Developing Iraq’s Natural Gas:

Trajectory and Prospects

January 2014

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Part 1: Gas Production and Power Generation Part 2: Integrated National Energy Strategy for Gas Part 3: Implementation and Trajectory

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January 2014

Part 1 Gas Production and Power Generation

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January 2014

INES Gas Supply and Demand

January 2014

4 Source: Iraq Integrated National Energy Strategy, data provided by Booz & Company

MOE Projections and Strategy

January 2014

5 Source: Dr Kosay Adbul Sattar, MOE (September 2012)

Power Generation 1. History of chronic failure

• August 2011: Minister Shalal sacked for signing improper contracts worth $1.7 billion

• February 2012: Minister Aftan announced power grid would be operational by early 2013

• January 2013: Prime Minister Al-Maliki and Minister Aftan revised timeline to end-2013

• Spring 2013: Al-Maliki announced that power sector officials had been lying to him

2. Iraq achieved 24 hours of power in October 2013 • October 11, 2013: although October is low demand season in Iraq

• MOE did not announce actual power production figures

• Iraq likely to experience power outages in summer 2014 when demand spikes

3. Supply and demand • Iraq’s average demand is 14.7 GW, but varies depending on season

• INES: Iraq’s nameplate power generation capacity is circa 15 GW: comprising gas turbines (47%), steam turbines (34%), hydropower plants (16%), and diesel generators (2%)

• Actual power generation capacity was 7.5 GW in 2010, and 13 GW by August 2013

• Up to 42% of generated power lost in transmission

• 26% of generated power delivered and billed (payment often not collected)

• Only 33% of power generated and transmitted is ultimately paid for by customers 6

January 2014

Basra Gas Company and Shell 1. Basra Gas Company

• BGC processing capacity stands at 500 MMcf/d

• Current gas production is 400 MMcf/d; LPG production is 2,000 tonnes/d

• BGC slated to produce up to 2 bcf/d by 2017 from LR1 fields; 3,000 tonnes/d LPG by H2 2014

• Volumes fluctuate by field, depending on factors like curtailment

• BGC has made notable progress: ABB-contracted 50 MW power plant construction at Khor Al-Zubair; GE-contracted ‘quick win’ project targeting five compressor stations each at North and South Rumaila; the ongoing Zubair compression station rental project.

2. South Gas Company • Gas from first LR1 fields is the property of SGC

• BGC buys the gas from SGC, processes it, and sells it back to SGC

• GOI determines end user – power stations and volumes

3. Shell setting precedent with Nebras ethane cracker • $11 billion project located near Basra

• Shell signed MOU for feasibility study April 2012; signed Heads of Agreement November 2013

• INES unclear on parameters of oil product exports, IOC profit sharing, prioritisation, timing

• Nassiriya is the only other major petrochemical project up for contract

4. Plans to export LNG and LPG delayed • BGC focus was originally on LNG export, however INES contradicts that ambition

• BGC and SGC had planned to export LPG by end-2013, but now targeting H2 2014 7

January 2014

Part 2 Integrated National Energy Strategy for Gas

January 2014

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Integrated National Energy Strategy

January 2014

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1. Key highlights • INES unveiled June 12, 2013

• Strategy outlines broad plans for closing gaps in Iraq’s power generation capacity, creating interconnectivity and efficiency in domestic electricity grid

• Implementation will cost $600 billion by 2030, but generate $6 trillion in revenue for development of other sectors of Iraq’s economy

2. Gas flaring reduction • INES calls for complete cessation of gas flaring by 2015, achieved through continuous

addition of gas processing capacity

• Once flaring has stopped, gas production will increase until all power generation and petrochemical feedstock requirements are accommodated

• INES forecasts sufficient electricity supply by 2015-2016, including improvement of transmission and distribution systems to minimise technical loss

• Basra produces 1 bcf/d of associated gas with 700 MMcf/d flared

INES Gas Recommendations

January 2014

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1. Gas for power generation • Unsuppressed peak demand expected to reach 16 GW by end-2015

• INES targets: To meet demand, given current system inefficiencies, the MOE is planning 22 GW of new gas fired power generation capacity across 40 power plants, in addition to the 7 GW of actual capacity that existed at end 2010. The MOE claims to have reached 13 GW of actual capacity as of August 2013.

• Iraq’s ability to meet peak demand by end-2015 highly questionable

• Electricity grid requires refurbishment; doubling of transmission lines on existing routes

2. Gas for fertilizer • INES advocates fertilizer export based on Iraq’s feedstock cost advantage in world

markets

• Domestic demand for fertilizer is around 420,000 TPA, while supply is 210,000 TPA

• Global demand for fertilizer expected to grow at an annual rate of 5% through 2030-2035

INES Gas Recommendations

January 2014

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3. Gas as petrochemical feedstock • INES advocates petrochemical production and export by 2019-2020, again based on

Iraq’s feedstock cost advantage in world markets and expected growth of more than 4% per annum

• Domestic demand is around 188,000 TPA, currently met almost entirely through imports at a cost of approximately $275 million per annum

• Domestic supply is roughly 35,000 TPA, from the sole and outdated Basra Petrochemical complex, built in the 1970s and in severe disrepair

• Japan: Offered Iraq a loan of $869 million in June 2013, conditional on tender award for a natural gas liquids refinery at Rumaila.

• Korea: Hanwha Chemical Corporation signed a Letter of Intent in December 2013 for a 1 million TPA petrochemical plant worth $4 billion (completion expected 2020-2021)

4. Gas for export • Global LNG market characterized by uncertainty

• INES envisions piped gas exports to Kuwait and LNG exports to other regional and global markets as early as 2016-2017, but it does not prioritise piped gas to Turkey and Syria

Part 3 Implementation and Trajectory

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January 2014

Key Milestones for Gas Development 1. Associated gas from LR2

• Specific plans for associated gas utilisation at LR2 fields remain unclear

2. INES ambiguous about leadership on gas • INES does not explicitly delegate authority for gas distribution to BGC, despite the JVs

dominant role in the project

• Disconnects exist on exact responsibilities of MOO, MOE, BGC

• MOO maintains responsibility for marketing and transporting gas domestically

• Control of gas and petrochemical product exports remains unclear

3. Gas gathering and processing coordination needed • INES: “The TSC’s assign responsibilities for gas gathering and processing, but no consistent

mechanism currently exists for coordinating these plans to ensure that infrastructure links are properly made, that processing facilities are efficiently located, and that the gas pipeline network is aligned to consumption requirements and locations.”

4. IOC production plans disjointed • INES: “Each of the TSC contractors is operating under a separate contract and with a separate

Joint Operating Committee. Coordination among these efforts is needed to provide evacuation infrastructure for oil and gas that is aligned and synchronized with production volumes.”

5. Successful implementation of INES • Dependent on the level of efficient coordination between the MOO and MOE

• Coordination has thus far proved challenging 13

January 2014

Thank You!

CMX Caspian and Gulf Consultants Limited

Dr Jennifer Coolidge, Executive Director

jen.coolidge@caspiangulf.com

+44 7812 434439 +1 857 277 4844

+964 750 227 5905 www.caspiangulf.com

DECEMBER 2013

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