Iraq s Ambition What is the Role of Natural Gas? Lucian Pugliaresi Energy Policy Research Foundation, Inc. Iraqi Petroleum 2010 London November 30, 2010 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 1
Key Points Critical role of expectations in oil and gas markets Why forecasters should show humility Iraq s role as a game changer (oil vs. gas) What should be done with the natural gas? Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 2
A Series of Unfortunate Events Leading to New Expectations Positive Expectations Expectations Shift Negative Expectations 95 Yukos -- Kremlin taking control of Russian oil development Russia takes over Sakhalin II, Chavez Nationalizes Projects 140 Global Production, million b/d 90 85 80 75 70 Outlook positive for expanded output from Nigeria, Mexico, Venez., Russia, North Slope 4.2 5.8 Oil development in Iraq delayed Congress continues ban on ANWR and offshore development OPEC Excess Capacity remains limited Nigeria rebels hurt output Continuing civil strife in Sudan, Nigeria 1.9 1.3 0.95 1.3 2 1.7 0 2001 2002 2003 2004 2005 2006 2007 2008e 120 100 80 60 40 20 $/bbl World Oil Production (EIA) OPEC Excess Capacity (EIA) Expected Production (EIA 2001 Predictions) Crude Oil Price 3
Forecasting and Humility (Hubbert s Limitations) 1000 40 Production - thousand barrels per day 900 800 700 600 500 400 300 200 100 35 30 25 20 15 10 5 Cumulative Discoveries - billion barrels Cumulative Discoveries - Permian (red area - right axis) Cumulative Discoveries - San Joaquin (blue area - right axis) Projected Year 2000 Production - San Joaquin (blue line - left axis) Projected Year 2000 Production - Permian (red line - left axis) 0 Source: EPRINC Study 1964 Estimate 1982 Estimate for Production for Production in 2000 in 2000 Actual 2000 Production 0 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 4
A Decoupling of Politics and Oilfields Development Although oil development is in an early stage it is moving forward, same cannot be said for politics and security Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 5
Gas Reserves and Location Estimated Gas Reserves (Tcf) Akkas 5.6* Mansuriyah 4.5* Kashm al- Ahmar 2.2 Siba 1.5* Tel Gazal 0.2 *Gas in place Oil Fields with Associated Gas West Qurna 13.7 Majnoon 11.8 Rumaila 9.8 Zubair 2.9 Nasiriyah 2.6 Total 43.2 Source: Oil Ministry, Energy Intelligence Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 6
Iraqi Gas Development of the Siba and Mansouriya gas fields has been initialed in Bagdad, but the Akkaz development has not been signed. They all await ratification by the cabinet which has yet to be formed. Total plateau production for three fields is 820 mn cfd, the anticipated was 685 mmcf/d Maximum total gas in place of 11.6 tcf, 7.4 is proven reserves, this implies a 63.8% recovery factor. 900 mmcf/d max daily production would give fields a life of 22.5 years. 700 mmcf/d of associated gas is flared in Iraq each day Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 7
Provincial Opposition and Electricity Concerns There is strong opposition by provincial governments for the Akkaz field bidding. Electricity is a major issue within Iraq leading to unrest, security concerns, instability, and infrastructure stagnation. Iraq puts out just 4-5 hours of electricity each day from the national grid. While there is 50% more electricity generation than before the invasion of Iraq in 2003, the electricity is spread throughout the country rather than giving it all to Iraq. Energy consumption has doubled in the last 7 years. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 8
Key Gas Contract Features? Allow companies to export 50 percent Costs are recoverable Iraqi government agreed to take or pay take it or pay 100 percent of gas production No signature bonus Commitment for TTSF (Training, Technology, and Scholarship Fund) very important Conversion factor for barrel of oil equivalent reduced from 8,000 to 6,000 cu ft. (EPRINC Calculations are 5.75 for value estimate). Remuneration fee 90% of scoring formula and remuneration fee and cost recovery paid with 25% plateau target needed to be reached within 3 years. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 9
Iraqi Gas Field Awards Bid Consortium (Participation %) Winner Renumeration Fee ($/mcf) Plateau Production Target (mmcf/d) Plateau Period (Years) Akkaz Kogas/KMG (50/50) Kogas/KMG $0.95 400 13 Mansouriya Total/TPAO (50/50) TPAO/KE/Kogas (50/30/20) $3.30 375 TPAO/KE/Kogas $1.22 320 13 Siba KE/TPAO (60/40) KE/TPAO $1.30 100 9 KMG (100) $2.78 65 Source: MEES November 8, 2010 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 10
What are the best options for Iraqi natural gas? (some preliminary observations) Power generation, industrial, and residential Re-injection GTL Regional pipeline sales LNG Long haul pipeline sales (Nabucco) Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 11
Natural Gas and Crude Oil Prices Through 2030 25 20 2007 $ per million BTU 15 10 5 Henry Hub Spot Price Imported Low-Sulfur Light Crude Oil ($ per million BTU) 0 Source: EIA Annual Energy Outlook 2009 12
Japan Korea Marker Remains Well Above US and UK Spot Prices LPI Consulting, Inc. 1031 31st St, NW Washington, DC 20007 202.944.5082 13
Natural Gas Offers Lower Busbar Cost Escalation Risk (cents per kwh) Coal Coal Supercritical: 10.554 Coal Integrated Gasification Combined Cycle (IGCC): 11.481 Coal IGCC with Carbon Capture & Storage (IGCC with CCS): 17.317 Alternatives Biogas: 8.552 Wind: 8.910 Gas Combined Cycle: 9.382 (assumes $5.50 to $6.50/MMBtu for gas) Geothermal: 10.182 Hydroelectric: 10.527 Concentrating solar thermal (CSP): 12.653 Nuclear: 15.316 Biomass: 16.485 Note: Busbar means the price of the power leaving the plant. All capital, fuel, and operating costs are taken into account in busbar costs. Source: California Energy Commission, Comparative Costs of California Central Station Electricity Generation Technologies, CEC Staff Report, June 2007 LPI Consulting, Inc. 1031 31st St, NW Washington, DC 20007 202.944.5082 14
Capital Costs and the Gas Crude Spread* 300 1200000 250 Current capital costs ($200,000/bbl) at Chevron's Escravos plant require $90 oil to break even. 1000000 Gross Margin - 80% discount to oil $ per barrel 200 150 100 50 To be competitive at current prices, capital costs would have to be reduced to $125,000/bbl 800000 600000 400000 200000 $ per barrel of installed capacity Gross Margin ($ per barrel of Distillate, assumed to be the price of crude oil plus 10%) - left axis Feedstock costs and operating costs ($5/bbl) per barrel of product output (Includes 40% energy penalty) - left axis Break even capital cost per barrel of installed capacity at a given oil price (required to break even over 20 years refined product value minus feedstock and operating costs of $5/bbl) - right axis 0 0 Break even capital cost per barrel of installed capacity - 80% discount to oil 40 60 80 100 120 140 160 180 200 Price of Oil - $ per barrel *EPRINC preliminary estimates 15
Nabucco Prospects Nabucco is contingent upon securing supplies from either Azeri gas and/or Iraqi gas - Expect 10 bcm from Iraq and 8 bcm from Shah Deniz yet both supplies are far from certain at the moment. Nabucco would require a supply agreement from Shah Deniz phase II in Azerbaijan. But such supplies face competition from other pipelines and from the Russian government, which has been working to maintain control over Central Asian gas. Other option is Iraq, but is not likely to be highest value for gas output The Nabucco consortium has recently called Iraq the most likely supplier because of Russia s influence over Central Asia (pipe dream Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 16