

an April Bloomberg report.

In March 2010, BP and CNPC awarded US$500mn of drilling contracts for the Rumaila field to

international oil services companies Weatherford International, Schlumberger (in partnership with

state-run Iraq Drilling) and China’s Daqing Oil Field. Weatherford, which is currently fulfilling



obligations under an existing contract at the Rumaila field with the South Oil Company, will drill seven

wells. The other consortium members will drill 21 wells each, on a turnkey basis. A contract for seven

further wells will be awarded to the company that shows the most progress. Drilling is expected to start in

2010.



Oil And Gas Outlook: Long-Term Forecasts

Regional Oil Demand

A continuation of the reasonably healthy 2010-2015 oil demand trend is predicted for the 2015-2020

period, reflecting the underdeveloped nature of several key economies, plus ongoing wealth generation

thanks to robust energy prices and rising export volumes. The region’s oil consumption is expected to

increase by 15.3% in 2015-2020, down from the 17.6% growth likely to have been achieved in the period

2010-2015. Over the extended 2010 to 2020 forecast period, Qatar leads the way, with oil demand

increasing by an estimated 79.1%, followed by Iraq and Oman’s impressive 62.9% growth. Israel lags the

field, as a result of greater market maturity and the lack of hydrocarbons income that stimulates

economies elsewhere in the region.

Table: Middle East Oil Consumption (000b/d)

Country 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f

Bahrain 46 47 49 50 52 54 56 58

Iran 1,899 1,956 2,015 2,055 2,096 2,138 2,202 2,268

Iraq 810 851 893 938 985 1,034 1,086 1,140

Israel 265 269 273 277 282 286 290 294

Kuwait 450 460 475 490 500 510 520 530

Oman 78 82 86 90 95 99 104 109

Qatar 259 275 291 309 328 347 368 390

Saudi Arabia 3,214 3,278 3,376 3,478 3,582 3,689 3,800 3,914

UAE 504 517 530 540 557 571 588 599

BMI universe 7,526 7,735 7,988 8,228 8,475 8,728 9,014 9,304

other ME 704 707 711 714 718 722 725 729

Regional total 8,230 8,442 8,699 8,942 9,193 9,450 9,739 10,033

f = forecast. All forecasts: BMI.



Regional Oil Supply

A 10.4% gain in Middle Eastern oil production during the 2015-2020 period represents an acceleration

from the 5.9% rate of expansion likely to have been seen in 2010-2015, and owes much to the likely gains

delivered by OPEC member states. Iraq is by far the biggest contributor to growth, with output forecast to

rise by 69.4% between 2010 and 2020. Its nearest major rival, at 38.6%, is Kuwait, although Bahrain has

the greatest percentage growth potential (81.8%). In Qatar, liquids output should rise by 25.6%, with gas

liquids volumes moving higher as a result of increased dry gas volumes.

Table: Middle East Oil Production (000b/d)


Bahrain 75 82 90 95 100 100 100 100

Iran 4,300 4,340 4,450 4,500 4,550 4,615 4,650 4,700

Israel na na na na na na na na

Kuwait 2,630 2,700 2,785 2,900 3,000 3,150 3,300 3,450

Oman 900 880 854 811 770 732 695 660

Qatar 1,750 1,821 1,865 1,885 1,999 2,019 2,039 2,059

Saudi Arabia 10,130 10,300 10,450 10,620 10,800 11,000 11,210 11,400

UAE 2,805 2,900 3,015 3,100 3,185 3,250 3,400 3,500

BMI universe 22,590 23,023 23,509 23,911 24,405 24,866 25,394 25,869

Iraq 2,750 2,950 3,150 3,300 3,550 3,800 4,000 4,150

Syria 326 310 294 280 266 252 240 228

Yemen 258 251 243 236 229 222 215 209

other ME 42 43 44 46 47 48 50 51

Regional total 25,966 26,576 27,240 27,772 28,496 29,189 29,899 30,507

f = forecast. na = not applicable. All forecasts: BMI.



Regional Refining Capacity

The Middle East is set for a 65.2% increase in crude distillation capacity between 2010 and 2020,

dominating the expansion of the world’s over-stretched refining industry. Cheap and plentiful local crude

supplies make it the region of choice for refinery investment. Iraq, Oman and Kuwait have particularly

ambitious plans. The region’s importance as a net exporter of refined products will rise, as capacity

growth is more rapid than the expansion of domestic oil markets.

