West Qurna-2 field is located in the southern part of Iraq, 65 kilometers north-west of Basra, a major seaport city, and is one of the world's largest fields. The field's recoverable reserves come to around 14 billion barrels. More than 90% of the reserves are concentrated in Mishrif and Yamama accumulations.
On December 12, 2009 the consortium of PJSC LUKOIL and Statoil, a Norwegian company, was awarded a contract for the development of West Qurna-2 field, one of the world's largest fields. On January 31, 2010, a services contract was signed for the development and production at West Qurna-2. The contract was ratified by the Cabinet of Ministers of the Republic of Iraq.
A supplement agreement to the contract was signed in January 2013 that outlined the target contractual production (1.2 million barrels of oil per day) for a the target production period of 19.5 years, and a 25-year extension of the contract term.
On March 29, 2014, commercial oil production was commenced at the field to reach 380 ths. bbl/day by year end, and more than 400 ths. bbl/day by year end 2015.
In 2015, as part of project costs compensation, LUKOIL received 10.5 million tons of oil (44 tankers). The total gross sales of the compensation oil came to USD 3.1 billion.
LUKOIL (interest — 75%).
North Oil Company (NOC), a state-owned company being a part of the Iraqi Oil Ministry. NOC with a 25% interest is involved in the project jointly with the LUKOIL Group under the contractual terms as one of the project contractors. NOC does not incur any costs receiving only its share (25%) in the remuneration.
South Oil Company (SOC) represents the Iraqi Republic in the project. SOC distributes the project oil between the project parties as a compensation of costs and remuneration and keeps the remainder.
Project's financial scheme
LUKOIL receives the compensation oil as sales proceeds. It is a share in the produced oil based on its price calculated in relation to the global market prices.
The LUKOIL Group’s proceeds are divided into two parts – as compensation of costs to the extent incurred, and as remuneration.
LUKOIL provides funding for all the project costs except for the remuneration tax payable by the parties to the project on their own for their share of remuneration.
Following the compensation of historical losses LUKOIL will obtain compensation of all the costs as a share in oil production.
In addition to the compensation of its costs, LUKOIL receives remuneration in proportion to its interest (75%) of USD 1.15 payable to project parties for each barrel of oil and pays profit tax.
Advantages of the financial scheme for the group
As soon as the costs have been compensated, the project will raise all the project funding itself without making use of the Group’s funds any more.
The compensation scheme involves assumption of the bad market environment risks by the Iraqi party ensuring an operations breakeven and steady project profitability within a wide range of oil prices.
Project implementation includes demothballing the existing wells, drilling a few hundred new production, exploratory, prospecting, and injection wells, creating a water supply and formation pressure maintenance system, construction of production facilities, and numerous other facilities of infrastructure, access ways, power system, infield and external pipelines.
Construction of basic production facilities was launched in April 2012.
The initial field development phase (Early Oil) was completed within a record-breaking time of 27 months. Starting in April, 2012, the field’s major production facilities were constructed at the contract area (an oil treatment plant with a capacity of more than 400,000 bbl./day), 48 production wells were drilled (as of March 2014), 5 well pads were prepared; a 126-MW gas turbine power plant, a water intake station from the Euphrates river, an export oil pipeline to the Tuba terminal stretching over 100 km, extra reservoirs at the Tuba terminal with a total capacity of 198,000 cubic meters, a rotation camp, access ways, and field pipelines were constructed.
On March 29, 2014, commercial oil production commenced at the field at the planning rate of 120 thousand bbl/day.
On June 11, 2014 LUKOIL was granted the right to the compensation of costs and remuneration of costs under West Qurna-2 project. On August 19, 2014, the first batch of compensation oil from West Qurna-2 was shipped from the port of Basra in southern Iraq.
Currently, the commissioned production facility enables the production of 450 thousand bbl per day. West Qurna-2 is a major investment project carried out in Iraq by a private company as part of which maximum production growth was achieved from a single field. In 2015, the oil field produced 20 million tons of oil.
The project contract until 2020 was signed.
The project was frozen due to the UN sanctions against Iraq.
The consortium of PJSC LUKOIL and Statoil was awarded the field development contract.
