Cablegate: Natural Gas From Iraq

DE RUEHGB #3254/01 2711320
P 281320Z SEP 07





E.O. 12958: N/A




1. (SBU) Iraq has world class reserves of natural gas, although
most of it is associated with oil deposits and will become available
only with oil development over the coming decade. In the medium
term, however, Iraq may be able to export 4-10 billion cubic meters
per year (BCM/yr) of gas. Depending on results of additional
delineation drilling, development of the discovered but undeveloped
Akkas field in Western Anbar could provide 4-5 BCM/yr to Turkey via
a link-up through Syria to the Arab Gas Pipeline. An additional
amount of gas, up to 10 BCM/yr may be available directly to Turkey
from apparently non-associated gas (depending on more drilling) in
Kurdish regions. Still larger volumes depend on development of gas
resources in the southern oil fields, and construction of major new
strategic pipelines through the length of the country, a long term
prospect depending as well on restoration of enduring security. END

2. (U) Iraq contains an estimated 2.7 to 3.1 trillion cubic meters
(thousand BCM) of proven natural gas reserves (placing it fifth in
the world), along with another 4.2 thousand BCM in probable gas
reserves. Almost all proven gas reserves in Iraq are associated
with petroleum reserves - 70 percent of the produced gas is solution
(associated) gas from oilfields, 20 percent from gas fields
(unassociated with oil), and the remainder is from oilfields with
gas caps.

3. (U) Iraq's current total gas production is about 15.5 BCM per
year (BCM/y). Iraq's long-term goal is to increase oil production
from 2.1 to 6.5 million barrels of oil per day (mbd) over the next
10 years. If it realizes that oil production target, gas production
should increase proportionally by about 53 BCM/y, to an annual
production rate of 69 BCM/y in 2017.

4. (U) At a conference in Dubai in September 2007, Iraq's Minister
of Oil Husayn Shahrastani optimistically said Iraq's medium term
goals are to increase oil production from 2.5 mbd in 2007, to 3 mbd
in 2008, and to 3.5 mbd in 2009. (COMMENT: Actual production in
2007 is likely to average only about 2 mbd, although it is
increasing moderately with the reopening of the northern export
route. END COMMENT). Such an oil production increase would imply
an increase in associated gas production of about 29 BCM/y. The
Minister said Iraq's short term goal is to use more of its gas, and
medium term, to increase the amount of proven gas reserves.

5. (SBU) Unlike most countries, there is little doubt that Iraq has
the oil reserves to meet its oil production targets; however,
capturing the full economic benefit of gas production faces serious
security, political and institutional obstacles. Also, because most
of Iraq's estimated proven oil reserves are concentrated in the
southern part of the country, and because most of the additional
production of gas will come from those southern oil fields, Iraq
faces a difficult logistical choice in deciding how to use its gas.

6. (SBU) Existing gas distribution systems in Iraq suffered from
multiple wars and neglect during the sanctions period. Most of the
gas pipelines that are left are of extreme age and have suffered
serious corrosion. Consequently, many have been de-rated to lower
operating pressures, resulting on lower flow rates. Additionally,
many have been damaged by the insurgency. Iraq lacks a functioning
network of degassing, compression and dehydration facilities. As a
result, Iraq has to flare vast amounts of gas.

7. (U) In the southern region, some 6-8 BCM/y of associated gas are
flared, and only about 3 BCM/y of gas are used from a production of
9.8 BCM/y. To place that in context, that amount of flared gas
could be used to generate some 2,400 to 3,200 MW of electricity in a
modern gas turbine power plant. The remaining gas that is captured
in the south is far distant and not connected to any pipeline
network to any existing and functioning export route.

8. (U) In the northern region, some 3.9 billion BCM/y of free gas
is produced, along with approximately 1.2 billion BCM/y of
associated gas. Total production in the North is 5.1 billion BCM/y.

BAGHDAD 00003254 002 OF 003

Most of that is used in power production, and even so, there still
is a shortage of gas for power generation.

9. (SBU) Looking beyond the immediate domestic need for utilizing
gas production, addressing the flaring of gas should be a high
priority for both economic and environmental reasons, and will
become even more important as Iraq ramps up petroleum production.
The development of the gas industry in Iraq should take into
consideration the country's current and future energy needs, as well
as the potential to be integrated into regional and international
gas and petrochemical markets.

10. (SBU) Gas exports to Europe represent the best opportunity to
capture the market value of Iraqi gas. The Minister of Oil readily
understands the geopolitical significance as well: he agrees that
if Iraqi gas made a substantial contribution to Europe's energy
diversification, it would encourage European interest in Iraqi
political stability. And for us, of course, Iraqi gas can help
fill-in supplies for a non-Gazprom Southern Corridor. If
established, this market would offer Iraq a stable market demand.

11. (SBU) So, in the short term, what gas export projects are
possible? Since 2003, we have been working with Iraq to help it
with the capacity-building needed for extending its domestic gas
network, and integrating the northern and southern gas systems which
have been effectively broken apart by the insurgency.
Unfortunately, given the insurgency and attendant instability, we
have little to show for our efforts: some gas-fired generation, some
repaired pipeline links. But even today the north and south
pipeline systems are not linked and some power plants designed for
gas are running on diesel, or, even worse from an operational and
environmental standpoint, on heavy fuel oil. But there are short
and medium term export options nevertheless, starting with modest
volumes via Syria.

