Musings on Iraq reports that for the last four months, Iraq has seen a steady decline in its oil exports even though production has gone up.
The major reason is that the country’s oil industry is at capacity. Monthly fluctuations have been the result of attacks, equipment problems, and recently, bad weather. That’s reflected in October 2011’s numbers.
2011 has witnessed new highs in oil production and exports for Iraq. In 2009, it auctioned off a number of petroleum fields to foreign energy companies, and they have been hard at work since then to boost the country’s output. That has led to over 2 million barrels of day in exports each month, and just under 3 million barrels a day in total production, something that had not been achieved consistently since the 2003 invasion.
At the same time, Iraq has not been able to significantly go past that mark because its export facilities are at capacity. To add to that, the oil industry faces constant problems like old equipment to terrorist bombings. That has driven down exports for the last few months. Until the whole industry is thoroughly renovated, something that the government plans to do, these trends will continue.
For those keeping score at home, yes the Neocon script for the 2003 invasion of Iraq was clear that the flood of crude oil out of a free Iraq would pay for the war, both in actual costs and as a reward for having the courage to invade. Yeah, I know, they lied about that too, just like the WMDs. And yes, there is a pattern.
See Part One if you missed it…
Oil Guy said the pipeline to Syria was built “back in the day” and looks like Swiss Cheese, full of holes (and a Scooby snack for the allusion!) The pipeline into Turkey is a bit better but can only handle about twenty percent of the oil, and has not had a full pressure test since 1991. That means eighty percent has to be piped down to the one deep water port Iraq has and shipped out through the Gulf by tanker. Somebody (such as Oil Guy) needs to first build all the piping and terminals and shipping stuff which are not there right now. Of course, that builder needs to be careful, because most of the countries in the neighborhood get their fresh water via desalinization plants that draw from the Gulf. An oil spill in an Iraqi port hastily thrown together would create an ecological and political disaster across the entire region that would make the BP Louisiana Gulf fiasco seem like just more spilled milk no one should cry over…
Umm Qasr is Iraq’s only deep water port. It represents the door in for the massive amount of heavy equipment needed to extract the oil and the door out for the oil on its way to the world. The place is in terrible condition, reported to be the worst port in the Middle East. Umm Qasr is now prioritized for grain imports, needed to feed the population. Grain unloading will need to stop before oil equipment can be moved through the limited terminal space. Iraq charges some of the world’s highest port fees as well, close to $8000 for services that cost no more than $1000 anywhere else on the planet. Bribery and corruption are rumored to be nasty business (the use of the word “rumored” here by Oil Guy means “absolutely taking place.”) The Ministry of Oil is supposedly trying to negotiate a deal to bring in the extraction gear overland through Kuwait, but given that Kuwait is an oil competitor and cranky about Iraq invading it in 1991 (and still not having paid its reparations), that may not work out well. Of course the future is always bright, as Iraq has big plans to build a new port at the town of Fao; construction has only just started.
You’d think oil and water don’t mix, and they don’t. However, one good way to get oil out of the ground is to pump fresh water under it, forcing the oily goodness upward. Turns out, said Oil Guy, that you need fresh water to do this because salt water clogs up the sand and does not work as well. Iraq or Oil Guy will need to build whopper-sized desalinization plants, because the supply of fresh water is decreasing as Syria, Turkey and Iran build dams that choke off the Tigris, Euphrates and other rivers that supply Iraq with its fresh water. If the oil companies decide to go with salt water, then lengthy pipelines and pumping stations which use a lot of electricity are needed instead. These would take a few years to construct.
Iraq has an acute shortage of electricity, and a shaky, inefficient grid to move the power around. Oil work, especially all the pumping needed to shoot the oil from the extraction site to the port, needs megawatts of power that currently do not exist in Iraq and will need to be found. Everybody argues over the numbers, but we’ll go with Iraq being able to generate 4500 megawatts on demand in 2002, 4000 megawatts after the invasion, down to 3600 megawatts at present as the infrastructure degrades. Whatever the exact numbers, the curve is downward, while demand increases require it to trend upward for any hope of success. Iraq’s Minister of Electricity resigned in June 2010, a move prompted by several days of violent demonstrations in the south spurred by electricity shortages. His acting replacement, The Minister of Oil, has so far failed to achieve any growth in domestic electrical output. He has, however, increased the import of electricity, seventy-eight percent of which is now coming from Iran.
Most of Iraq’s oil is in so-called “green” virgin fields, untapped. No one has done the thorough geological work that is needed, plus test wells, delineation wells (Snack!) and the like. This will take two or three years. The rest of the infrastructure needs Bob the Builder time as well so it might be four or five years before the oil starts to flow. Even some of the smaller “brown” fields that have been tapped since the 1920’s will need several years’ of work to bring into flower.