An agreement was signed with the new Iraqi government till 2030. The LUKOIL Group’s interest came to 56.25%.
Contracts were signed with the contractors for construction of surface facilities and commencement of its active development phase. The project interest was increased to 75%.
The contract was amended to mitigate project risks: the design peak production was reduced from 1.8 to 1.2 million bbl/year, the contract period extended till 2035.
March: target production rate of 120 thousand bbl/day reached. June: accelerated compensation of costs (the precondition that the production must be maintained at 120 thousand bbl/day for 90 consecutive days was met) commenced. August: drilling of the first horizontal well successfully completed. The first tanker of 1 million barrels of compensation oil was shipped out. The oil was exported to the Group’s ISAB refinery in Italy. This made it possible to achieve significant synergies from vertical integration of the LUKOIL’s upstream and downstream business. The LUKOIL Group’s share in annual production assessed as proceeds came to 41.7 million bbl. to reach USD 3.7 billion, of which 30.9 million bbl. was shipped out (19 tankers directed to Europe and Asia) whose value came to USD 2.1 billion. By the end of the year, oil production output came to 380 thousand bbl./day, and the stock of production wells that produced oil included 61 wells.
Development of Mishrif formation.
LUKOIL actively involves the local population to construct surface facilities at West Qurna-2 field. At the peak of construction activities the field’s total headcount was more than 11 thousand people, of whom two thirds were represented by the local personnel employed by both international and Iraqi companies (over a dozen major Iraqi subcontractors were engaged in the project).
Currently, the project Operator (a subsidiary, LUKOIL Mid-East Ltd.) has over 570 local employees on the payroll, which is 37.2% of the Operator’s total headcount. According to the human resources plan for 2016 more than 700 local employees will be on the payroll (42%).
LUKOIL makes a great effort to improve wellbeing of the local residents. Since the very beginning of the project social issues were treated with special attention, despite the fact that it is not the Company’s contractual obligation. Large-scale social program that LUKOIL has been implementing for a few years already as part of the West Qurna-2 project aims at improving the physical infrastructure of educational, healthcare and sporting institutions.
LUKOIL Mid-East Ltd. (a fully-owned subsidiary of PJSC LUKOIL acting as operator of West Qurna-2 project) created thousands of jobs, hundreds of employees received training at the training center for the Iraqi personnel employed at the West Qurna-2 field in the south of the country. Over the past years the entity has been actively supporting the local communities: it has provided new equipment for schools, purchased computers, arranged for regular supplies of drinking water, constructed sporting facilities, and supplied medical equipment. In 2015, LUKOIL Mid-East Ltd. implemented a number of social and charity projects in different fields.
Since 2012, the entity has been making an effort to supply equipment to the healthcare clinics of Madain district where West Qurna-2 field is located. This provided an opportunity for the population to obtain qualified medical care close to their point of residence. In 2015, state-of-the-art equipment of leading global manufacturers was supplied to the district’s hospitals. The supplied equipment included a cardiograph, an X-Ray unit, dental equipment, an autoclave, and accessories required to transport seriously ill patients.
Every year, starting in 2015, LUKOIL Mid-East Ltd. provides funding to supply drinking water to Madain schools. Last year more than a thousand tons of water was supplied.
In autumn 2015, LUKOIL Mid-East Ltd. in cooperation with the Dubai branch of LUKOIL International Services B.V. (UAE) and Al-Aun (Iraq) charity foundation conducted a campaign for purchasing and distribution of winter clothes and toys among low-income families and orphans. A total 700 outfits and 200 toys were purchased.
Since the very first year of its operations at West Qurna-2 field LUKOIL Mid-East Ltd. has been active in supporting the development of physical training and sports. This first of all has to do with soccer. Construction of a football pitch was funded by the entity. Now a LUKOIL Cup tournament is regularly held that is joined by more than 50 teams. In 2015, the entity purchased sporting equipment and clothes for the team of Guveyr district.
In 2015, LUKOIL Mid-East Ltd. sponsored the Madain city sporting club. Equipment was purchased and funds were provided for the travel of Guveyr district volleyball team to take part in the Iraqi volleyball championship. The sponsored team won the 2015 Iraqi Premier League season.