Iraqi Oil May Finally Be Open for Business
Late yesterday (November 11), the major factions in Baghdad indicated a breakthrough may be coming in forming a new government. The parliamentary elections took place eight months ago and the politicos have been at loggerheads ever since.
It is still early to know whether a government is going to emerge that will be acceptable to the major regional and religious-based factions. And there still seems to be much work required here.
It is unknown if the creation of a new advisory council is sufficient to divide up the power. I don’t think so, knowing firsthand how some of these Iraqi politicians operate. Take, for example, the recently signed agreements to begin developing natural gas fields for export.
The secular Iraqiya election slate, headed by former interim Prime Minister Iyad Allawi, said the gas contracts with foreign companies following the latest bidding round are illegal because they need parliamentary approval. The election faction also said it considered the government had exceeded its constitutional mandates.
Iraqiya is by far the most important non-Shiite and Sunni-backed election grouping. It was actually the leading vote-getter in the March 7th elections, but it could not form a coalition to rule. In yesterday’s apparent agreement, current Prime Minister Nouri al-Maliki would keep his post with Allawi heading up the new council having uncertain powers. No word yet on whether this is enough to keep the agreement from unraveling.
This is why reaching a political consensus is so important.
One of the main tasks awaiting new officials is the finalization of a national Oil Law that will determine the revenue sharing from profits among the regions and the status of oil under the control of the Kurds in the north and the Shiite-dominated Basra area in the south. Until that law is in place, outside producers are still at a risk. Because until that law is finalized, companies do not have legal protection for their investments.
However, that has not stopped Western companies from moving in anyway. Throughout the entire period since the March 7th elections, the contract signed in June of 2009 and a number of others inked last December have been slowly phased in.
The Potential Windfall is Enormous
Iraq has a current production level of about 2.4 million barrels a day, an extraction volume well below that of Iran. But, unlike its neighbor, Baghdad has genuine prospects for a considerable influx of foreign investment. And the projected result of an international rush into the country, at least according to the Ministry of Oil, is a rapid rise in production. Oil Minister Hussain al-Shahristani is already on record with a figure of 12 million barrels a day by 2017.
That’s an increase of 400% over the present levels in less than a decade.
The figure is largely obtained by taking the aggregate increase at fields for which international oil companies (IOCs) contracted in the two rounds of auctions last year. Each of those contracts pays a per-barrel fee to the outside operator in return for development expenses and a commitment to a specific increase in per-day production beyond present levels. With the exception of West Qurna-2, all fields auctioned to date have been in production for some time and require significant well workovers, upgrades and a major increase in the number of wells.
A 12-million-barrel figure would surpass Saudi Arabia’s current production capacity of about 10 to 10.5 million barrels a day. There is considerable doubt this can be achieved in the time frame proposed; the goal of 12 million barrels may not be attainable period. Nobody seriously questions the reserves may be there. Rather, the issue surrounds the immense task of bringing the crude oil up and moving it along to the global market.
This follows from the way in which the currently available oil resources are divided. Some two-thirds of the total is located in the Shiite-dominated south, close to the border with Iran.
These reserves would be highly vulnerable to Iranian pressure with some political telegraphing of what may be in store found in the ongoing problems experienced by IOCs attempting to secure a final agreement on use of associated gas in crude oil field enhancements. The local Shiite political parties are exhibiting increasingly obstructive approaches. In addition, Iranian troops earlier this year occupied a disputed oil field on what is considered the Iraqi side of the border. And while that issue is now under review by a bilateral commission, the troops withdrew only a few hundred meters and the precedent can always be replicated in the future.
There is also a significant problem with most of the remaining Iraqi volume: One-third of it essentially lies in northern fields surrounding the city of Kirkuk. That major city remains under central administration, although it is claimed by semi-autonomous Kurdistan. The Kurdish Regional Government (KRG) has taken an increasingly adamant stance against Baghdad when it comes to the use of oil and gas resources in the northern region. In addition to the ongoing battle of oil laws, international contracts and export demands between the central government and the KRG in Irbil, there are also wider regional concerns over Kurdish intentions.
Tehran has experienced recurring stability problems with its Kurdish population in northeastern Iran. Ankara has had to contest with radical Kurdish elements blowing up pipelines in eastern Turkey and then retreating back to enclaves inside Kurdistan. Both Iran and Turkey have undertaken military incursions into Kurdistan in response.
Bottom line: This remains a volatile place to drill. But IOCs are drawn by one overarching realization. The amount of available oil reserves to be developed is considerable. The Oil Ministry has reported that new estimates put the available oil at more than 143.1 billion barrels. That catapults Iraq in OPEC production to second place behind only Saudi Arabia.
That amount of oil open for business is just too juicy a prospect to pass up.