Will Iraq Be a Global Gas Pump?
A Sea Change in Iraqi Oil Production?
Until recently, most analysts assumed that Iraq would continue, at best, to make modest progress in its efforts to increase daily output. There were too many obstacles, it was argued, to achieve dramatic breakthroughs. These included continued insurgent attacks on pipelines and production facilities; corruption in the Oil Ministry and major energy production enterprises; the failure of parliament to adopt a national hydrocarbons law; differences between the Kurdish Regional Government (KRG) and the central government over who has the right to award what sort of oil contracts in Kurdish-controlled territories; and the reluctance of major foreign oil firms to venture into or invest in a major way in such a dangerous and unstable place.
Recently, however, the Oil Ministry has made noticeable progress in overcoming at least some of these obstacles. Under the leadership of Oil Minister Hussain al-Shahristani, a former nuclear scientist who was jailed and tortured by Saddam Hussein for refusing to assist in the development of nuclear weapons, corruption has been substantially reduced and various production bottlenecks eliminated. Shahristani has also won support from Prime Minister Nuri Kamal al-Maliki for the participation of foreign firms in the development of Iraqi oil fields, even though this has alienated many in Iraq who oppose any such involvement. Once derided for ineptitude, the Oil Ministry is beginning to be viewed as a functioning, professional operation.
As a result, there are clear indications that Iraq's oil industry could be poised for a major turnaround. Among the most significant recent developments:
• Late last year, Iraq's state-owned North Oil Company signed a $3.5 billion, twenty-year service contract with the Chinese National Petroleum Corporation (CNPC) to develop the Adhab oil field in Wasit province, southeast of Baghdad. Originally negotiated under the Saddam Hussein regime, the deal was put on hold after the 2003 invasion and given final approval only in November 2008. This is the first major contract the government in Baghdad has signed with a foreign oil firm since the Iraq Petroleum Company was nationalized in the 1970s. It also represents the first significant investment by a company from China in Iraq. Under the agreement, CNPC and its partners will develop the Adhab field and deliver all resulting crude oil to state refineries; as the field's main operator, CNPC will be paid a fee by the Iraqi government for its engineering work and all delivered petroleum.
• In May, the Oil Ministry reached an accord with the Kurdistan Regional Government that, for the first time, will allow the Kurds to export oil from fields under their control. Previously, the Baghdad government had refused to recognize any contracts signed by the KRG with private oil firms to develop fields in their territory and had prevented the Kurds from exporting oil from these fields through pipelines controlled by the central government. Under the accord, the KRG will initially be allowed to export 100,000 barrels per day from the Tawke and Taq Taq fields, with higher rates expected in the future; 73 percent of the resulting revenues will go to the central government, 15 percent to the Kurds and 12 percent to the foreign oil companies that signed production contracts directly with the KRG, bypassing the central government in Baghdad. This agreement paves the way for a significant increase in output from Kurdish-controlled areas, which are thought to hold substantial reserves of untapped petroleum.
• In June, the Oil Ministry conducted its first auction of rights to operate existing fields in the country's major producing areas. This represented a major--even staggering--shift in policy, opening the door for the first time in three decades to the participation of major international oil companies in the operation--if not the ownership--of the country's nationalized oil fields. Although opposed by many key groups in Iraq, ranging from the oil workers' union to significant factions in parliament, the move was taken to secure outside expertise in modernizing and upgrading the country's crumbling oil infrastructure, thereby boosting output in a country that still relies on oil for more than 75 percent of its gross domestic product and about 95 percent of its revenues. In fact, many foreign companies chose not to bid in the auction's opening round, finding the returns being offered insufficiently attractive. Nevertheless, one Western firm, BP, won the right (in partnership with CNPC) to operate the giant Rumaila field, Iraq's largest. The Oil Ministry has since indicated that it will conduct additional auctions, including one for the right to explore for oil, on terms as yet unrevealed, in the country's undeveloped south and west--possibly laying the groundwork for significantly more intrusive participation by foreign firms.
Taken together, these steps--aimed at securing the necessary external financing and expertise to achieve a significant boost in production--represent a genuine sea change in the way the Oil Ministry has been overseeing the country's hydrocarbons industry. If all goes as planned, it intends to increase output by 1.5 million barrels per day, and another 4 to 5 million barrels by 2017. These efforts, if successful (and given recent history, that remains a big "if"), would place Iraq among the world's top four or five oil producers, along with Saudi Arabia, Russia and the United States.