Table: Middle East Oil Refining Capacity (000b/d)


Bahrain 262 262 302 302 302 302 302 302

Iran 2,000 2,250 2,400 2,650 2,650 2,800 2,800 2,900

Iraq 1,150 1,300 1,300 1,450 1,650 1,650 1,800 1,800

Israel 320 320 320 320 350 350 350 350

Kuwait 1,150 1,150 1,415 1,415 1,615 1,615 1,765 1,765

Oman 205 205 290 290 290 290 290 290

Qatar 520 586 586 586 586 586 586 586

Saudi Arabia 2,600 3,000 3,250 3,400 3,400 3,400 3,400 3,400

UAE 974 1,041 1,041 1,041 1,041 1,041 1,041 1,041

BMI universe 9,181 10,114 10,904 11,454 11,884 12,034 12,334 12,434

other ME 843 886 930 976 1,025 1,076 1,130 1,187

Regional total 10,024 11,000 11,834 12,430 12,909 13,110 13,464 13,621




Regional Gas Demand

Gas demand growth could accelerate between 2015 and 2020 compared with the 23.0% rate expected for

the 2010-2015 period. There is likely to be some 24.6% gas market expansion in the region in the final

five years of the period. Expansion of gas consumption is expected to be at its greatest in Kuwait, Iraq,

Israel and Bahrain.

Table: Middle East Gas Consumption (bcm)


Bahrain 15.7 16.7 17.7 18.7 19.8 21.0 22.3 23.6

Iran 140.0 142.8 145.7 148.6 150.0 152.0 154.0 156.0

Iraq 8.0 9.0 11.5 13.0 14.3 15.7 17.3 19.0

Israel 6.0 7.0 7.0 8.0 8.0 8.6 9.2 10.0

Kuwait 16.3 17.2 18.1 18.9 20.0 21.0 22.0 23.1

Oman 19.0 20.3 21.0 22.0 23.1 24.3 25.5 26.7

Qatar 34.9 37.6 40.0 42.8 45.6 48.5 51.7 55.1

Saudi Arabia 80.2 86.2 87.0 95.1 101.2 107.7 116.3 117.7

UAE 71.3 74.6 78.2 81.7 85.3 89.2 93.3 98.0

BMI universe 391.5 411.3 426.2 448.8 467.4 488.1 511.6 529.3

other ME 50.7 53.2 55.9 58.7 61.6 64.7 67.9 71.3

Regional total 442.2 464.5 482.0 507.4 529.0 552.7 579.5 600.7




Regional Gas Supply

A production increase of 29.4% is forecast for the Middle East region in 2015-2020, representing a virtual

repeat of the growth predicted during the 2010-15 period. Qatar’s explosive expansion in the first half of

the forecast period is not sustainable, although its volumes could still rise 10.9% in 2015-2020, compared

with 29.6% in 2010-2015.

Table: Middle East Gas Production (bcm)


Bahrain 15.2 15.9 16.7 17.2 17.7 17.7 17.7 17.7

Iran 165.0 185.0 185.0 205.0 205.0 225.0 240.0 265.0

Iraq 10.0 11.0 18.0 25.0 32.0 35.0 40.0 42.0

Israel 7.0 7.0 7.0 8.0 8.0 10.0 12.0 12.0

Kuwait 16.1 16.4 17.8 18.3 18.8 19.5 20.1 20.8

Oman 32.0 33.5 35.0 36.0 38.0 40.0 40.0 40.0

Qatar 158.0 167.0 175.0 179.0 182.0 186.0 190.0 194.0

Saudi Arabia 80.2 86.2 87.0 95.1 101.2 107.7 116.3 117.7

UAE 58.0 60.0 61.5 62.0 63.0 65.0 66.5 68.0

BMI universe 541.5 582.0 603.0 645.6 665.7 705.8 742.6 777.3

other ME 7.2 7.9 8.7 9.6 10.6 11.6 12.8 14.1

Regional total 548.7 589.9 611.7 655.2 676.3 717.5 755.4 791.4

f = forecast. na = not applicable. All forecasts: BMI.

