Iraq Oil Report interviews Crescent CEO

  A key leader in the development of the Khor Mor gas field, Majid Jafar discusses the project that has fueled Kurdistan's economic boom and become Exhibit A in the argument for reforming Iraqi gas policy. Majid Jafar is the CEO of Crescent Petroleum and a board member of Dana Gas. The companies are jointly developing gas resources in Iraq's semi-autonomous Kurdistan region. (Photo courtesy of Crescent/Dana Gas) DUBAI - International energy companies have flocked to Iraq's semi-autonomous Kurdistan region for its booming oil sector, yet it's a different hydrocarbon - gas - that has played the most important role in Kurdistan's economic and social development. The region's major cities of Erbil, Suleimaniyah and Dohuk enjoy almost continuous electricity service, most of which is fueled by gas from the Khor Mor field. The project is operated by the UAE's Crescent Petroleum and its affiliate Dana Gas; those companies, along with Austrian firm OMV and Hungary's MOL, constitute the Pearl Petroleum consortium, which holds the license for the field. The well-powered cities of Kurdistan stand in marked contrast to the urban centers in southern Iraq, which remain hobbled by electricity shortages and a lack of natural gas to fully fuel existing generating capacity. But in the north, plentiful electricity has laid the foundation for broader growth. Large construction projects are underway in Kurdistan's cities, heavy industry is emerging, and standards of living are increasing. Domestic power demand is rising at a rate of 15 percent per year, says KRG Electricity Minister Yasin Abu-Bakir. Kurdistan's gas sector is also fueling the region's economic diplomacy. Minister of Natural Resources Ashti Hawrami has said he expects to begin exporting gas in two to three years, and the region has ambitions to export electricity, with 6,000 megawatts due to come online by 2015. Pearl Petroleum is leading the drive to meet domestic demand and the KRG's ambitions. It produced first gas within 16 months of signing its Khor Mor contract with the Kurdistan Regional Government (KRG) in April 2007, and is now producing 340 million standard cubic feet of gas per day (scf/d) and 15,000 barrels per day (bpd) of associated condensates. The consortium is set to almost double its output from Khor Mor and begin developing the Chemchemal field. Majid Jafar, the CEO of Crescent Petroleum and board member of its affiliate Dana Gas, has advocated for the private sector's ability to bring rapid development to the Middle East's energy sector, and has often argued that energy companies should prioritize the domestic needs of host countries. In an interview in Dubai, Jafar spoke about the policies that have allowed his companies to develop Kurdistan's gas so quickly, and why Baghdad's corresponding policies have been less successful. Patrick Osgood: You've announced recent production figures at Khor Mor. Can you give an overview of what the next twelve months holds for the Crescent Group in Kurdistan? What challenges or contingent factors are there? Majid Jafar: Well, we're proud to be the largest single private investor in Kurdistan's oil and gas sector, with just under a billion dollars invested since signing our agreements with the KRG in April 2007. We're also the biggest cumulative producer on a barrel of oil equivalent (boe) basis. We're also proud to supply energy to provide nearly continuous electricity to over four million Iraqis in the Kurdistan region, and save the regional - and therefore national - budget over $5 billion by providing domestic gas as feedstock for power generation instead of imported fuel oil. This is also changing the social and economic fabric of Erbil. We're supplying the two main power stations in the region at Erbil and Sulymaniah, and you have reported on the KAR Group's construction of a gas pipeline to supply a further station at Dohuk. There are also other power stations announced. What we have found is that gas supply tends to then create its own demand. What you perceive to be your initial demand changes as supplies of gas become available, with new power stations planned, plans to supply other parts of Iraq with power, and the growth of local industry. Going forward there is a big opportunity to develop local industry using gas, but even existing industry in the KRG, such as cement factories which are burning liquid fuels, are looking for gas as a more cost-effective and cleaner fuel. We're looking to the future, to increasing gas production up to 400 billion cubic feet per day, and beyond that up to 600 million cubic feet per day, and we are in discussions with the MNR (Ministry of Natural Resources) and the KRG on the timetable and the mechanism, the investment required, how to go about it technically, and how to phase it in time-wise. PO: How do you evaluate Iraq's oil policy? MJ: The right petroleum policy in Iraq is critical for the whole world in terms of future demand, and unfortunately it hasn't been achieved to date. The media sometimes casts this as political spats and conflicts between Arabs and Kurds, as if it is an ethnic issue. It's actually more fundamental than that. On one level it's about central versus provincial authorities, which is a constitutional issue. Devolution to a federal system is proving a challenge for some, because