The Executive Interview
Turning up the gas
Crescent Petroleum’s chief executive, Majid Jafar, discusses the Sharjah-based firm’s gas project in Kurdistan, the challenges facing Iraq’s hydrocarbons industry, oil politics, Opec and global demand
Majid Jafar is chief executive of Crescent Petroleum, one of the largest privately-owned oil and gas companies in the Middle East. The Sharjah-headquartered firm, an affiliate of the United Arab Emirates’ Dana Gas is a major investor in Iraq’s Kurdish North. The firm signed a service contract in 2007 with the Kurdistan Regional Government, to redevelop the Khor Mor and Chemchemal fields. By October last year, production there had reached 200 million cubic feet (mcf) of gas per day. Today that figure has risen to 300 mcf per day.
In an interview with The Gulf, Jafar, an Iraqi national, discusses the firm’s operations, Iraq’s still-unapproved oil and gas law, the formation of a National Oil Company, contract structures and the difficulties of securing skilled manpower.
Jafar argues that the world is "going to need Iraq’s oil quicker than its going to be able to produce it." He warns that global demand growth means that the world will need the "equivalent of seven Saudi Arabia’s every five to seven years."
How is your gas project in Northern Iraq progressing?
Along with our partners and affiliate Dana Gas, we are proud to be the largest private sector investors in the Iraqi oil and gas sector today. So far we’ve invested over $850 million
and commenced gas production in a record time of 15 months, from signature. We managed to implement an integrated gas project in challenging conditions and start producing gas, which is now providing almost continuous electricity in the main cities of Iraq’s Kurdistan region, making it a significantly better quality of life than the rest of Iraq.
How much are you producing?
We’re currently producing approximately 300 million cubic feet per
day of gas, as well as 14,000 barrels per day of condensate. We are
currently discussing with the Kurdistan Regional Government (KRG) an expansion plan, because there is need for even more gas, giving the first priority to local power needs. For any host government anywhere in the world when it comes to natural gas, your highest and best economic value is for electricity generation because you are displacing liquid fuels. Second is local industry, which creates a market for your gas, while creating jobs and investment and economic multiplier effects. Only once you have met all your local needs, should you consider export.
At what level does export become viable?
It depends on the market that you are targeting. From Kurdistan being landlocked, the most obvious markets are pipeline markets, but there are gas shortages in many of Iraq’s neighbours, including Syria and Turkey, and from Turkey on to Europe. These are future potential markets for gas from Iraq. The priority now must be to meet the local needs.
What are your production targets?
I don’t want to speculate on reserves or production figures, because we are still in the process of drilling and appraisal assessment, but the reserves are there and these are world class assets with significant future potential.
What are your thoughts about the relationship between the Kurdish leadership in Erbil and the central government in Baghdad and the ability of the KRG to honour contracts?
There is a lot of politics unfortunately surrounding the Iraqi petroleum sector, and egos and prejudices have come into play. What should be placed paramount above all else are the interests of the Iraqi people and the constitution, which is the highest governing law.
The situation has improved as far as the political infighting on these issues, and some pragmatic steps have been taken, such as the commencement of payments from the federal government to the regional government for the oil that has been exported. So these are positive steps.
Most important will be the legislation underpinning the petroleum sector – the necessary package of laws. The revenue sharing law which will decide how the pie is allocated, how the revenues are split in the country, and the Oil and Gas Law, sometimes called the hydrocarbon law, which regulates the whole sector, and decides which bodies within the government are responsible for what. It’s very important that there is clear separation between the regulator and the regulated – the regulator being the ministry, the regulated being the companies, private or state-owned. The highest policy body will be the Federal Oil and Gas Council. And then finally the law to set up the National Oil Company, to own the assets that the state owns on the producing side.
As an Iraqi, I believe that a pro-investment and pro-private sector approach is the way forward. Our experience and our achievements in Iraq’s Kurdistan region in a record period of time are a testament to what the private sector, particularly the region’s private sector, can achieve in Iraq.
Companies and capital from the Gulf Co-operation Council are extremely welcome in Iraq, and in fact are better placed to manoeuvre than Western capital, because the understanding of the country and the ability to manage local risks will be higher, and there is no sensitivity as there is with some large western companies about imperialism, or the reason for war.
Will you be participating in the fourth bidding round scheduled for January?
The fourth bidding round was announced by the Federal Ministry of Oil in Baghdad as a purely exploration round; we are interested potentially, but it is next year, and still a lot of parameters are left to be defined. It also remains to be seen whether the international oil companies (IOCs) will accept service contract terms on exploration blocks.
Do you agree with Production Sharing Agreements (PSAs)?
A lot of nonsense has been said about the type of contracts Iraq should sign, and Iraq shouldn’t sign production sharing or investment type agreements, because it’s a loss of sovereignty, which is of course nonsense. PSAs were invented by the Indonesian government in the 1960s, a socialist and Islamic government, to preserve its sovereignty. What is important is not the name or the type of contract. What is important are two things: one, what is the government’s share of the income, and what is the investors’ share? Two, that the contract aligns the interests of the investor with the government to prevent conflicts in the future, and to make sure that the investor keeps working in the best interests of the government. Whatever the oil price scenario, and whatever the reserves end up being, the contract needs to be robust for these different scenarios.
Do you have plans for other regions of Iraq?
In the past we pursued detailed discussions with the federal ministry about the development of fields in southern Iraq. We did a study for an exploration area under and MOU for the ministry of oil, but at the moment, our operations are restricted to the Kurdistan region. We hope in the future to be active in other parts of Iraq, with the right projects at the right time.
Are you concerned by Opec quotas, politics and how Iraq will fit in?
That whole area of thinking is a waste of time, because the world is going to need Iraq’s oil quicker than it’s going to be able to produce it. I have no doubt about that. Even with the conservative annual growth that we see today based on the world recession, we have oil at over $100 a barrel. We have a shortage in world markets and we have growth rates that imply that you’re going to have to add a new Saudi Arabia every five to seven years, and where is that going to come from?
Iraq was where Opec was founded, in Baghdad, in 1960; it’s always been a founding member. Plus Iraq’s quota had been reduced artificially for many years because of wars, sanctions and so on, so I think the world is going to welcome Iraq coming back. Quotas are always based upon reserves, and I have no doubt that Iraq will have the highest oil reserves in the world.
What are the key challenges facing Iraq’s oil sector?
The challenge for Iraq is not about finding markets for its oil, but about accelerating the development of the production of its oil and using that revenue wisely to create a properly diversified, sustainable economy for its citizens, which has been successfully achieved in the GCC countries for example. The UAE, where we are based, is the second largest Arab economy, and the most diversified. And that’s where Iraq needs to be, not to be depending on oil for 98 per cent of your earnings.
Other challenges are politics and legislation, the availability of qualified contractors, although that is improving. They are starting to come into the country, but for our project we had to rely mostly on local contractors and supplement them with our own staff because they hadn’t the experience. Qualified local staff are in short supply. But hiring local Iraqis is the priority; 80 per cent of our staff is Iraqi.
We are one of the pioneers in a way, once more companies start operating then the demand for these few people is going to increase, so you need to be educating the next generation very quickly.
More on The Executive Interview