Iraq Country Overview

Between 2010 and 2020, we are forecasting an increase in Iraqi oil production of 69.4%, with crude

volumes rising steadily to 4.15mn b/d by the end of the 10-year forecast period. Oil consumption between

2010 and 2020 is set to increase by 62.9%, with growth slowing to an assumed 5.0% per annum towards

the end of the period and the country using 1.14mn b/d by 2020. Gas production is expected to climb to

42bcm by the end of the period. With 2010-2020 demand growth of 281%, export potential should rise to

23bcm by 2020.



Methodology And Risks to Forecasts

In terms of oil and gas supply, as well as refining capacity, the projections are wherever possible based on

known development projects, committed investment plans or stated government/company intentions. A

significant element of risk is clearly associated with these forecasts, as project timing is critical to volume

delivery. Our assumptions also take into account some third-party estimates, such as those provided by

the US-based Energy Information Administration (EIA), the International Energy Agency (IEA), the

Organisation of the Petroleum Exporting Countries (OPEC) and certain consultants’ reports that are in the

public domain. Reserves projections reflect production and depletion trends, expected exploration activity

and historical reserves replacement levels.

We have assumed flat oil and gas prices throughout the extended forecast period, but continue to provide

sensitivity analysis based on higher and lower price scenarios. Investment levels and production/reserves

trends will of course be influenced by energy prices. Oil demand has provide itself to be less sensitive to

pricing than expected, but will still have some bearing on consumption trends. Otherwise, we have

assumed a slowing of GDP growth for all countries beyond our core forecast period (to 2015) and a

further easing of demand trends to reflect energy-saving efforts and fuels substitution away from

hydrocarbons. Where available, government and third-party projections of oil and gas demand have been

used to cross check our own assumptions.



Glossary Of Terms AOR additional oil recovery KCTS Kazakh Caspian Transport System

APA awards for predefined areas km kilometres

API American Petroleum Institute LAB linear alkyl benzene

bbl barrel LDPE low density polypropylene

bcm billion cubic metres LNG liquefied natural gas

b/d barrels per day LPG liquefied petroleum gas

bn billion m metres

boe barrels of oil equivalent mcm thousand cubic metres

BTC Baku-Tbilisi-Ceyhan Pipeline Mcm mn cubic metres

BTU British thermal unit MEA Middle East and Africa

capex capital expenditure mn million

CBM coal bed methane MoU memorandum of understanding

CEE Central and Eastern Europe mt metric tonne

CPC Caspian Pipeline Consortium MW megawatts

CSG coal seam gas na not available/applicable

DoE US Department of Energy NGL natural gas liquids

EBRD European Bank for Reconstruction and Development NOC national oil company

EEZ exclusive economic zone OECD Organisation for Economic Co-operation and Development

e/f estimate/forecast OPEC Organization of the Petroleum Exporting Countries

EIA US Energy Information Administration PE polyethylene

EM emerging markets PP polypropylene

EOR enhanced oil recovery PSA production sharing agreement

E&P exploration and production PSC production sharing contract

EPSA exploration and production sharing agreement q-o-q quarter-on-quarter

FID final investment decision R&D research and development

FDI foreign direct investment R/P reserves/production

FEED front end engineering and design RPR reserves to production ratio

FPSO floating production, storage and offloading SGI strategic gas initiative

FTA free trade agreement SoI statement of intent

FTZ free trade zone SPA sale and purchase agreement

GDP gross domestic product SPR strategic petroleum reserve

G&G geological and geophysical t/d tonnes per day

GoM Gulf of Mexico tcm trillion cubic metres

GS geological survey toe tonnes of oil equivalent

GTL gas-to-liquids conversion tpa tonnes per annum

GW gigawatts TRIPS Trade-Related Aspects of Intellectual Property Rights

GWh gigawatt hours trn trillion

HDPE high density polyethylene T&T Trinidad & Tobago

HoA heads of agreement TTPC Trans-Tunisian Pipeline Company

IEA International Energy Agency TWh terawatt hours

IGCC integrated gasification combined cycle UAE United Arab Emirates

IOC international oil company USGS US Geological Survey

IPI Iran-Pakistan-India Pipeline WAGP West African Gas Pipeline

IPO initial public offering WIPO World Intellectual Property Organization

JOC joint operating company WTI West Texas Intermediate

JPDA joint petroleum development area WTO World Trade Organization



BMI Methodology

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The

precise form of time-series model we use varies from industry to industry, in each case being determined,

as per standard practice, by the prevailing features of the industry data being examined. For example, data

for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,

there may be pronounced non-linearity, whereby large recessions, for example, may occur more

frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the

use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the

variable’s own history as explanatory information. For example, when forecasting oil prices, we can

include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient

historical data or data quality is poor. In such cases, we use either traditional decomposition methods or

smoothing methods as a basis for analysis and forecasting.

