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Whatever Happened To Iraqi Oil? Whatever Happened To Iraqi Oil?

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ONLINE EXCLUSIVE

Whatever Happened To Iraqi Oil?

Short On Foreign Investment, Iraq's Oil Industry Hasn't Lived Up To The Hype

What's The State Of The Industry?

After taking a nosedive after the 2003 invasion, Iraq's oil industry is making a slow but steady recovery. The country pumped 2.4 million barrels of crude a day in the first seven months of the year, up from 2 million barrels a day in 2004. But those numbers are still well shy of the 2.6 million barrels a day the industry was churning out in 2000, and Iraq is far from living up to its potential. The country boasts the world's fourth largest oil reserves, with 115 billion untapped barrels, but is just the 13th largest producer, according to the Energy Information Administration.

 

What's The Holdup?

A lack of foreign investment has been the primary problem. Baghdad has been slow to award contracts, and potential investors have been scared off by corruption, a lack of established law governing the industry and poor infrastructure.

And what's really retarded the industry's growth, experts argue, is the hard bargain Baghdad is driving with foreign oil companies. At a licensing round in June, the first of its kind in decades, oil majors wanted to pocket more than $4 a barrel on crude pumped. Iraq offered $2, which turned off some suitors and left the Oil Ministry to ink deals for just one of the six oil and two gas fields available.

Hardball tactics play well domestically and reassure Iraqis wary of being taken advantage of by oil majors. "It's a nationalist victory in Iraq," said Joost Hiltermann, deputy program director for the Middle East and North Africa at the International Crisis Group. "People like very much that the government is setting tough terms."

 

Still, the allure of billions of barrels more means some companies are willing to be flexible. "They're very bad terms," said Sam Parker, a program officer on Iraq for the United States Institute of Peace. "Everybody is taking the bad terms because they want to get their foot in the door. It's worth taking it to establish the relationship."

There are signs, though, that the Iraqis may be softening, letting companies recoup their initial investments faster, according to Greg Priddy, an energy analyst with the consulting firm Eurasia Group. That in turn may spur more foreign interest and speed up investment.

"They seem to be getting a bit more realistic," Priddy said.

Oil revenue accounts for more than 90 percent of Iraq's annual budget, and much of the future planning was made when oil prices hit record highs in 2008, Parker says. Now that crude prices have fallen, Baghdad feels new pressure to ramp up production: The Oil Ministry hopes to be pumping 6 million barrels a day by 2017.

 

This week has finally seen the first steps toward significant foreign investment. The winners of the June auction, U.K.'s BP and China's state-owned CNPC, signed a 20 year-contract worth $50 billion in investments Tuesday. Iraqi officials hope to increase production at Rumaila, a large oil field in the south, from 1 million barrels per day to around 2.8 million within six years. In a separate deal, Italy's Eni SpA formalized an agreement Monday to develop Zubair, another, smaller field in the south.

But Priddy warns that even if elections in January go smoothly, "things don't fall apart" because of sectarian violence and Baghdad drives a softer bargain with foreign oil companies, it will still be five or more years before Iraq sees any major increases in production.

Even with more investment, Iraq still doesn't have enough engineers or institutional experience. While Saudi Arabia has half a century of oil expertise under its belt, brain-drain robbed Iraq of plenty of talent under Saddam Hussein and scared off more talent during the turbulent aftermath of the 2003 invasion.

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"A lot of it has to be relearned," said Raad Alkadiri, a senior director with the consulting firm PFC Energy. "There is a capacity question that is unanswerable right now, but the indications are that it's going to be a big challenge."

Is Jockeying For Oil Revenue Undermining National Unity?

It's no secret that the Kurdistan Regional Government, which governs the semi-autonomous region in northern Iraq created after the first Gulf War, will eventually want independence. While the Kurdish north boasts large oil reserves, it is more profitable for the KRG to remain part of Iraq and draw 17 percent of all Iraqi oil revenues, including those from mammoth fields in the south. Turkey, Iran, and Baghdad would not tolerate an independent Kurdistan anyway, but the financial imperative gives the Kurds a short-term interest in remaining part of Iraq.

Yet the continual lack of a hydrocarbon law has caused tension between the KRG and Baghdad: The Kurdish government halted petroleum shipments from the region after a disagreement over payments for the companies doing work there. Kurdistan is eager for a hydrocarbon law to be passed to delineate just who controls what fields, and to encourage foreign investment.

"They are laying the groundwork for future independence," Hiltermann says. "For now it makes sense to draw on the national budget. But they're looking very strategically."

dherbert@nationaljournal.com

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