OPEC was founded in Baghdad in September 1960 and Iraq served in a leadership role for the group until the 1990 invasion of Kuwait. Sentimentality, however, counts for little in the oil world. As Iraq cranks up its oil production, it stands to rival Saudi Arabia as a supplier to the world (US and China). More oil typically means lower prices (capitalism again) and it is possible OPEC, to include Iran, is not going to be happy to see the market flooded and oil prices drop so Iraq can be a happier place. Iraq will argue it should be allowed to over produce to make up for lost time, and the US would welcome the extra production to negate loses on the world market caused by its Iranian sanctions, but it is unclear Iraq’s neighbors will be so generous, especially as mini-revolutions spark up around the region; not a good time to mess with the economy. In December 2009 Iran may have been testing out a preemptive warning shot when it sent troops across the border to briefly occupy an Iraqi well head in Fakka. Given the naughty role other OPEC neighbors such as Syria and Saudi Arabia even now play in the shadows of Iraqi politics and security, this might turn out badly (violence).
One pundit argues that the war was all about oil, so much so that the original name was Operation Iraqi Liberation (OIL), only later changed to Operation Iraqi Freedom (OIF). Only his argument is that the goal was to seize and then sideline Iraq’s reserves to keep the market price high for a barrel of that sweet, sweet black gold.
Kuwait is already lining up for a fight. Kuwait will attempt to seize Iraqi oil assets abroad when international legal protections end on June 30 – a move that will create problems for the international oil companies that are paid by Iraq in crude in lieu of (unavailable) hard currency. Kuwait seeks to enforce a 2006 British Court ruling against Iraqi Airways, for stealing $1.2 billion worth of equipment during the first Gulf War. Good times ahead.
So given all these things to do before they get totally oil drunk rich, you’d think Iraq would be out there getting crazy on oil work, staying up late and working weekends. They are not.
In 2009 the Ministry of Oil spent only $391 million dollars out of an allocated budget of $1.4 billion. Capital spending on oil represented twenty-seven percent of the country’s budget, not bad until you see that even the “Other” category in the budget was twenty-one percent. The Ministry of Finance is having a hard time coordinating all this money, having been suicide bombed three times since August 2009. Oil Guy said he had been to their most recent temporary offices (a brave man, and another Scooby snack!) and they had plastic garbage bags filled with unpaid invoices piled up. They were months behind on accounting and have no idea what their revenues and expenses might be. The country is run literally on paper ledger-based accounting systems. To make things worse, oil output in June 2010 actually fell over the previous month’s total. Fast forward: In March 2011, Iraq’s oil exports dropped two percent compared to the previous month.
So who cares, right? Iraq has gotten along being poor for awhile now and while it has not been pretty, it has remaining stable. We in the West have all mumbled along without Iraqi oil for like, dude, forever, and drive rainbow-powered Prius’ and have solar powered iPads. Cool, we don’t need the oil. But Iraq does. It really needs the oil really badly because Iraqis continue to have babies.
Iraq has a population of about thirty million people, with a median age of twenty years old. The population growth rate is 2.5 percent (neighbor Iran by comparison has a population growth rate of less than one percent). Iraq is going to see a huge population bulge and needs to create some 250,000 jobs a year every year for awhile to accommodate all these people. The oil industry is not labor intensive; oil can produce enormous wealth but not so many jobs. Iraq’s financial future is based on becoming something of an oil welfare state, using the oil revenues to fund education (the last comprehensive budget allotted only four percent to education), infrastructure and jobs for its growing population. People without work tend to drift, and in a country where the oil deposits are not equally distributed and where folks seemingly join up with insurgent groups like we patronize drive-throughs for burgers, that is a bad recipe.
It is all about oil. After a year in Iraq as a State Department Provincial Reconstruction Team (PRT) leader, I came to understand it’s all about oil in Iraq, but not in the way you think. Despite sitting on the world’s largest reserves, and despite billions of US government and corporate investment, Iraq pulls no more oil from the ground today than it did in 2003. There are 12 good reasons why this is.
The big events in modern Iraqi history have always been linked to the nation’s vast oil reserves. In 1920 colonialist Britain in part brought together the Ottoman provinces of Basra, Baghdad and Mosul in order to better exploit the oil holdings of the Turkish Petroleum Company in what is now Iraq. Under Saddam, oil revenues were used to enrich the Sunni minority; so much oil wealth was amassed by Saddam’s home tribe Tikritis that Saddam passed a law in 1972 banning the use of surnames in order to mask this reality. The 1991 invasion of Kuwait was also tied to oil, whether it was Kuwait’s horizontal drilling into Iraqi fields or Iraq’s need for the well-developed refining and extraction sites and spacious ports there. During the 2003 invasion the US protected only two Ministries from looters – Intelligence and Oil. Today, ninety-five percent of Iraq’s revenues come from oil sales.
While most of the 365 days I spent in Iraq as a US State Department Provincial Reconstruction Team (PRT) leader were merely something to be endured, every once in a while I stumbled across a person who just knew stuff and I got to learn something important and new. This happened when I had a chance to talk with An Important Person in the Oil Business (“Oil Guy”). We were both stuck somewhere in an airport and bored. He liked to talk. I enjoyed listening.
