Shell seeks lower production targets for Majnoon

Royal Dutch Shell, Europe’s biggest oil firm, wants to slash budgeted crude output at its Majnoon oil field, saying that production forecasts may be unviable. Shell’s oil investment in Majnoon is estimated to reach $50 billion spread over a 20-year period.

The targeted cuts would slash original forecasts by 0.8 million barrels to 1 million barrels per day – more than 40 percent of initial projections.

Aside from production cuts, Shell discussed proposals to add more years to Majnoon’s plateau period.  Majnoon output is expected to level off in 2017, but the oil company is pushing for extension by up to 20 years. Moreover, it plans to reduce targeted expansion costs for the oil facility by a hefty $10 billion, based on data culled from the oil ministry.

The budget talks between representatives from Shell and the Iraqi oil ministry is part of company initiatives to hash out definitive expansion plans for Majnoon, although discussions are likely to continue till middle of May.

Observers note that other oil firms may follow suit. A handful of these firms have over-estimated budgets for projects with Iraq, in the hope of winning the auction on Iraq’s oil field. It may be time for these companies to adjust targets to more realistic levels to make oil investing more viable.

In 2010, Shell has invested about $1 billion in Manjoon and another in 2012.Some of Iraq’s deals with foreign oil companies like Shell are geared towards achieving a 12 million barrel per day output by 2017. However, this is no longer feasible due to weaknesses in current organizational setups and logistical limitations.

Some oil companies with existing contracts with Iraq are negotiating for an adjustment of projected per barrel charges and daily plateau outputs, but the Iraqi oil ministry is disinclined to lower the $1.39 per barrel fee.  However, it will accept decreases in output as this will help ease the rate of extraction from reserves.

An Iraqi official said “We agree with Shell to cut output, but not with changing remuneration fees as this would mean we would be signing a new deal and being fooled by Shell.”

Shell is required to present a finalized Manjoon expansion plan to South Oil Co. (SOC), Shell’s Iraqi partner for the project, but SOC is surprised that the company is holding talks with the oil ministry instead.

SOC officials say that production cuts are justifiable because sticking with original plan will only result in unnecessary depletion of oil reserves.

Iraq needs additional funds amounting to $180 billion so it is pursuing oil and gas investments from foreign oil firms. It has forged agreements with some big companies like Shell, Exxon, and BP for the development of its southern oil fields.

By: Chris Termeer