Iraq spent so long under a centralised socialist dictatorship. Part of the fallout of this has been emotional. A lot of the old guard of Iraq’s oil sector were implementing policies in the 1970s and 1980s when there was a national oil company, and Iraq's oil production hit 3 million barrels a day, making them heroes. Then in a way their careers were taken away from them, by wars, by sanctions. Now they are trying to take us back to 1971, to recreate the national oil company and do it all themselves again, with a strong sense of self-sufficiency. That era has gone, and it failed anyway. The world has moved on. And Iraq has recognized that it needs the private sector, and not really for money: it's about management, efficiencies, technology. It should have an Iraqi private sector, not just a foreign one. If it is to be a democracy then it should be confident in encouraging a private sector, not just a public one. Now, this is not about privatizations, like what happened to Russia in the 1990s, a process which it is trying to reverse. But we were promised by the central government, on a macro level, 6 million barrels a day of oil production by 2012. We are at only half of that amount now and the government is somehow announcing it as an achievement. And frankly, someone needs to ask why wasn't this achieved, and what the losses were for the Iraqi people. On a more fundamental level, the critical issue is what policy you are going to use to develop your oil sector. PO: The disappointments of the fourth bidding round, from a company that produces gas in Iraq, were part of this. MJ: Even from the first round! The companies are renegotiating and the ones that aren't are just leaving. Statoil is leaving. Exxon, the largest oil company in the world, leaving the largest untapped supergiant oil field in the world to go for six small, higher-risk exploration blocks in the Kurdistan region - that tells you something. It tells me that, politics aside, there is something fundamentally wrong with the investment regime that they have tried to use to attract investment in the south, and its implementation. At the end of the day, oil companies are not banks; they are not service companies. Their job is not to finance projects or to just do them for a cost-plus basis. That's not what their investors are seeking. So the mindset needs to change, because the results are speaking for themselves. PO: And Kurdistan? MJ: Luckily in the Kurdistan region we have an example of what is doable, although they are starting from a much lower base because they don't have the history, they don't have the staff. And yet, they went about passing their law in a way that the world understood. Their model contracts are the type of thing that the industry understands. When you contrast the different models, in Kurdistan you have completely private investment, and we produce the gas that supplies the new power stations so it hasn't cost the government a cent in terms of their own investment. Before that, the most recent source of supply in Kurdistan were two hydroelectric dams my grandfather as minister inaugurated in the 1950s. Meanwhile, the central government has spent tens of billions on power and water and look how little they have to show for it. And this is going to start to have consequences not only for the legitimacy of government but for the legitimacy of the whole political process in Iraq. Some in Baghdad say that sharing in production is sharing sovereignty: this is nonsense. The agreements were developed by a socialist Islamic government in Indonesia in the 1960s to try and take back sovereignty from the old concession models. And so many other countries have used them, without problems. Even Saddam's Iraq signed them in the 1990s, because in the late 1980s it was recognised that the national oil company model had failed. So why now, when the Iraqi constitution calls for the most advanced techniques of the market to encourage investment, do we see them going back to an emphasis on service contracts and a national oil company? This is a violation of Iraq's constitution. Some countries have outdated constitutions which prevent private investment in the oil sector. But the Iraqi one of 2005 calls for it! And yet, unfortunately that hasn't been followed or seen through. PO: There has been some recognition of this, such as Deputy Prime Minister for Energy Hussein al-Sharistani's comments on the terms of the fourth round, and that a fifth round would be more generous. The emphasis is on trying to kick-start Iraq's natural gas industry. MJ: But on gas in particular they still haven't sorted out a suitable pricing structure. Unless you have a market-based gas price for Iraq - and it can only be based on a net-back basis, in my view - you are not going to be able to develop your gas. If not, you will end up like Saudi Arabia, with unlimited demand, no supply, and burning crude for power which is incredibly damaging and financially wasteful in terms of the opportunity cost. Iraq has an opportunity to avoid that future but it has to put the right policies in place now. They can decide to have subsidies for energy but they should do that at the end of the chain, not at the upstream stage, because otherwise they will never develop their resources. It's for the finance ministry to give subsidies, or the ministry for social