August 2012, Vol. 239 No. 8

Features

No Half Measures In Helping Iraq Resurgence

Let us take a look at Iraq’s re-emergence as a major oil producer and examine why international companies wanting to benefit have to commit.

It is hard to come up with a better symbol of Iraq’s resurgent oil and gas sector than the candidacy of the nation’s Thamir Ghadhban to head the Organization of Petroleum Exporting Countries (OPEC). After decades on the sidelines, Ghadhban is one of four hopefuls to take the reins of OPEC.

The candidacy confirms Iraq’s growing importance in international oil markets, and also is a reminder of the country’s impressive legacy that it is seeking to recapture. It was, after all, in Baghdad that OPEC was born in 1960, with Iraq one of its six founding members.

In fact, Iraq is already some way toward recapturing its golden days as an oil producer, producing oil at a higher rate than at any time since the 1970s. In fact, Iraq exports were up 20% this year to 2.45 million bpd in May. Freed from decades of dictatorship, sanctions and war, the country is setting about exploiting proven oil reserves of more than 140 billion barrels – the third-largest in the world – as well as gas reserves that, at 112 Tcf, are also in the top 10, according to the U.S. Department of Energy.

If anything, the bald figures understate the country’s importance. In the short term at least, Iraq is also the only significant source of potential growth in oil supplies. Fatih Birol, the International Energy Agency’s chief economist, put it well at a conference in May: “If there is no good news from Iraq, it’s bad news for the global oil outlook.”

Iraq’s government is determined to deliver that good news. Oil Minister Abdelkarim al-Luaybi has said the country plans to increase output to 3.4 million bpd this year and exports to 2.6 million bpd. By 2017, al-Luaybi wants production to be up to 12 million bpd – a level putting it on par with Saudi Arabia.

It is a hugely ambitious target, representing an unprecedented increase in production, and Iraq’s plans for refining are no less ambitious. Here, it foresees an increase in capacity from 600,000 bpd to 1.6 million over the 10 years to 2017 – and then doubling it again by 2030.

Even getting close to these levels will require a significant commitment from the Iraqi government to face the pressing challenge of upgrading the existing production, refining and transportation network. With Iraq relying on oil for 95% of its income, these are the revenue generators that will pay for the badly needed improvements in infrastructure to enable the greenfield projects to happen. Indeed, there is little point in trying to increase production if Iraq does not have the means to get the product to customers, or the refining capacity to keep the country running.

After more than three decades starved of investment under unrest and sanctions, the country’s facilities are badly in need of modernization. The infrastructure is old and often obsolete – threatening production. In May, for instance, oil exports from the country’s southern ports were actually down on previous months – largely because of urgent maintenance at one of its southern oil fields.

Counting On Modernization
Fortunately, there is every sign of commitment on the part of the Iraqis to tackle this. Just as the country is relying on the oil majors to develop its reserves (with a fourth round of auctions for licenses to develop its exploration blocks held in May), there is significant interest from the national oil and gas companies to draw on international expertise.

Honeywell – which reentered the country in 2010 – has seen strong demand for distributed control systems, safety instrumented systems, emergency shutdown systems and optimization, simulation, security and advanced processing solutions as it has worked with the national oil companies to prioritize the rehabilitation of their facilities. It is a similar story for the company’s subsidiary, UOP, a refining and gas process technology specialist.

There is, in almost every case, an appreciation that the new technology brings the increases in efficiency, reliability and safety that are needed if Iraq is to meet its production targets. Similarly, the commitment to enlisting international expertise has been evident from the support of the National Investment Commission, which played a key role in helping Honeywell navigate the processes required to register in Iraq and the various logistical challenges along the way.

However, if Iraq is to see sustained improvements in its refining and production capacity, it also requires the international companies working there to demonstrate similar commitment.

In common with other developing markets, there are, broadly, two approaches to Iraq taken by international companies. The first is look to win business before committing to significant investment in the country, handling relationships from afar with international staff – albeit with frequent visits. The second is to commit to the country from the start, building a long-term, full-scale presence founded on local expertise.