12. (SBU) Several studies have been conducted (or are being
conducted) to capitalize on Iraq's gas resources, including by Shell
country-wide and by the Japan External Trade Organization in the
north and south. The western desert of Iraq is relatively
under-explored, and has not seen recent or new exploration drilling
except in the area of Akkas field. Only six gas wells, of which
only four are productive, have been drilled in the Akkas field,
located in Anbar province conveniently near Syria but inconveniently
without a suitable gas pipeline nearby. Although a commercial-scale
gas reserve has been proven at Akkas field, for lack of a pipeline
the gas is stranded at the moment, and the wells were capped.

13. (SBU) The Iraqi Oil Minister announced on September 9 that the
Ministry will construct a pipeline to supply gas to Syria. He told
EMIN on September 14 that Iraq is going to build a short pipeline
from Akkas across to a gas/oil separation plant (GOSP) in Syria,
which would supply 0.5 bcm per year of gas, initially for injection
for enhanced recovery for Syrian oil wells in the region. According
to the Minister of Oil, however, Iraq would be open to develop
greater volumes from Akkas, up to 5 BCM. (NOTE: The field has not
been proven to that capacity yet. END NOTE).

14. (SBU) This additional gas could be available for export to
Turkey and then to Europe via the Arab Gas Pipeline (which we
understand is still in its third phase of construction through
Syria, and not yet connected to European markets via Turkey). Full
field development of this nature could take three years or less if
it is turned over to an IOC on a service contract basis to develop,
as the Minister says he would like to do. However, without the
national hydrocarbon framework law, such a contract would require
Parliamentary approval.

14. (SBU) A medium-term export possibility is to construct a gas
pipeline directly from the northeastern gas fields to (or through)
Turkey. Iraq had been a minor regional gas exporter prior to the
first Gulf War. The implementation of sanctions put an end to the
export of gas for a decade. The previous regime in Iraq laid the
groundwork for resuming exports of natural gas to Turkey, once UN
sanctions were lifted. In 1996, Iraq and Turkey signed a provisional
agreement to supply up to 10 bcm/yr of Iraqi gas. The project
planned to utilize gas from five gas-rich deposits in northeast Iraq
(Khor Mar, Chemchemal, Jaria Pika, Khashm al Ahmar and Mansuriyah)
that were not -- and still are not -- in production. However, to
develop this gas would require the construction of gas treatment

BAGHDAD 00003254 003 OF 003

facilities and a pipeline to the Turkish grid. The initial
estimated cost of the development in 1996 was more than US$2.5

15. (SBU) Turkey has never forgotten the potential of Iraqi gas.
According to press reports, the general manager of BOTAS (Turkey's
national gas company), Saltuk Duzyol, said on September 4 that BOTAS
hopes to develop gas fields in northern Iraq to strengthen supplies
for the Nabucco pipeline project, as soon as the new petroleum law
is enacted in Iraq.

16. (SBU) There is one large caveat to keep in mind about gas in
the northeastern fields. The fields are classed as gas fields by
the Ministry of Oil and generally assumed to contain dry gas, but
some data suggests otherwise, and it is possible that the first
exploratory wells have only encountered the gas cap of an oil
accumulation. The production of free gas from an oil reservoir
usually degrades the reservoir pressure and decreases the ultimate
oil recovery. Without additional exploratory evidence, this would
not be a recommended practice.

17. (SBU) The choice between these pipeline export routes raises
political and technical issues. With respect to Syria, export by
Iraq of the small quantities (500 mcm) being discussed would give
Iraq a considerable lever on Syrian behavior, as this gas would help
Syria maintain its oil production levels. Even the modestly larger
volumes (4.5 bcm) that could be supplied to Turkey across Syria
could give Baghdad leverage over Damascus, although in that case the
leverage could cut both ways.

18. (SBU) On direct exports from the northern fields to Turkey,
such deals could improve Kurdish-Turkish relations, but Baghdad's
buy-in will be needed also.

19. (SBU) On the technical side, both of these options only scratch
the surface, so to speak, of total reserves with the northern gas
resources, and Iraq should continue work to repair its internal
pipeline infrastructure to tap into the potential of its southern
fields, a long-term project. But as these fields and pipelines are
developed, exportable surpluses of 50-60 BCM of Iraqi gas are quite
realistic, making Iraq a potential major world supplier of gas, and
creating competition for Russia and Iran.

20. (SBU) Iraq is developing a master gas plan, which should take
into consideration commercial, technical, organizational and legal
parameters (including energy regulation and gas policy). The
obvious obstacles to the path forward are the current instability,
the need for extensive mine and ordinance removal in critical
southern fields, and the ability of Iraq to regain the management
and technical expertise lost due to personnel departure. Our long
term goal should be a functioning domestic distribution system that
satisfies domestic fuel needs, an increase in oil exports, and
exports of significant quantities of natural gas through Iraq's
neighbors to customers in Europe and perhaps Asia.

© Scoop Media

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