Archive

No. 3, 2012

VLADIMIR ROGOV

WEST QURNA-2: CHRONICLES OF PROGRESS


LUKOIL is substantially strengthening its positions in the Middle East

IRAQ TODAY, HAVING A FIFTH OF THE WORLD'S OIL reserves, is at the centre of global investments in oil production. For LUKOIL, this is a region of strategic importance. The company is implementing here the West Qurna-2 project, which is unique in scale.

Work within the scope of the project will allow the company, over the next few years, to increase substantially the volumes of production of hydrocarbons. At the same time, the company is interested in development of interesting new projects here, too. In June 2012, for instance, LUKOIL Overseas Holding, in conjunction with the Japanese INPEX Corporation, obtained the right to geological exploration of Block-10, which is situated in a promising region where the oil majors are already developing the major Rumaila, West Qurna-1, West Qurna-2 and Al-Garraf oil fields.

OIL SUPERGIANT

Russia and of Iraq have a well-established history of cooperation in the oil sphere. This cooperation gained impetus three decades ago. In 1969‒1971, Iraq signed a number of agreements with the Soviet Union and a group of other socialist states of Eastern Europe on provision of economic and technical assistance to Iraqi industry in developing oil fields - the Northern Rumaila in the south of the country and Jambur in the Kirkuk region, as well as in construction of pipelines and refineries.

In April 1972, with assistance from the USSR, the first stages was started up of the oil field in Northern Rumaila, with production of up to 5 million tons a year, and in 1974 - of the second stage, with a productivity of up to 18 million tons. In this same period, in 1973, one of the world's biggest oil fields, West Qurna-2, was discovered. The geological exploration of this field (2D seismic and drilling of exploration wells) was performed by Soviet geologists and service organizations. For a long time, development of the field was put off, largely owing to the military actions in which Iraq became involved in the 1980s, the crisis in the Persian Gulf in 1991 and subsequent UN economic sanctions.

In anticipation of the sanctions being lifted at the end of the 1990s, companies from Russia, China and France signed a series of oil contracts with Saddam Hussein's government. One of the key contracts related to the West Qurna-2: in 1997, LUKOIL, Zarubezhneft and Mashinoimport signed an agreement on comprehensive development of the giant West Qurna-2 oil field. Under the project, all sorts of work permissible within the bounds of the UN sanctions were carried out but, following the UN resolution, the partners did not launch actual field development. Saddam Hussein's government cancelled this agreement in 2002, referring to the absence of active work on the project.

Moreover, in 2003, the new government of Iraq in any case cancelled all the contracts concluded before Saddam Hussein was overthrown. Companies, including LUKOIL, were offered the opportunity to participate in new tenders for the projects. Until 2009, LUKOIL waited for a chance to return to this promising project. Recently, the Russian major has managed to recommend itself well in the country by providing the Ministry of Oil of Iraq with serious support, transferring to Iraqi oilmen specialized vehicles, as well as heavy construction equipment required for restoring the country's infrastructure. Also, since 2004, hundred of oil engineers from Iraq have undergone internships at LUKOIL Russian enterprises. With the company's support, about one hundred Iraqis have graduated from oil and gas institutes in Russia.

In December 2009, a consortium including LUKOIL and the Norwegian company Statoil won a tender to develop this West Qurna-2 oil field. The partners submitted the best bids: remuneration per barrel of oil - $1.15 and production of 1.8 million barrels a day. On the basis of the tender, on January 31, 2010 a protocol was signed and a contract initialled for 20 years, with the right to extend for another 5 years. The parties to the contract were LUKOIL (56.25%), the Norwegian Statoil (18.75%) and the Iraqi North Oil Company (25%), as contractors, and the Iraqi South Oil Company representing the government.

Within the scope of implementation of the project, a whole series of major tenders were organised, demining of the contract sector cawed out, operating drilling launched and a rotational Pilot Camp built.

ACTIVE PHASE OF DEVELOPMENT

For LUKOIL Overseas in Iraq, 2012 has proved to be full of positive news. On April 25, 2012, the company began operational drilling and construction of an oil preparation unit - a key production facility at the West Qurna-2 oil field in Iraq.

The ceremony to celebrate these events was attended by the Minister of Oil of Iraq Abdulkareem Liaybi, heads of the province of Basra, the South Oil Company of Iraq, LUKOIL Overseas and the main contractor companies Baker Hughes and Samsung Engineering.

