Iraq's Oil Output at Stake for Want of Water

Project designed to raise oil extraction rates but red tape, cost disputes slow it down. Some mature fields already suffering from lack of water.

A lack of water threatens Iraq's plans to raise its oil output, boost its stumbling economy and become a leading producer in the region after Saudi Arabia.

A multi-billion dollar common seawater injection scheme designed to boost production from the giant export oilfields in Iraq's south is snarled up in red tape and acrimony.

The seawater injection project is core to the development of the southern fields - which account for most of Iraq's production - and aims partly to flush oil to the surface and overcome declines in production at fields such as Rumaila, West Qurna, Zubair and Majnoon.

While the Islamist insurgency has hit oil exports from Iraq's northern pipeline, the southern oilfields have not been affected by Baghdad's fight with Islamic State.

But the shortage of water is hurting production at two main southern fields: West Qurna-1 and Zubair, official and industry sources told Reuters.

Further production declines from both mature fields look likely if water scarcity persists, the sources said.

Output from West Qurna-1 - operated by ExxonMobil - has fallen almost 40 percent to around 300,000 barrels per day compared with last year, an industry source said, adding that a shortage of water was one of the reasons.

Zubair, run by Italy's ENI, is feeling the pain too. A source at state run South Oil Company said production from Zubair had fallen, but declined to give further details. It was currently pumping around 280,000 bpd, the source said.

"100 percent correct," another Iraqi oil source in Baghdad said when asked if lack of water was a reason behind the production decline in the two oilfields.

Infrastructure and logistical constraints, as well as security worries, have already forced Iraq to cut its 2014 oil output target more than once -- to 3.7 million bpd from an initial target of 4.5 million bpd, excluding Kurdish oil exports. Saudi Arabia's output was around 9.6 million bpd in August, according to OPEC figures.

The water injection project, where the first phase is designed to pump 5.2 million bpd of treated seawater from the Gulf to the fields, was originally supposed to be completed by the end of 2013. It is now not due to come online before 2018-2019, the sources say.

When the plan was announced in 2010, U.S. oil company ExxonMobil was chosen to take the lead in coordinating initial studies for the plan.

But red tape and disputes over cost delayed the plan for months, and Exxon was removed from the project in 2012 due to disagreements over the economics of the deal. State-run South Oil Co. has since taken over project management.

Apart from the project itself, hurdles to approving contracts for service work, such as building new pipelines and drilling wells, as well as getting visas and customs clearance are top complains by oil executives working in the south.

"It is not just getting the water to the field, it is getting the pumps and pipes to get it into the ground, and then new kit to separate out the larger quantities of water," said a second industry source.

"Quite a bit of the fate of production is in the hands of those who have the inclination to speed up the process."

Officials at South Oil Company could not be reached for comment and an oil ministry spokesman said he had no immediate comment and was still looking into the matter.

PRODUCTION FALLS

Zubair produced 315,000 bpd on average during the second quarter of this year, according to a document by South Korea's KOGAS, a partner with Eni at the field.

Madhi Abdul Razzaq, head of the joint management committee for West Qurna-1 told Reuters in March last year that output from the field was 480,000 bpd and it had been projected to reach 600,000 bpd by the end of 2013.

In June, former Oil Minister Abdul-Karim al-Luaibi told reporters in Vienna that output from West Qurna-1 was around 350,000 bpd. He gave no reason for the drop.

"Oil production has definitely been impacted but I have not seen any indication of what's happening with the common seawater supply project, absolutely none," the first industry source said.

Rumaila oilfield, which accounts for almost half of Iraq's production and is operated by BP, gets around 500,000-700,000 bpd of treated water from the Qarmat Ali facility, which covers its water needs, at least for now.

Even relatively young oilfields such as West Qurna-2, run by Lukoil, and Majnoon, led by Royal Dutch Shell (RYDAF) , may start feeling the pressure by 2016-2017 as they need water to manage their reservoirs and lift output, the industry sources said.

Revisions to some of the existing contracts between Baghdad and foreign oil companies include a provision that protects the companies in case Iraq cannot supply the water needed to boost output, two sources told Reuters.

But the long delays to the project mean that even when the seawater project comes online, it may not be enough to meet demand, one industry source said. Oil majors are already seeking alternatives and are building their own water facilities.

"The issue is not just the delay, but the impact the delay is having," said another industry source. "The longer you leave the project, the demand (for water) increases, so effectively by delaying the project, it becomes more difficult to execute."

By Rania El Gamal