Iraq’s only hope for the future is in oil. That is what they have that others want and so the current government of Iraq has signed agreements with a bunch of giant oil companies such as BP and Shell to help them extract the oil from the ground. Iraq will pay the companies to get the oil out (about $2 a barrel), at which point the oil belongs to the Government to sell. The oil companies also have to pay for all the equipment and drilling stuff. The oil companies are happy to pay for all this equipment and drilling stuff because Iraq is cold freaking floating on oil. Iraq has five “supergiant” oil fields, which comprise five of the twenty largest oil fields in the world. It also has smaller fields with “only” half a billion barrels or so each. Better yet, all this oil is easy to get at, not so deep or underwater, making the “lift cost” (I felt like giving Oil Guy a Scooby snack every time he used a cool insider term like that) very low. If things go well, Iraq has the potential to out produce Saudi Arabia, plus Iraq is currently America’s bestest friend on Facebook (actually, Iraq probably still uses MySpace.)
But Oil Guy stopped me (sans Scooby snack) to remind that it is not how much oil you’ve got, but how much oil you can get out of the ground and then to market.
Right now Iraq is producing about two and a half million barrels of oil a day, which sounds like an epic amount but is not so much as these things go. Oil Guy said that at its 1970’s peak Iraq put out about three million barrels a day. Iraq would like to raise output up to twelve million barrels a day, which is an epic amount. Iraq’s ambitious seven-year plan to grow its production capacity is the biggest oil expansion ever attempted in history. So, let’s get drillin’.
Well, said Oil Guy, there are a couple of things (in the sense that a couple of things might include relocating Jupiter and inventing time travel) that need to be worked out first.
Iraq has to make it so that the oil wells, the drilling gear, the terminals and all the foreigners needed to run this stuff are safe. Iraq has to secure long pipelines and roads, with no car bombs or IEDs, and no one knows if this is possible. Sabotage remains in the news while US officials express concern that Iraq’s Oil Police, tasked with securing much of the country’s oil infrastructure and cracking down on crude and fuel smuggling, lack the equipment and staff to do so. Southern Iraq is also home to up to twenty-five million mines laid during the Iran-Iraq War that will somehow need to be located and defused (this task has been assigned to the Oil Ministry, which does not possess the proper equipment or trained personnel. Mines are not solely a southern Iraq problem; a US PRT sponsored a Soccer and Mine Awareness festival in Kirkuk, teaching young people how to play the game and to recognize mines they might find on the pitch).
In three separate incidents during 2010, oil pipelines within well-protected Pipeline Exclusion Zones (PEZ) were damaged by attacks. These were the first reported attacks on PEZ-protected pipelines since these zones started to become operational in 2007, and resulted in several days’ worth of stoppages and a $30 million repair bill. Other attacks in April 2010 interrupted flows in the export pipeline to Turkey. The Turkey pipeline has since been again attacked and tapped six times in summer 2010. The last attack stopped the flow of oil completely for four days.
As recently as March 8, 2011, the northern pipeline was bombed in Ninewa province, knocking it out for several days and disrupting the flow. Still, the good (?) news is that such attacks have proven to be short-term bothers at worst, at least so far. No recent attack has done more than mess things up for a few days or so, though the possibility remains of a major strike.
To ensure their safety, most of the foreign oil companies have their offices located within the confines of the US military base at Basra, along with the US PRT, the British Consulate and the Russian and Chinese oil exploration firms, which must make for some interesting cafeteria small talk. “US policy at this time is that the USG in Iraq should assist in facilitating the mobilization of these companies without regard to the nationality of the companies,” said Kenneth Thomas, head of the energy section of the Basra PRT, though he added “But we are not going to assist an Iranian company.”
For Iraq to meet its goals on time, it needs to crank up production by 1.5 million barrels a day for a year, then up another 1.5 million the next year and so forth every year for “awhile.” No one has ever done that before, and there may not even be enough oil equipment in the world to realize that kind of growth. Oil Guy wants to start cranking the Rumaila super giant field near Basra early; it produces maybe 900,000 barrels a day now, and he thinks it could go as high as three million barrels a day. The Economist magazine is equally awed by the scale hoped for by Iraq, reminding that such production would place Iraq thirty percent ahead of the best years of Saudi output. Being The Economist, this is drolly characterized as “essentially ambitious.” (The Economist on real paper, February 20, 2010)
Iraq has a horrible banking system, with few international connections, poor auditing (the entire country of Iraq has only thirty auditors and they get tired), no deposit insurance but plenty of corruption. In May 2010, for example, over $310 million went missing in $7.7 billion in off-the-books loans. The Ministry of Finance no longer accepts checks from private banks, only from state-run institutions. One US Government report notes that “legal and technological challenges deter foreign banks from establishing a presence in Iraq.” Large amounts of oil demand large amounts of money to, um, flow, and Iraq is not ready. They’ll have to grow the banking system faster than they grow the oil processes.