The West Qurna-2 project is quite complicated from the technological point of view, this requiring unusual approaches to development of the oil field. It is for this reason that, in Iraq, at the West Qurna-2 oil field, LUKOIL has developed projects for construction of inclined and horizontal wells, has envisaged intelligent injection systems, so-called "intelligent wells", and systems for drilling monitoring and real time data transfer. In consideration of the enormous potential of the gigantic oil field and the correspondingly high well flow rates, the company is preparing a developed infrastructure envisaging a high through capacity of the system for oil collection and treatment - large diameter oil collectors and highly productive oil treatment capacities.

The production drilling project provides for construction of 23 inclined wells. Drilling will be carried out simultaneously at 5 cluster pads with the latest diesel-electric rigs with a lifting capacity of 450 tons, allowing shafts to be sunk to a depth of up to 5000 meters without reinstallation of the equipment. The rigs have been specially modified for rapid movement within the bounds of the cluster pad according to the cluster slider rig scheme. In the future, drilling will be carried out at four cluster pads by means of analogous rigs.

The oil treatment unit will be raised at the complex together with development facilities for the cluster pads and oil collection lines, as well as water and energy supply systems, a rotational village and a number of other infrastructure and auxiliary facilities.

At the early stages, in 2013, production is envisaged in a volume of 150 thousand barrels a day, at the next stage - 500 thousand barrels a day. In 2017, it is planned to produce 1.8 million barrels a day. It is planned to launch commercial production of oil in the fourth quarter of 2013.

"After reaching a production level of 150 thousand barrels a day, LUKOIL will gain the right to cost reimbursement and to remuneration. After covering the initial outlays, the project will transfer to a self-financing basis. Total investments in full-scale implementation of the project will amount to about $25 billion", notes LUKOIL President Vagit Alekperov.

Implementation of the project will allow the company to fulfil one of LUKOIL Overseas' strategic tasks - to bring the share of production in international projects up to 20% of LUKOIL aggregate production in the foreseeable future. In addition, West Qurna-2 already provides the company with an opportunity to acquire unique experience of managing major projects and training qualified personnel for working in the Middle East.

NEW HORIZONS

In June 2012, the company joined yet another promising project in Iraq. According to the results of the 4th licensing round in the country, LUKOIL Overseas (a 100% subsidiary company of JSC LUKOIL), in conjunction with the Japanese INPEX Corporation, gained the right to geological exploration of Block 10, situated in the south of Iraq.

Block 10, covering an area of 5.5 thousand km2, is located 120 km to the west of Basra. In this region, which accommodates huge reserves of oil, international oil companies are developing the huge oil fields of Rumeila, West Qurna-1, West Qurna-2 and Al-Garraf. LUKOIL Overseas, as the operator, holds a 60% stake in the project and INPEX, 40%. The winners bids were: compensation for the oil produced - $5.99 per barrel of oil equivalent; subscription bonus $25 million; mandatory minimum geological exploration program ‒ 2D-seismic extending for 1375 km and drilling of one exploratory well, with a minimum investment of $100 million. The detailed terms and conditions of the oil and gas agreement for Block 10 are to be discussed additionally with the Iraq government.

According to Hati al-Jeburi, who represented LUKOIL at the tender and is top manager of the operating company, the victory was achieved in fierce competition with such serious, major players as Kuwait Energy, PetroVietnam, Bashneft, Dragon Oil and Premier Oil.

Andrey Kuzyaev, President of LUKOIL Overseas, asserts that it is strategically important for the company to continue increasing the scale of its operations in Iraq. Block 10 is one of the most investment attractive blocks owing to the high probability of discovering major oil reserves there and, considering its proximity to West Qurna, an additional, synergetic effect.

Geological exploration of the block will take 5‒7 years. At the same time, according to the terms of the tender, the Iraq government is entitled to a holding period (deferral of production launch) in the event of discovery of commercial reserves, which is connected with infrastructure constraints and Iraq's obligations towards OPEC. Even so, if the authorities deem it not feasible to launch production, the consortium will be reimbursed for its historical expenditures on geological exploration.

The choice of partner for development of the block is explained by LUKOIL's development strategy. "We had close contacts with Japanese companies even beforehand. For us, it is very important to increase reserves in the Middle East and orientate supplies on the Asia-Pacific market, which is a key one for LUKOIL", Andrey Kuzyaev noted.

Almost at the same as winning the Baghdad tender, LUKOIL Overseas also substantially increased its stake in the West Qurna-2 owing to Statoil's withdrawal from the project. The legal execution of Statoil's withdrawal from the project is now completed, as a result of which the stakes of the participants in the project are now distributed as follows: LUKOIL Overseas ‒ 75%, the Iraq national North Oil Company - 25%. At the same time, the company allows for the possibility the project being joined by a new participant with the requisite financial resources and experience of implementing major international hydrocarbon production projects.



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