Karbala Advances But Downstream Still Faces Rough Waters

BMI Veiw : Iraq has awarded a project management contract to Technip for a 150,000b/d refinery. The news is some progress for a downstream sector badly in need investment as infrastructure worsens and consumption grows. In spite ambitious plans and incentives , we expect Iraq's refining sector will continue to struggle in attracting private investment evidenced by the slow pace of progress to date.

Technip confirmed it was awarded a project management consultancy (PMC) contract for the US$4bn Karbala refinery by the Iraq's State Company for Oil Projects . The 150,000 barrel per day greenfield plant will eventually produce liquid petroleum gas (LPG) , gasoline, jet fuel, diesel oil, asphalt and fuel oil for the domestic consumption. In 2010, Technip was given the original front-end engineering design (FEED) for the Karbala project .

Karbala was among four large downstream projects for which Iraq handed out design contracts to international engineering com panies . The refineries would help to alleviate Iraq's growing need for imports of refined products despite the country's sizable petroleum wealth. New projects would also help with a current imbalance product slate with overproduction of heavy distillates such as fuel oil relative to light distillates - such as gasoline - which is needed to meet fast growing local demand. Iraq's refining sector is comprised of a number of smaller facilities with a few large plants in Baiji , Baghdad and Basra comprising the lion's share of output. Although each plant is slated for an upgrade, progress on brownfield projects has been equally slow.

Without Capacity Boost Imports Will Grow With Consumption
Iraq Refined Product Consumption & Refining Capacity ('000b/d)

Overall, with aging infrastructure and increasing consumption, the country's downstream sector is in desperate need of investment after years of sanctions and mismanagement. Although nameplate capacity varies widely by source, utilisation rates are estimated to hover around 60%, translating into a significant supply deficit even as Iraqi crude production grows. This has translated into a rising import bill with an estimated US$4bn spend over 2012 on imports of LPG, gasoline, kerosene, and diesel.

BMI's Iraq Downstream Projects
Location Name Capacity, b/d Status
Source: BMI Global Refining Database
Karbalah / Hindeyah Karbalah / Hindeyah 150,000 Proposed
Nassiriya Nassiriya 300,000 Proposed
Missan Missan 150,000 Proposed
Kirkuk Kirkuk 150,000 Proposed
Northern Iraq Kisik 10,000 Planned
South-East Iraq Missan 30,000 Active
Mufthia Mufthia 5,000 Active
Basra Basra 140,000 Active
Sinniyah Sinniyah 20,000 Active
Mosul Qaiyarah 20,000 Active
Kirkuk Kirkuk 30,000 Active
South-Central Iraq Nassiriya 30,000 Active
Erbil Erbil 40,000 Active
Baghdad Daura 210,000 Active
Baiji Baiji 320,000 Active
Diwaniyah Diwaniyah 20,000 Active
Najaf Najaf 30,000 Active
Samawah Samawah 30,000 Active
Haditha Haditha 16,000 Active

While above grounds risks remain a concern for investment in Iraq's upstream and downstream, officials have actively promoted private investment into Iraq's refining sector. After a delay, in 2010 a bill was passed to incentivise foreign perception in the sector, with the new law offering:

  • An increase of the discount refiners would receive on crude oil from 1% to 5%;

  • A guarantee the state would by products at international prices;

  • The opportunity to export surplus production.

Questionable project economics and a slow moving bureaucracy have translated into little tangible progress for the planned 740,000 b/d capacity expansion at a cost of up to US$20bn. According to MEED, while Iraq has nearly US$38bn worth of downstream projects planned, the vast majority - some US$2 4bn - are in the design stage.

Even in stable operati ng environments, downstream profitably can be both erratic and uncertain in response to changing input costs and competitive pressures. Iraq's above grou nd risks - from security and politics to poor infrastructure - only increase the wariness of investors . Moreover, upgrading existing plants is made more difficult by the fact that taking them offline would only exacerbate current product shortages.

With the potential for global overcapacity given a rising number of major downstream projects both in the Middle East and the elsewhere , Iraq may face even larger obstacles to attracting private investment for its refining sector. While the country could offer better incentives, it may be forced to take on a larger share of the risk for projects if it wishes for downstream plans to advance. As such, despite progress on the Karbala project, we have held off on altering our forecasts as we continue to expect delays and projects continue to face an uncertain fate .

We do highlight the project we seem mostly likely to advance and one which could be a model going forward. The Nassirya development , which calls for 300,000b/d facility, will be put to tender in December 2013 as both a downstream and upstream project with the winner develop ing the 4 .4 bn barrel (bbl) Nassiriya oil field alongside the refinery. A number of firms have reportedly expressed interest, with Iraq offering better than usual fiscal terms. However without the added incentive of a major upstream development to support project economics, Iraq may struggle to advance other developments in the refining sector.

This may in turn see further deterioration in the sector as upgrades a re delayed, setting the stage for the continued growth in the country's product imports. Iraq's place near the bottom of BMI 's Downstream Risk/Reward Ratings for Oil & Gas reflects our bearish outlook for the sector in the regional context .

BMI's Oil & Gas Middle East Downstream Risk/Reward Ratings
Downstream Industry Rewards Downstream Country Rewards Downstream Rewards Downstream Industry Risks* Downstream Country Risks* Downstream Risks* Downstream R/R Ratings Rank
* Lower score denotes higher risk; Source : BMI
Israel 36 60 42 100 69 88 55 1
UAE 50 44 49 50 63 55 50 2
Saudi Arabia 60 34 54 10 71 34 48 3
Iran 51 50 51 10 42 23 42 4
Qatar 44 28 40 20 66 38 40 5
Oman 26 42 30 60 58 59 39 6
Iraq 42 44 43 15 39 25 37 7
Bahrain 22 32 25 60 63 61 36 8
Kuwait 38 26 35 15 63 34 35 9
This article is tagged to:
Sector: Oil & Gas
Geography: Iraq

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