Honeywell has taken this second approach. CEO Dave Cote first visited Baghdad in 2009. The following year the company opened its first office there. This office is in the process of moving outside the International Zone – reflecting not only the improving security situation in the capital but also Honeywell’s increasing integration into the country. A second office opened at the end of 2011 in Basra, giving it a greater presence in the country than any of its competitors. A third office is planned for the north, possibly in Erbil.

Staff numbers are still modest, but doubled during 2011, with about 20 permanent staff now based in Iraq. It will at least double again in 2012. Almost all are Iraqi nationals, including, from later in 2012, the new country manager.

Learning The Lessons
There are several reasons why a strategy of localization is preferable.

The first is that it is, quite simply, more effective in winning business. The national oil companies are keener to work with businesses demonstrating they share the commitment to the Iraqi market. Moreover, Iraq remains a country where personal relationships matter in business, and those are most effectively developed on the ground.

The second is that the big challenges Iraq faces are best, and arguably only, tackled by a local presence. Training is an obvious example. Iraq’s oil and gas sector has not just been starved of modern automation solutions for the past couple of decades, but also experience in using them. Updating skills, as much as technology, is an urgent need in the country.

Honeywell Process Solutions’ Junior Engineer Talent Program (JetPro) and Honeywell UOP’s Career Development Program (CDP) are both operating in the country. The CDP sees chemical engineering graduates spend a year to 18 months at UOP’s head office in Des Plaines, IL before returning as highly skilled engineers, while under JetPro young engineering graduates are initially trained in an overseas Honeywell Automation College before being assigned to projects at home for the remainder of the year-long scholarship program. Both the Honeywell UOP and Jetpro programs are fully paid.

The result is that participants in these programs quickly begin to share their training in both automation technologies and project management methodologies; in many cases in Iraq the latter are as antiquated as the equipment and represent a serious impediment to the industry’s development. The skills in managing schedules and costs and improving risk mitigation are among the most valuable brought by international businesses to their partnerships with Iraq’s oil and gas industry.

A new training facility in Energy City outside Basra, meanwhile, which will open shortly, is aimed primarily at the staff of the Iraqi national oil companies. Taking on up to 25 trainees at a time, the training on Honeywell technology – as with other efforts – will help to both bolster expertise in Iraq, but also develop a solid base of familiarization and preference for its products in the country. It is another example of how the commitment to localization not only addresses the company’s responsibilities to the country, but also makes good business sense.

This is also true of challenges involved in navigating the country’s perennial security concerns. Attacks and intentional disruptions to supply chain continue, but it is noticeable that they have become less common as control and security has passed to the Iraqi state. Organizations that are better integrated and in which the country’s population have a demonstrable stake may face lower risks in terms of security. And, as with the sometimes crippling bureaucracy in the country, local staff is better able to understand and mitigate those risks that still remain.

However, the most compelling argument for localization is that failure to embrace it is to waste the one resource that Iraq has retained throughout its turbulent history: its people. The education system in Iraq has in many ways proved astonishingly robust, and – in keeping with the strength of its oil and gas sector and aerospace sectors in the 1970s – the country retains a strong engineering heritage and the discipline continues to be held in high regard. Despite low university enrollment rates, a quarter of the country’s graduates are in engineering, manufacturing and construction, according to the World Bank.

The result is that while in Western Europe and the U.S. we contend with the challenges posed by constant skills shortages, there has been little problem in Iraq finding high quality and enthusiastic applicants for our training courses. It is a sign, perhaps, that the learning in Iraq should not be all one way.

Author
Chris Spear is vice president of New Emerging Countries for Honeywell Process Solutions, responsible for managing business growth in seven countries, including Nigeria, Libya, Iraq, Syria, Azerbaijan, Turkmenistan and Uzbekistan. Previously he served as vice president for Global Government Relations, based in Washington, DC and Brussels, Belgium.