Despite of oil companies’ brave face, rising security problems causing threats for oil industry

Worsening security challenges in Iraq is becoming quite a challenge for the country to move forward with its ambiguous oil expansion plans, though oil companies in Iraq are putting on a brave face.
On Sunday, Iraq’s largest refinery, the 300,000 barrels-per-day (bpd) complex at Baiji, 200 kilometers north-west of Baghdad, was under renewed siege from Islamic State extremists who had first attacked the plant back in June.
According to media report, “The fighting, in which militants attacked the Baiji refinery from three sides, broke out on Saturday evening and continued into [Sunday].” That attempt was repelled by Iraqi government forces, but illustrated that the country’s oil infrastructure is a top target for Islamic State extremists.
The June siege of the Baiji complex – plus Islamic State attacks on the 250,000 bpd Kirkuk oilfield, which supplies the refinery – knocked out about 50 per cent of Iraq’s supplies of petroleum and other oil products, requiring the country to import and ration petrol. In the Kurdish region, the Peshmerga forces, which have borne the brunt of Islamic State fighting in recent weeks, have been given priority for the scarce supplies, putting further strain on the population.
Despite the sporadic direct impact on the oil industry of Iraq by the Islamic state incursions, the overall effect has been mixed. As the IEA or International Energy Agency noted in its latest monthly oil market report, the Islamic State advance across the north of the country “has shaken Iraq’s foundation and threatened oil operations in the north of the country, but the prized oilfields in the south are so far insulated from the fighting”.
Although the infrastructure in the south of the country is a prime target for the Islamic State, “it is going to be very difficult – not impossible, but very difficult – for them to send fighters down there, where they can be much more easily spotted and where it would be hard to find sympathizers among the predominantly Shiite population,” said John Drake, an Iraq analyst at AKE Group, a threat assessment specialist.
In June, Iraq’s 260,000 bpd month-on-month fall in oil production was as much because of bottlenecks at its Basra terminal in the south as lower flow at Kirkuk in the north. Oil production in the Kurdish region as a whole was up 130,000 bpd in June as shipments via its independent pipeline to Turkey began.
Apart from the worsening security threat, Iraq’s fraught internal politics – including the unresolved issue of the Kurdish region’s ability to deal independently with oil companies – remain an impediment to progress in the oil sector.
IEA stated, “Even before Sunni extremists stepped up their campaign, the country’s weak institutional capacity along with various logistical and infrastructure hurdles were jeopardizing expansion plans.” The organization further said, “The prolonged sectarian bloodshed may shake investor confidence and set back longer-term growth in the country that had been poised to provide the biggest source of new OPEC capacity over the next decade.”
Oil companies operating in the Kurdish region, several of which are part-owned by Abu Dhabi, have had varied responses to the latest rash of violence. DNO, Oil Search, Taqa, Genel and others have beefed up their security arrangements. Some have evacuated non-essential staff and others have curtailed part of their activities. But all have sought to emphasize their commitment to the region.
“You make a statement when you draw down your staff in a region, which can have political implications later on,” said Michael Olver, a director at Kroll, a security and threat assessment specialist. All companies will be reluctant to pull out so each will make an assessment based on its own set of circumstances, he said. This approach was echoed by the Erbil-based head of security at one of the international firms operating in the Kurdish region, who said a set of “risk triggers” determined when and by how much they would pull out staff and curtail operations.
Even a company such as DNO, which was gung-ho about its Kurdish operations last week, has had to step back. “Charging ahead at Tawke,” the company trumpeted last Thursday, announcing intentions to ramp up production at the oilfield toward its target 200,000 bpd. But the DNO chairman, Bijan Mossavar-Rahmani, later admitted that the company’s plans were at the mercy of the security situation.
There are a number of security measures that companies can take to protect their assets, including making sure the companies have strong local ties to the community to get timely and accurate intelligence, Mr. Olver said.
But the vulnerability of the Baiji plant underscored the limits of security measures in the face of determined extremists – it had undertaken an extensive security program just a couple of years ago.
The reluctance of companies to scale back, even temporarily, is understandable – the long-term prize in Iraq is enormous. It has the world’s third-largest proven oil reserves, behind only Saudi Arabia and Iran, and its three decades of unremitting strife means that much of its potential is unrealized.
IEA estimate have revealed that the contracts Iraq already has in place with international oil companies imply an increase in its oil and gas production capacity over the next decade by five-fold from its current level of just above 3 million barrels of oil equivalent per day. The obstacles to that growth are the security and political mire the country finds itself in.