MILLION-BARREL QUESTION
Will Iraq rebound and become an energy superpower again?
Adecade after President George Bush’s invasion that overthrew the Baathist regime of Saddam Hussein, Iraq remains mired in one of the Middle East’s bloodiest sectarian wars. Terrorism and sabotage have degraded Iraq’s oil and gas infrastructure and the Baghdad government of Prime Minister Nuri Al Maliki has neither passed a petroleum law nor resolved its difference over oil royalties and revenue sharing with the Kurdish Regional Government in Erbil, a de facto sovereign enclave in existence since the 1991 Gulf War. Iraq has not lived up to its potential to emerge as another Saudi Arabia, even though Baghdad produces three million barrels of crude a day.
Iraq has captured the imagination of the world’s most powerful oil and gas supermajor executives after the United States defeated the Saddam dictatorship, insurgents in the Anbar and Diyala provinces, the Mehdi Amy and Iran’s proxy militias after a succession of battles and campaign Iraq promised Big Oil 145 billion barrels of proven oil reserves, the fourth largest on the planet, a geological prize that attracted as Exxon Mobil, Total, Royal Dutch Shell, BP, Lukoil and state oil companies from India, China, Turkey, Kuwait and Malaysia.
The election of the Maliki government in Iraq was followed by the first oil licence auction since the end of Baathist rule in 2009. However, democratic elections and even the withdrawal of US combat troops did not equate to political stability, as sectarian fault lines and the spillover from Syria’s civil war led to another grim round of ethnic and sectarian bloodletting.
Iraq’s oil and gas infrastructure has also been degraded by three decades of Baathist misrule, civil war, Iranian and US bombs during the three Gulf wars, UN sanctions and lack of investment.
The IEA now estimates that Iraqi oil production could fall by 500,000 barrels a day alone due to infrastructure deficiencies in Basra province alone. Pipelines storage depots and oil terminals in the south are a frequent target for terrorists, a major reason Western oil majors have been unable to initiate or complete projects on schedule. Even though the west Qarna and Majnoon oil fields (with 15 billion of proven reserves alone) are some of the largest ever discovered in the Arab world — elephant gushers, in the language of Texan wildcatters — Iraq simply does not have either the infrastructure or security environment to increase production growth in 2013 and 2014.
The Iraqi Prime Minister’s Office and Oil Ministry had predicted in 2012 that Iraq would have the capacity to raise production to 12
Iraqi production growth will define the supply curve of crude oil in the next decade
million barrels a day by the end of this decade. This is an impossible objective if current security, engineering and infrastructure trends continue. The Iraqi Oil Ministry has now lowered its official forecast to 9.5MBD in production and 6MBD in exports by 2017, a far higher figure than the estimates of energy economists in the IEA, IMF and Wall Street. However, even now, Iraq is the Opec’s secondlargest oil producer after Saudi Arabia. Apart from abysmal politics, security issues, Iraq cannot increase production growth without a substantial increase in onshore pumping, storage and pipeline infrastructure. Bureaucratic turf wars in Baghdad are also a deterrent for foreign oil companies interested in bidding for new projects. Big Oil makes more profits per barrel of crude oil in offshore West Africa, Columbia or even in the Kordish statelet in the north.
Iraq has been a linchpin of the global oil and gas business since the British Empire created the Hashemite kingdom out of the Ottoman Turk provinces of Baghdad, Mosul and Basra 90 years ago. Once again, Iraqi production growth will define the supply curve of crude oil in the next decade, determine global oil and gas prices, and the balance of geopolitical power in the Middle East. However, Iraq will not achieve its potential as an energy superpower without the participation and commitment of Exxon, BP, Shell, Total and Chevron, the world’s largest and most-technologically sophisticated oil and gas companies.
Iraqi’s relations with oil super majors have deteriorated alarmingly in the past six months. Baghdad publicly blamed Shell for delays in production in the Majnoon field, even though Shell did not have access to adequate mining networks and was forced to drill/test in acerage still dotted with landmines and plagued with terrorism. Exxon sold 50 per cent of its stake in the West Qurna oilfield to a PetroChina and Petromina (Indonesia) consortium in August 2013. Iraq also blames Exxon Mobil for its decision to commit to drill for oil and gas in disputed Kurdish oilfields. If the world’s largest private oil and gas super major is reducing its project footprint in Iraq, the Ministry of Oil’s production growth forecasts are unrealistic. As long as the Baghdad government is unable to agree on a Petrolium Law, foreign oil companies will be reluctant to sign its technical service contacts.