affairs. There also has to be a recognition that gas takes longer and costs more to develop, that it has important links to industry and development, and the pricing needs to be agreed and the investment terms need to be more attractive. PO: How do the pricing models work in Kurdistan now for gas and condensate sales for Crescent Group, and will these need to change as the domestic demand profile changes and new supply is funneled to exports? MJ: We believe - and the MNR agrees with us - that gas for all Iraq needs to be priced on a market basis that is going to make investments sustainable for the long term. The challenge is sometimes that you have pressures from a local or political levels for subsidies. Now, the issue is that liquid fuels in Iraq are subsidised, such that the same fuel can be different prices around the country. And then you have Baghdad importing fuel. That's why a supreme petroleum council is import to set policy for this at a national level, not ad hoc. It's a huge drain, when you have open borders and subsidised fuel. It goes to other countries and the Iraqi budget loses out. Iraq spends a lot on subsidies. In my view, the priority is not the oil investment law so much but the revenue sharing law. That's the political law. That decides how the pie is to be divided. Once you sort this out, then everyone has an interest in maximizing the size of the pie, and that's where the oil investment law and regulation comes in, and INOC comes in, and after that laws for downstream and things like that. Now the Americans were trying - in my view, wrongly - to push in the last days of the Bush administration for the whole package to be pushed through quickly. Because it was a US congressional benchmark. There were so many incorrect statements being made by the US and other officials about "the oil law needs to be passed," and it caused a lot of confusion. PO: The recent IEA report on Iraq also puts a lot of emphasis on an oil and gas law. MJ: I think the IEA report paints a flattering picture of an already sorry story of unfulfilled potential. Iraq can and should get to 10-12 million barrels a day and even beyond. But it's not going to get there with the current internal impasse on policy agreement and the contracts which have failed to create an alignment between the investor and the host government. And the time value of money is not appreciated. Every day of delay in achieving production growth is costing companies money and costing the Iraqi people millions of dollars. I know MPs who were shocked at having to pay out $3 billion last year on costs before production growth had been achieved. With the right kind of contract, the government doesn't pay up front for costs; it should instead give a share of the increase in production. Where we are at was inevitable, it's just a shame it took so long to percolate through. PO: Still, now the oil law attracts most attention, even though the emphasis has shifted to trying to resolve revenue issues first. MJ: To this day people don't appreciate the difference between the oil law and the revenue sharing law. At least now we are seeing with the latest payment that things between Baghdad and Erbil seem to be on a positive footing again. Or at least temporarily – we don't don't know. I mean, last year it was positive and two payments were made, then it stopped. Now at least one large payment has been made. PO: Have you been paid? MJ: We haven't yet received our share. We expect or are told it will be in the next couple of weeks. After that, the second payment – but then again, maybe nothing until the next budget. And as you know the next budget is mired in internal debate. The Iraqi government is at loggerheads internally. It's not a sectarian thing between Sunni, Shia or Kurds anymore but now pro-government and anti-government. Maybe that's healthier. PO: Aside from oil, the KRG is looking to export its energy in two different ways. It is looking to build more power stations than it is likely to need for domestic use, and is looking to export electricity. Electricity transmission networks are being upgraded. The region will also become an exporter of gas. What balance to you see in terms of the Crescent Group's contribution to these exports, and which is most attractive? MJ: We have had an ethos across our operations and it has served us well, which is that the priority must be serving local needs first. If you look at any government, the highest and best use for gas - economically, socially, politically - is for power, for replacing liquid fuels. It's a no-brainer. Second comes domestic industry, because you create more FDI (foreign direct investment), more job creation and knock-on multiplier effects to the economy. Only once these needs are met should you export gas. We believe and have shared our figures with the KRG that the gas potential in the region is 200 trillion cubic feet plus. Our own two fields have significant reserves, and we are working on assessment and appraisal. We have enough to meet future needs and discuss future export potential. From the Kurdistan region, being landlocked, there are the options of Iran, Syria, gas swaps with the Arab Gas Pipeline. But the most obvious one, apart from the internal market in the south, is of course Turkey. Turkey in itself, and as a possible transit for LNG in Ceyhan as the Minister [Hawrami] has said, or whether it's through one of the corridors to Europe. The challenge, however, is setting the right pricing regime and investment regime to maximize local benefits first and maximize benefits from international exports. PO: What does that regime look like to Crescent Group? MJ: It is an issue that requires – well, the Iraqi constitution makes clear that agreements between national governments are the federal government's purview. However, the private sector, under lawful oil and gas investment contracts - and they are legal, whatever is said by anyone in Baghdad, there's even a clause in the constitution which says a regional law prevails over a federal law where there is ambiguity - can conduct its own arrangements. Now, Thamer Ghadhban and others in the federal government are working on a national comprehensive energy strategy study with international consultants, and that's great. It's exactly what Iraq needs, some macro, long-term planning. I hope it doesn't just become an on-the-shelf study, but really guides policy and decisions. Contrary to some others I think you've interviewed, I think centralised, monopolised decision making is a disaster. Federal economic systems can be extremely successful by contrast. But there needs to be a political consensus. And if the Iraqi people get better outcomes, then no-one should complain about who signed what. In fact, Baghdad's blacklisting policy is illegal. PO: Where do companies fit in to this strategy? MH: As responsible IOCs, we have to be focused on domestic needs. I'm shocked sometimes when I hear about the big majors - and I used to work for one (Royal Dutch Shell) - planning LNG exports from Iraq, years before the south has its power needs covered. The south of Iraq at the moment needs LNG exports like a hole in the head. The infrastructure is dilapidated, all apart from domestic industry needs. LNG may make sense long term, although the US is off the table as a market and other schemes in the Middle East are already being scaled back. For exports, pipeline markets may give faster return and a better netback. LNG may be for the long term. But now, gathering what gas is there needs to be for developing power. Unfortunately some of the super-majors are not focused on local needs, they are focused on exports as a priority. They even want floating terminals so they can take assets away if things go badly - that shows you how much confidence they have in Iraq itself. By contrast, we put our own people on the ground, and are aiming for over 90% Iraq-ization from around 85% now. We put in micro-generation in the areas where we work at our own cost. These villages have grown in size as a result, and are the only communities in Iraq with 24-hour electricity supply. PO: Do you see exports of electricity and gas from Kurdistan as potentially less politically sensitive than exports of oil? The KRG is progressing with new export infrastructure and this has drawn a lot of attention. MJ: There's a lot of misunderstanding about exports and what's political. The pipeline from Kirkuk to Ceyhan runs through Kurdistan and there is no problem there. The Kurdistan region is committing 200,000 barrels of oil a day to it. The issue of adding infrastructure is a positive one, both for oil and gas. When it comes to electricity there have always been ambitious plans in the Middle East for cross-border trade which is often less easy to achieve because it's not just a line its ensuring compatibility of the grid, demand cycles and on and on, so it is not easily achievable, but it's a worthy aim. PO: On condensates, these are being swapped by the KRG for fuel oil with Turkey. What is the status of this deal? Will volumes expand? MJ: On the condensate side, the off-taker is the KRG. They then nominate certain buyers, local buyers. There have been a lot of reports from you, from our sources in the KRG and Turkey, but we haven't actually been exporting, contrary to one misreport. There was an implication in a Reuters article that somehow we were exporting, but we aren't. It gave the wrong impression. If it's being properly accounted for and it is benefitting the whole of Iraq as per the latest agreement, then why not? Allegations are unfounded; nothing is happening in a secretive way. The September agreement talks about an audit process, and as we understand there are already auditors from Baghdad in Erbil. PO: And they apparently go over every receipt. MJ: I recently heard that with one of the majors in the south that it took 92 signatures for them to receive one medium-sized payment. So it's partly the model for the contracts, partly the bureaucracy that's killing any scope for development. The mindset that the government needs to break out of is that they should be micromanaging commercial operations. It's not about Iraqis being incapable: they kept the industry alive through years of war and sanctions. In a way Iraq is blessed and cursed by having so much money. Because it has so much money already it feels like it doesn't need help or advice, and there is a kind of arrogance combined with a natural Iraqi pride. Iraq has had about half a trillion dollars of budgets in the last five years or so, and look how little it has to show for it in terms of real development and progress, jobs, security and services. The people deserve better. Courtesy :