BP back to the future at Kirkuk

Almost a century ago, on October 15, 1927, the forerunner of BP struck oil at Kirkuk in northern Iraq. An uncontrollable fountain of oil, 95,000 barrels per day, shot into the air for 10 days, threatening to flood into the Tigris River. Now, the British oil company is returning to Kirkuk , shifting the balance of power within the Iraqi oil industry, and potentially within Opec. The famed Baba Gurgur discovery well was drilled by the Turkish Petroleum Company, soon to be renamed the Iraq Petroleum Company (IPC). This was a consortium of Anglo-Persian (called BP from 1954), Shell, French and American corporations, and oil tycoon and dealmaker Calouste Gulbenkian, founder of the famed museum in Lisbon. As its name suggests, Anglo-Persian was already the Middle East expert, having pioneered the Iranian oil industry. Kirkuk turned out to be one of the world’s greatest oilfields. As you fly into Erbil, its vast, 105-kilometre long geological structure is clearly visible. Original reserves were up to 25 billion barrels, a quarter of the UAE’s whole reserves today. Along with Iran, and shortly afterwards, the first discoveries in Kuwait and Saudi Arabia, it showed that the centre of world oil would shift decisively from the US and Caribbean to the Middle East. Three more major fields were discovered in the area: Bai Hassan in 1953, Jambur in 1954 and Khabbaz in 1976. At its height, Kirkuk yielded 1.4 million bpd. The IPC consortium profited from this bounty, but faced endless problems in avoiding flooding the market, as through the 1960s, Iran, Saudi Arabia and the other Middle Eastern producers clamoured for higher production from their fields. The area’s oil brought profound political consequences: economic development, revolution, nationalisation and repression. Demographics shifted between the Kurdish, Turkmen and Arab communities, first from job seekers, then from heavy-handed efforts from Baghdad at ethnic engineering. Only in the 1970s, with the expansion of the supergiant Rumaila field near Basra, would the centre of gravity of the Iraqi oil industry shift to the south. In 1972, the international companies were kicked out, followed by more than two decades of war from 1980, sanctions and isolation. Several foreign oil corporations returned to the southern fields from 2009 onwards, including BP in Rumaila, but they have been unhappy with the tight margins on offer. BP made several attempts to negotiate a deal for Kirkuk, starting in 2011, but was stymied by Baghdad’s bureaucratic deadlock, and by the threat of the extremist group ISIS. Now, it is finally back. This is a crucial project for the company. Just over a year into his tenure, chief executive Murray Auchincloss needs to show results. BP has been struggling with a weak share price and high debt. Shareholder scepticism over its energy transition plans made it a target for activist investor Elliott, and its strategic reset, revealed in February, was received tepidly. It is vulnerable to a takeover approach by compatriot Shell or another buyer. In November, Mr Auchincloss told the Adipec conference in Abu Dhabi that, “we’re headed back to our roots here in the Middle East”. As well as Rumaila, the company has a strong position in Abu Dhabi, Oman and Egypt, and provides technical advice in Kuwait. Along with the US, the Middle East is one of its two foundations. It will spend more than $25 billion during the course of the project in Kirkuk to boost production to 420,000 bpd from the current 300,000 bpd, capture and treat 400 million cubic feet per day of associated gas, and build a power station and solar power. With at least seven billion barrels of oil reserves remaining, Kirkuk still has plenty of life in it. The initial phase of this contract will produce three billion barrels. This will require some hard work on the field’s challenges: ageing and war-damaged facilities, exceptionally complicated reservoir geology, and a tumultuous century-long production history which has involved injection at various times of water, gas and surplus fuel oil. The British company says it anticipates resources in the wider contract area of up to 20 billion barrels of oil equivalent, probably a mix of gas capture, improved recovery from the existing fields, and new exploration potential. Kirkuk’s future is important for Iraqi politics, too. The oil industry in the predominantly Sunni north has been rather neglected, compared to the intense activity around Shiite-dominated Basra. But the BP deal, along with recent contract awards to Sharjah-based Crescent Petroleum nearby, could partly rebalance that. Iraq needs gas to fill its electricity deficit, and crude for its northern refineries. The government wants to reconstruct the oil pipeline from Kirkuk to Turkey, that was destroyed by ISIS, giving it an alternative to the Gulf ports, or the use of the pipeline running through the semi-autonomous Kurdistan region. Khurmala, the northernmost part of the Kirkuk field, is controlled by the Kurdistan regional authorities. It is now Iraqi Kurdistan’s leading producing field, operated by Kar Group, headed by leading Kurdish businessman Baz Karim. The BP deal further asserts federal authority, following Baghdad’s retaking of Kirkuk in October 2017, and the closure since March 2023 of Kurdistan’s export route through the Turkish pipeline. Finally, success at Kirkuk matters for Opec. Iraq has been repeated blamed by its colleagues in the Vienna organisation for overproducing. Its oil ministry said last Sunday that it plans to raise its production capacity above 6 million bpd by 2029. With current output around 4.4 million bpd, including from the semi-autonomous Iraqi Kurdistan region, the work at Kirkuk will be an important part of this gain. Other Opec+ countries have to recover their production cuts, and the UAE, in particular, also has plans for major gains in capacity. As the saying has it, you can’t pour a quart into a pint pot. Iraq’s growth will either fall short, or Opec+ will need another messy compromise. If not, Iraq will flood the world oil market like Kirkuk nearly flooded the Tigris a century ago. Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis