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Can Iraq Escape the Resource Curse?

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The historical trend isn't inevitable; it can be slowed and reversed.

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"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.
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