Iraq Sets Jordan Pipeline Into Motion

January 03, 2013

Iraq has begun courting investors to build new pipelines from Basra to
Jordan's Aqaba port, a necessary step toward diversifying its export outlets
and meeting the demands of rising production capacity.

The Oil Ministry has set a target of creating 1 million barrels per day
(bpd) of export capacity to Jordan. The 1,680 kilometer pipeline will run from
Basra up to Haditha, in Anbar province, and then into Jordan, according to a
presentation given to prospective investors, which was obtained by Iraq Oil
Report.

Iraq urgently needs such investment. The Oil Ministry's presentation
anticipated that Iraq's production capacity will rise from 3.4 million bpd now
to 8 million bpd by 2018; at the same time, the presentation said, Iraq's
primary export route through Basra is "logistically constrained" to
about 5 million bpd of exports.

"Fundamental to this increase (in production) is an increase in Iraq’s
existing export pipeline infrastructure, in particular access to alternative
export routes," said the presentation.

Iraq and Jordan will need to sign an Energy Charter Treaty to govern the
project.

Dozens of upstream, contracting, financing, and construction companies
learned the details of the project at a London roadshow this month, organized
by project consultant SNC-Lavalin. The prospective pipeline construction will
be split between two contracts to reduce the exposure to investors, according
to the presentation.

"It's the most complicated project Iraq has ever undertaken in terms of
project financing," said Zaab Sethna, a partner and head of the Baghdad
office of Northern Gulf Partners. Sethna attended the London roadshow and
estimated the total cost would be roughly $5 billion.

Production capacity is set to skyrocket to 13.5 million bpd under a dozen
technical service contracts that the Oil Ministry has signed since 2008 with
companies like ExxonMobil, Royal Dutch Shell, BP, Lukoil, and the China
National Petroleum Corp. This does not include contracts signed by the
Kurdistan Regional Government (KRG), which could add another 1 million bpd or
more.

Iraq's will likely adjust its production targets as it finalizes a new oil
strategy and renegotiates its contracts. Deputy Prime Minister for Energy
Hussain al-Shahristani recently told Iraq Oil Report that the government will
likely aim for between 9 and 10 million bpd, to be sustained for 20 to 25
years.

Iraq currently exports the vast majority of its oil from two new single
point mooring systems and two aging oil terminals in the Basra Gulf. Of the
average 2.62 million bpd exported in November, which earned the state $8.2
billion, 2.19 million bpd went to market from the south. It also trucks between
6,000 and 12,000 bpd to Jordan, with the rest sent northward through Turkey, to
the Mediterranean port of Ceyhan.

The Iraq-Turkey pipeline has a design capacity of 1.6 million bpd, but can
currently transport about 600,000 bpd due to disrepair. There are no plans
currently to refurbish it.

Iraq has in the past announced plans to rebuild its national strategic
pipeline network. An early version of those plans called for expanding capacity
into Turkey and opening routes to both Jordan and Syria. Political
complications with Turkey and volatility in Syria have scuttled both of those
components, however.

Multiple times throughout the presentation, the Ministry attempted to
address common investor concerns about big-ticket projects, such as timely
payment and visa approvals and physical project security. The presentation
itself included reoccurring lists of associated risks and the commitment of the
Ministry to mitigate them – an admission of common cause between contractor and
host government that IOCs have expressed as lacking in the past.

Basra to Haditha

This first phase of the export plan, according to the presentation, is a 680
kilometer, 2.25 million bpd line carrying crude "received from five (5)
new fields in and around Basrah, including West Qurna‐I and West Qurna‐II"
from Basra's Pumping Station 1A (PS1A), located at the Rumaila oil field, to
Haditha (K3).

The new pipeline will be built under an engineering, procurement and
construction (EPC) contract.

SNC Lavalin has conducted a feasibility study, environmental and social
constrains assessments, and the concept of security reports for the EPC
project. The Basra-Haditha link will be funded by the Oil Ministry's annual
budget or "alternative payment and/or financing solutions," according
to the presentation. The payment to the contractor will be guaranteed by the
Finance Ministry.

The project will technically include two parallel lines – a 56-inch oil line
and "an associated fuel gas pipeline" – along an existing pipeline
corridor constructed decades ago. In addition, a tank farm near PS1A will have
seven days' worth of crude storage.

The pipeline will run northwest, staying east of Najaf, Karbala and Ramadi.
It will have pumping stations near Samawa, Najaf and Ramadi. Five days of crude
storage will be located at K3.

Haditha to Aqaba

The 1,000 kilometer, 1 million bpd link from Haditha to Aqaba will be
constructed under a build, own, operate, transfer (BOOT) contract, to be
awarded next fall and signed by the end of 2013.

The winning contractor will finance the project, build the line, and operate
it for 20 years, charging a service fee. Then, it will be transferred to the
Oil Ministry.

A feasibility study, currently carried out by SNC-Lavalin, will be finished
early next year.

A 42 inch oil pipeline and "associated fuel gas pipeline" will
begin at a new Pumping Station 5A (PS5A) at Haditha. En route to a dedicated 7
million barrel tank farm near Aqaba, the pipeline will also utilize a dedicated
3 million barrel tank farm at Jordan's Zarqa refinery and a 160,000 bpd
capacity tie in to feed the refinery itself.

Iraq's state-run South Oil Company (SOC) will be responsible for supplying
the crude to the pipeline. The SOC is also responsible for paying the fees to the
operator of the BOOT contract: a capacity charge pegged to the pipeline's
capacity to cover construction, debt service and operational costs, regardless
of how much oil is being sent through it; and a throughput charge, which is
similar to a transit fee.

The State Oil Marketing Organization (SOMO) will be the responsible seller
of the crude, as it is for all of Iraq's other export routes. The state-run
South Gas Company will supply the fuel gas, used to generate power for the
pumping stations, under a fuel gas supply agreement.

Companies interested will be invited next month to take part in a
pre-qualification process, after which qualified companies will submit tender
bids. An Oil Ministry committee will then recommend "preferred
bidders" with whom the ministry will enter negotiations, followed by final
negotiation with the final preferred bidder by the end of 2013. If all stays on
track, Iraq could begin exporting crude to Aqaba in 2016.

Iraq hasn't built cross-border pipelines since the Iraq-Saudi line in the
1980s, which was subsequently appropriated by Saudi Arabia in an act that Iraq
considers an illegal theft. This is likely one of the reasons Iraq is
self-financing the pipeline construction only on its own territory.