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Shell cutting back manpower sharply at Iraq’s Majnoon oilfield

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Anthony McAuleyMay 21, 2016

Royal Dutch Shell is cutting its workforce sharply at the Majnoon oilfield near Basra in southern Iraq as the government’s financial woes deepen.

Majnoon is one of the five “supergiant” (containing more than 5 billion barrels) oilfields located in southern Iraq, with estimated recoverable reserves of nearly 13 billion barrels, and it has been a major provider of additional funds for the Iraqi government since it started exporting two years ago.

The field employed more than 3,000 at peak construction – three-quarters of whom were Iraqis. But the expatriate workforce had dwindled to 400 amid cutbacks as the government has struggled with both the collapse in oil prices over the past 18 months and the costs of the war with militants in the west of the country.

Now the expatriate workforce is being trimmed to 200, according to a Shell executive who helps manage the project.

A Shell spokesman in Dubai said: “In light of the economic challenges, Shell is supporting the country by implementing cost efficiencies while reducing our expatriate workforce across our businesses.” But he declined to specify the number of job cuts at Majnoon.

He added that “the Majnoon oilfield continues to reliably and safely produce more than 200,000 barrels per day, which is of significant value to Iraq”. He declined to comment on whether the cutbacks might affect future production. It is the latest blow to the Iraqi prime minister Haider Al Abadi and his government, which has been warned for months by international oil firms that investment in maintaining and adding to production could be stalled because of cutbacks.

The country has been one of the world’s largest sources of additional oil over the past year, despite the oil price collapse. Production in the first quarter averaged about 4.3 million barrels per day, up nearly 500,000 bpd from a year earlier, according to the consuming countries’ energy watchdog, the International Energy Agency.

Most of the oil is produced in the southern oilfields, where international oil companies including Shell, BP and Exxon are revamping long-neglected fields that rank among the largest in the world.

Despite the war, which has caused periodic disruptions to exports from the north of the country, Iraq’s southern fields have grown consistently. March marked the fifth successive month of exports above 3.2 million bpd, earning the government an estimated US$2.9 billion that month alone.

Still, the Iraqi government has struggled to meet its obligations to the oil companies. The IEA estimates that the government’s arrears to the companies are about $6bn. The oil price slump has led the government to seek oilfield budget cutbacks, which have fallen to $9bn this year from $13bn last year.

The Majnoon deal in 2010 was seen as a forerunner of things to come, with Shell winning a contract to essentially act as a service contractor rather than an equity partner, getting a 45 per cent stake in a deal that netted $1.39 per barrel for Shell, Malaysia’s Petronas (30 per cent) and Iraq’s Missan Oil Company (25 per cent). Under the terms of the deal, Shell and its partners are compensated in oil they can sell on international markets, but while the deal worked well for the Iraqi government when oil prices averaged $100 a barrel, it must hand over considerably more oil to compensate the partners while oil prices hover in the forties.

Besides Majnoon, Shell holds a 20 per cent stake in the southern oilfield of West Qurna 1, which is operated by ExxonMobil. It is also in a 25-year joint venture with Iraq’s state-run South Gas Company to gather, treat and process associated gas from West Qurna 1, Zubair and Rumaila in the south, and it has a 44 per cent stake in the Basrah Gas Company joint venture.

The Shell spokesman said: “A lower oil price has resulted in a challenging business environment impacting our partners in Iraq and the Shell Group. We are managing a range of issues across our portfolio of projects and implementing measures to ensure continuous business improvement and cost competitiveness.”

Shell said in January that it would be cutting 10,000 jobs worldwide. Industry-wide, hundreds of thousands of jobs have been cut over the past year from both private and government oil and gas companies.

Iraq and the IMF last week agreed on $5.4bn in three-year emergency financing.

But even with the IMF loan, Fitch Ratings forecasts that Iraq’s government budget deficit will widen to 15 per cent of GDP this year, to $22bn, assuming that crude exports remain steady at 3.3 million bpd and the government makes modest spending cuts.

“Lower oil revenue is also causing a balance-of-payments shock,” Fitch said. “The central bank’s stock of foreign reserves (including gold) has fallen from $78bn at the end of 2013 to about $50bn currently. This is still a robust level, at about nine months of current external payments, but is set to fall further this year and next.”

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