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A New Era For Iraq's Oil
By:
Javier Blas
A correspondent for Expansión the FT’s Spanish partner newspaper.
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I traveled to the Kurdistan region, in northern
Iraq
, to see the first oil field to come on stream since the fall of Saddam Hussein in 2003. It is also the first oil drilled by a foreign company since the nationalization of
Iraq
’s hydrocarbons industry 35 years ago. DNO, the Norwegian oil company working in the Kurdish region, has already started to pump some oil for a long-term production test of its Tawke field.
Iraq
could be a key source of future production growth for energy-hungry emerging countries, led by
China
. However, Iraqi oil output, which topped 3m barrels per day just after the war began in 2003, has declined to about 2m b/d. Forecasts published during the run-up to the US-led invasion projected the country’s production could double to 6m b/d within five years. These are now forgotten. |
My trip begins in Arbil, the capital of semi-autonomous Kurdistan
Iraq
, which has become a gateway for international oil companies wishing to work in the country. It feels far away from the violence that is engulfing the rest of the country. But from time to time the city does suffer attacks.
A week before I arrived, a truck bomb killed 14 people and injured nearly 100 in an attack against one of the Kurdish regional government buildings. This is my third trip to
Iraq
. The immigration check takes only a couple of minutes – a sharp contrast to my trips during the Saddam Hussein years. After my passport is stamped, I meet with Samir, my driver.
On the way from the airport to the city, he points to the new buildings that emerge like mushrooms. Investment is begging to change the city landscape, although the citadel still dominates Arbil city centre. A new airport is being built to attract business. Kurdistan
is home of about 20 per cent of the Iraqi population, but each day more people relocate here from
Baghdad
in search of security. |
With the third-largest oil reserves in the world and some of the lowest production costs,
Iraq
is an obvious target for the international oil companies desperate to get access to new reserves.
Magne Normann, DNO vice-president and head of the
Iraq
project, shows me a satellite picture of the Tawke oil field, which it is hoped will produce 35,000 b/d by the end of 2007. DNO has begun production tests in Tawke and full production will start in June. It would be the first new oil in
Iraq
in post-Saddam Hussein era.
In April 2004, DNO became the first oil company to sign an agreement with the
Kurdistan
regional government to explore for oil in the region. As the risky project comes closer to fruition, Mr Normann believes coming to
Iraq
was “a very good decision”. DNO has a large acreage to explore in two different areas and has identified several new locations for drilling. |
 After signing its contract in April 2004, DNO discovered oil quickly. Less than a year later the company identified the Tawke oil field and in November 2005 drilled its first well.
In DNO’s Arbil office I meet Tareq Chalabi, the general manager of DNO Iraq and the first local staff member that DNO hired in April 2004. He is one of the key personalities behind DNO’s discoveries in northern
Iraq
.
He explains that Tawke produces a medium-heavy oil, with a high percentage of sulphur. Like other crude streams in northern
Iraq
, it is particularly suitable for refining into diesel and heating oil.
Medium-heavy oil sells for less than European and US benchmark Brent and West Texas Intermediate. But it is likely that in the current price environment, Tawke oil would be sold for more than $60 a barrel. |
A remote and tiny village in northern
Iraq
, Tawke is also home to a spectacular geological feature. Crude oil flows naturally to the surface. I have seen these natural oil pools in other countries, such as near the Mene Grande oil field in
Venezuela
. But this one is far bigger.
Mr Normann stands in front of one of the pools, which is more than 3m in diameter and at least 1m deep. Thousands of years of crude oil flows have left an area of more than 500 sq metres covered in asphalt, so the path from Tawke village to the oil seepages feels like a freshly laid road. |
 Driving to the Tawke oil field, I am surprised by another natural phenomenon: an oil stream flows through the green hills of northern
Iraq
. It could be mistaken for an environmental disaster, but this black-gold river is natural, not the product of man-made pollution.
Crude oil from the seepages near the village flows downhill to form this extraordinary stream, only a couple of kilometres from Tawke. In winter the oil barely moves. When I visited it was slow-moving and sticky, but when summer temperatures hit 46 degrees Celsius, the crude oil will flow again. |
 On my way back to Tawke from the oil seepages I meet Bidar, a three-year-old boy from the village, and his family. Bidar shows me his dirty hands after playing in the oil seepages. The oil seepages have been a playground for generations of Tawke children.
The 30 families who live in the village survive by farming and raising sheep. As a result of the oil discovery, their village will have running water for the first time and some of the local men may find alternative employment. |
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Later on my trip I meet Islam Tahir Aziz, 35, who now works in Tawke’s nascent oil industry. During a break in his shift on the oil rig, Mr Aziz tells me how he used to play on the seepages.
“We loved to make fires in the oil seepages. My father punished us for the fires we lit,” he says, remembering how his father complained too about his oily clothes. “In summer, oil was flowing everywhere, so it was difficult not to get dirty.”
Today, Aziz’s clothes are still soiled with oil but his father is happy because his job is more lucrative than sheep farming.
The Kurdish government estimates its territory contains about 45bn barrels of oil reserves and forecasts output by 2010 in the range of 500,000 b/d. “Without oil we have nothing,” says Aziz. “Kurds cannot be independent without oil. But now, we have our own oil.” |
A villager who was collecting wild garlic near the oil seepages stopped to talk with Tareq Chalabi, DNO’s
Iraq
chief, about the oil in the area. He says the seepages were larger when he was a child - he remembers one that was more than 35m long.
In Tawke village Nassan Ramadan, 75, tells me he remembers donkey caravans transporting the oil to Zahko, a city about two hours walk away. In Zahko the oil was distilled in a primitive refinery.
The oldest people from the village say that in the 1920s, after the fall of the Ottoman Empire, a British geologist visited the area collecting samples of rocks and crude oil, but he never returned, probably because the giant
Kirkuk
oil field was discovered in the south. |
Setting up DNO’s oil processing plant in Tawke was a mammoth project – though the scale is not unusual for the natural resources sector. The plant was bought second-hand from a company in the
United States
, then shipped to
Turkey
for refitting via
Abu Dhabi
. From there it was transported by road to Iraqi Kurdistan.
This took more than 100 truckloads over two weeks. It was installed in its current location near the Turkish and Syrian borders by a team of Turkish and Kurdish workers. |
 I fear an accident when I see black smoke from this oil rig, but the oil is flared from a production test near one of the drilling rigs. Test flaring, a common practice in the Middle East and Africa, is virtually unknown in Europe and the
United States
. DNO says it plans to avoid flaring over the longer term and plans to deliver the crude oil from production testing to small local refineries in
Kurdistan
.
Each of DNO’s Tawke oil field wells produces between 5,000 and 8,000 b/d and the company is drilling in new areas to try to increase total production. |
 China is making big inroads into an industry once dominated by US companies. In Tawke, Chinese writing is seen as often as Kurdish or English. Much of the equipment, like this pump, comes from Great Wall Drilling Company. |
 This is an oilrig from Great Wall Drilling Company, a subsidiary of the China National Petroleum Corporation. “Drilling here is easy. The rock is good,” says Sun Ming, who supervises operations at the company’s rig number nine.
Oil has been found here at a depth of only 370m, although some of the wells are drilled to a depth of 3,700m. Security is a big concern for all the contractors, says Mr Sun, but he adds: “I have been here for the last 18 months and I feel safe.”
Great Wall Drilling Company has more than 150 rigs drilling worldwide. |
 Mr Normann discusses construction progress with staff and contractors. The logos on the back of their jackets highlights an unusual collaboration – between a Kurdish company, Zagros, and a Turkish one, PEICC, which have formed a joint venture for the main construction work.
Kurdish officials told me that for DNO, contracting that joint venture was a smart move. Zagros is a well-connected company in the Kurdistan region, while contracting a Turkish company would soften some of the Turkish concerns about
Kurdistan
’s semi-autonomous status. |
 A herd of sheep graze near a water tank at the Tawke oil central processing facility in northern
Iraq
. Sheep are one of the few sources of income for villagers, but the arrival of the oil industry is providing some villagers with alternative sources of employment.
Relations between villagers and the company are good, although the villagers would like more jobs and social infrastructure to be made available. DNO is building a pipeline to provide fresh water to the local village. |
 A Kurdish soldier checks a Soviet machine gun in front of one of the drilling sites in the Tawke oil field. Kurdish soldiers say they only load the machine gun at night, when security is a bigger concern. More than 250 soldiers protect the facilities, with the help of some outside contractors.
DNO claims that in spite of the dangers associated with working in
Iraq
, there has not been a single security incident since seismic and drilling operations began more than two years ago. But the company says it is not relaxing its guard. Kurdish fighters, also know as peshmerga (literally meaning “those who face death”) are deployed around the oil field and its facilities in the largest single security operation in Iraqi Kurdistan.
Saed Shengali, commander of the regional security forces in Dihok governorate, which includes Tawke, tells me: “The area of DNO operations is really secure. I have never used so many soldiers to protect anything. And the villagers would help too if there were any problem.” |
 DNO’s 44km pipeline was one of the biggest challenges faced by the Norwegian oil company. The pipeline crosses several minefields, which had to be cleared before work could begin.
“The minefields were old, but you never can be sure that they won't blow up,” Mr Normann says, pointing to several small red signs near the pipeline with the word: “Danger!”.
DNO hopes to link its pipeline with a main Iraqi pipeline at the Fishkabour metering station located in a tiny village near the Turkish-Syrian border. So far, DNO has not received permission from
Baghdad
’s oil ministry, so the company plans to export its initial production by truck. |
 Back to Arbil from Tawke, I walk through the city centre. Doing this in
Baghdad
would be suicidal, but is safe, at least in a normal day, here in
Kurdistan
.
Local men read the news at a kiosk near the city old citadel. The debate of the Petroleum Law, legislation imperative for the development of the sector, makes big headlines in the daily press. The debate has stalled after the Iraqi cabinet approved it in February and officials say it is unlikely it will be passed by the deadline at the end of May. The Kurdish regional government has threatened to boycott the law if new annexes introduced recently are not amended. |
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