Editor's Note: This article was written by Ben Lando of OilPrice.com, which offers free information and analysis on energy and commodities. Lando focuses on fossil fuels, alternative energy, metals, and geopolitics.
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% 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
(STO), 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 haven't 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's 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's 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, isn't 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 US 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.