BAGHDAD - What was once considered a pipe-dream
could become reality: after decades of dictatorship, war and international
sanctions,
Iraq’s
massive oil reserves are set to be tapped proper and the country once known for
two overflowing rivers could be crowned oil king.
If the seven oil projects awarded to foreign oil companies
this weekend, and the three from an auction earlier this year, develop as
planned, within eight years,
Iraq
will see its oil production capacity leap to more than 12 million barrels per
day (bpd).
“We think it is a big victory for
Iraq
to be able to be a leader in the world,” Iraqi Oil Minister, Hussain
al-Shahristani, said after the auction.
Saudi
Arabia, the world’s largest producer at 8.18
million bpd, has a capacity of just over 11 million bpd today, after slower
demand growth halted plans to expand to 12.5 million bpd by the end of this
year.
Iraq –
behind
Saudi Arabia and
Iran
– has the world’s third largest proven oil reserves, with potentially more
remaining to be found. Currently, however, its 115 billion barrels below ground
pump at just 2.4 million bpd, with production hampered by political, structural
and security problems that could moot the enthusiasm from this weekend’s
auction.
Out of the 10 oil projects on offer during the two-day
auction, seven were awarded to a dozen companies. Three fields up for grabs in
a June 30 auction were awarded, with one deal already finalized. And there are
more than 60 fields discovered but not yet developed. These include two that
the ministry is negotiating directly with foreign companies outside of an
auction process.
Currently,
Iraq
relies on oil revenue for 95 percent of its revenue. This will increase if the
fields develop as planned. Only after, however,
Iraq
reimburses companies for their investment and pays them a relatively small fee
per barrel of increased output.
But this is
Iraq,
where, aside from this weekend’s bidding round, it seems nothing goes according
to schedule.
Since late 2006, a new oil law to replace current oil
governance – an often vague and conflicting mix of the 2005 Constitution and
laws left from previous eras – has been delayed by political squabbles. Laws
reestablishing the national oil company, reorganizing the oil ministry and
formalizing revenue redistribution, are also languishing.
Iraq’s
Kurds, who favor heavy decentralization, and nationalist Arabs, who want strong
state control, have both questioned Shahristani’s oil deals. Some have called
them illegal.
In press conferences and speeches before the auction, both
Prime Minister Nouri al-Maliki and Oil Minister Shahristani, reiterated the
government’s pledge that the deals would remain valid – no matter what happens
in the March 7 national election.
Legal cover has been as much of a concern to foreign oil
companies as physical security. Three days before the first field was put on
the block, five bombs killed more than 120 people.
Iraq’s
northern export pipeline was offline for a week, during both October and
November, due to sabotage.
“The contract specifies very clearly the responsibilities of
the companies and the security for the fields is the responsibility of the
Iraqi government, but if the oil companies require specific security for their
personnel or their activities, that is their responsibility,” said Shahristani.
“We will make necessary precautions to deal with it,” said
Torgeir Kydland, the senior vice president for
Iraq
at Statoil, the Norwegian firm which partnered with
Russia’s
Lukoil to increase production at the West Qurna-Phase 2 project from nearly
nothing now to 1.8 million bpd.
That additional crude, however, now needs somewhere to go.
And throughout the value chain, there are missing links.
Iraq
needs to upgrade refineries, build more storage units, and create a larger
capacity transport infrastructure. Following wars and sanctions, everything
needs repair and modern technology.
Iraq
cannot export much more than it does already; depending on which segment of the
pipeline system, either repairs have not been made or an increase in oil flow
risks all-out rupture.
“The amount of work required for the infrastructure to
handle such a massive production and to transport it and to export it is huge,”
said Shahristani. He said a pipeline and export master plan will be completed
soon after assessing the needs of the fields awarded for development.
“There will be another port there and also a network of
pipelines extended from the north of
Iraq
to the south and from the east to the west of
Iraq
to export oil from different areas,” he said. Such a move will diversify
recipients, increase delivery to those already served, and allow it to separate
the different qualities of crude instead of selling it as a concoction of one.
And when it makes significant gains in production, it will
have to find its place within OPEC’s quota system, which
Iraq
– a founding member – has been excused from because capacity was cut by wars
and sanctions. Shahristani said the 12 million bpd target will merely be
Iraq’s
capacity, and that actual output will be based on market demands and aligned
with OPEC. There is language in the contracts that compensates foreign companies
if production is reduced, he said.
Iraq
is considered by Transparency International as one of the most corrupt
countries in the world. And the influx of potentially hundreds of billion
dollars of foreign investment into an as yet unproven government of struggling
institutions is a volatile concoction producing in other developing yet
resource-rich nations what has come to be known as the “resource curse.”
That is, when oil revenues aren’t used to benefit the
citizens of the producing country but, rather, the elite. Investor companies
are often enablers if not complicit, and their home nations approving.
The result is a populace lacking basic services and a
polluted environment that soon turns into violence, destabilizing both oil
operations and government. The resource curse in
Iraq,
however, is not inevitable. And although history is a bad indicator, in
Iraq
and in most oil producers, such a trend can be slowed and reversed.
“That’s why we’re glad it’s not coming on line all in one
day,” said a senior
U.S.
official. The ministry’s Inspector General’s office is considered to be both
progressive and aggressive.
The companies are expected to reach an initial agreement
with the ministry by the end of the year.
“They will give us a work plan about the numbers of the
fields to be developed, the expected costs, the invested money, and the number
of the workers,” said Shahristani.
This is then followed by Cabinet approval and the final
signing. Thirty days later the companies must pay the signature bonus, which is
no less than $100 million, depending on the field. And it’s non-recoverable, as
opposed to the first round where the much larger signing bonus was given as a
loan.
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This article was written for OilPrice.com by Ben Lando of the Iraq Oil Report (www.iraqoilreport.com). OilPrice.com focuses on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics. To find out
more visit their website at: http://www.oilprice.com.
Ben Lando is the founder and Iraq Bureau Chief of Iraq Oil Report.
Ben was previously the energy editor at United Press International,
reporting extensively on and from Iraq. He also served as UPI’s energy
correspondent while based in Washington DC. Throughout his career, he
has reported on energy, political and security issues in Iraq, Saudi
Arabia, Russia, Turkey, UAE, Jordan, UK and the United States. He is
currently also the Iraq-based freelance reporter for Platts, and a
freelance reporter for The Wall Street Journal and TIME. Ben has been published in The Washington Times, The Jerusalem Post and World Politics Review, and has given numerous expert interviews to BBC News, NPR, The Washington Post
and other media outlets. He is a noted specialist on Iraq, and has
consulted members of the U.S. Congress and global business risk and
investment firms on a myriad of topics.
Ben is based in Baghdad and travels frequently around the Middle
East. He oversees a team of journalists and researchers based in Iraq,
and throughout the world.