Human intervention plays a necessary and desirable part of all our industry forecasting techniques.

Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning

points and seasonal features where a purely mechanical forecasting process would not.

Energy Industry

A number of principal criteria drive our forecasts for each energy indicator.

Energy Supply

Supply of crude oil, natural gas, refined oil products and electrical power is determined largely by

investment levels, available capacity, plant utilisation rates and national policy. We therefore examine:

National energy policy, stated output goals and investment levels;

Company-specific capacity data, output targets and capital expenditures, using national, regional and

multinational company sources;



International quotas, guidelines and projections, such as OPEC, the International Energy Agency

(IEA) and the US Energy Information Administration (EIA).

Energy Consumption

A mix of methods is used to generate demand forecasts, applied as appropriate to each individual country:

Underlying economic (GDP) growth for individual countries/regions, sourced from BMI’s estimates.

Historical relationships between GDP growth and energy demand growth at an individual country are

analysed and used as the basis for predicting levels of consumption;

Government projections for oil, gas and electricity demand;

Third-party agency projections for regional demand, such as the IEA, EIA and OPEC;

Extrapolation of capacity expansion forecasts, based on company- or state-specific investment levels.

Cross checks

Whenever possible, we compare government and/or third party agency projections with the declared

spending and capacity expansion plans of the companies operating in each individual country. Where

there are discrepancies, we use company-specific data as physical spending patterns to ultimately

determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand

projections to check the energy balance of each country. Where the data suggest imports or exports, we

check that necessary capacity exists or that the required investment in infrastructure is taking place.

Oil And Gas Ratings Methodology

BMI’s approach to our Oil & Gas Business Environments Ratings (BER) is threefold. First, we

disaggregate the upstream (oil/gas E&P) and downstream (oil refining and marketing, gas processing and

distribution), enabling us to take a nuanced approach to analysing the potential within each segment, and

the different risks along the value chain. Second, we identify objective indicators that may serve as

proxies for issues/trends that were previously evaluated on a subjective basis. Finally, we use BMI’s

proprietary Country Risk Ratings (CRR) to ensure that only those risks most relevant to the industry have

been included. Overall, the ratings system, which is integrated with those of all industries covered by

BMI, offers an industry-leading insight into the prospects/risks for companies across the globe.

Conceptually, the new ratings system is organised in a manner that enables us clearly to present the

comparative strengths and weaknesses of each state. As before, the headline Oil & Gas BER is the

principal rating. However, the differentiation of Upstream/Downstream and the articulation of the



elements that comprise each segment enable more sophisticated conclusions to be drawn, and also

facilitate the use of the ratings by clients, who will have varying levels of exposure and risk appetite for

their operations.

Oil & Gas Business Environment Ratings

This is the overall rating, which comprises 50% Upstream BER and 50% Downstream BER:

Upstream Oil & Gas Business Environment Ratings

This is the overall Upstream rating which is composed of limits/risks (see below);

Downstream Oil & Gas Business Environment Ratings

This is the overall Downstream rating which comprises limits/risks (see below).

Both the Upstream and Downstream BER are composed of limits and risks sub-ratings, which themselves

comprise industry-specific and broader country risk components:

Limits Of Potential Returns

Evaluates the sector’s size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development;

Risks To Realisation Returns

Evaluates both Industry-specific dangers and those emanating from the state’s political/economic profile

that call into question the likelihood of expected returns being realised over the assessed time period.



Table: Structure Of BMI’s Oil & Gas Business Environment Ratings

Component Details

Oil & Gas BER Overall rating

Upstream BER 50% of O&G BER

Limits of potential returns 70% of Upstream BER

Upstream market 75% of Limits

Country structure 25% of Limits

Risks to realisation of returns 30% of Upstream BER

Industry risks 65% of Risks

Country risk 35% of Risks

Downstream BER 50% of O&G BER

Limits of potential returns 70% of Downstream BER

Upstream market 75% of Limits

Country structure 25% of Limits

Risks to realisation of returns 30% of Downstream BER

Industry risks 60% of Risks

Country risk 40% of Risks

Source: BMI



Indicators

Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets.

Table: BMI’s Upstream Oil & Gas Business Environment Ratings – Methodology

Indicator Rationale

Limits of potential returns

Upstream market

Resource base

– Proven oil reserves, mn bbl To denote total market potential. High values are given a better score.

– Proven gas reserves, bcm As above.

Growth outlook

– Oil production growth, 2009-2014 Proxy for BMI’s market assumptions, with strong growth given higher score.

– Gas production growth, 2009-2014 As above.

Market maturity

– Oil reserves/ production Used to denote whether industries are frontier/emerging/developed or mature markets. Low existing exploitation in relation to potential gets higher scores.

– Gas reserves/ production As above.

– Current oil production vs peak As above.

– Current gas production vs peak As above.

Country structure

State ownership of assets, % Used to denote opportunity for foreign NOCs/IOCs/independents. Low state ownership scores higher.

Number of non-state companies Used to denote market competitiveness. Presence (and large number) of non-state companies scores higher.

Risks to realisation of returns

Industry risks

Licensing terms Subjective evaluation of government policy towards sector against BMI-defined criteria. Protectionist states are marked down.

Privatisation trend Subjective evaluation of government industry orientation. Protectionist states are marked down.

Country risk

Physical infrastructure Rating from BMI’s Country Risk Ratings (CRR). Evaluates constraints imposed by power, transport and communications infrastructure.

Long-term policy continuity risk CRR. Evaluates risk of sharp change in broad direction of government policy.

Rule of law CRR. Evaluates government’s ability to enforce its will within the state.

Corruption CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete.

Source: BMI



Table: BMI’s Downstream Oil & Gas Business Environment Ratings – Methodology

Indicator Rationale

Limits of potential returns

Downstream market

Market

– Refining capacity, 000b/d Denotes existing domestic oil processing capacity. High capacity considered beneficial.

– Oil demand, 000b/d Denotes size of domestic oil/gas market. High values are accorded better scores.

– Gas demand, bcm As above.

– Retail outlets/1,000 people Indicator denotes fuels retail market penetration; low penetration scores highly.

Growth outlook

– Oil demand growth, 2009-2014 Proxy for BMI’s market assumptions, with strong growth accorded higher scores.

– Gas demand growth, 2009-2014 As above.

– Refining capacity growth, 2009-2014 As above.

Import dependence

– Refining capacity vs oil demand, %, 2009-2014

Denote reliance on imported oil products and natural gas. Greater self-sufficiency is accorded higher scores.

– Gas demand vs gas supply, %, 2009-2014 As above.

Country structure

State ownership of assets, % Used to denote opportunity for foreign NOCs/IOCs/independents. Low state ownership scores higher.

Number of non-state companies Indicator used to denote market competitiveness. Presence (and large number) of non-state companies scores higher.

Population, mn Data from BMI’s Country Risk team. Indicators used as proxies for overall market size and potential.

Nominal GDP, US$bn As above.

GDP per capita, US$ As above.

Risks to realisation of returns

Industry risks

Regulation Subjective evaluation of government policy towards sector against BMI-defined criteria. Bureaucratic/intrusive states are marked down.

Privatisation trend Subjective evaluation of government industry orientation. Protectionist states are marked down.

Country risk

Short-term policy continuity risk CRR. Evaluates the risk of sharp change in broad direction of government policy.



Table: BMI’s Downstream Oil & Gas Business Environment Ratings – Methodology

Indicator Rationale

Short-term economic external risk CRR. Evaluates vulnerability to external economic shock, the typical trigger of recession in emerging markets.

Short-term economic growth risk CRR. Evaluates current growth trajectory and state’s position in economic cycle.

Rule of law CRR. Evaluates the government’s ability to enforce its will within the state.

Legal framework CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete.

Physical infrastructure CRR. Evaluates constraints imposed by power, transport and communications infrastructure.

Source: BMI

Sources

Sources include those international bodies mentioned above, such as OPEC, the IEA and the EIA, as well

as local energy ministries, official company information, and international and national news agencies.

SSIQ02 20110401 Iraq Oil and Gas... · Q2 2011 oil & Gas RepoRt issN 1748-4030 published by Business Monitor international ltd. iRaQ INCLUDES BMI'S FORECASTS

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