• Twelve Reasons Why Iraq Will Not Be a Major Oil Exporter, Part One

    May 6, 2011

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    Posted in: Iran, Iraq, Other Ideas

    The Clampetts Strike OilIt 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.

    1. Security

    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.”

    2. Scale

    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)

    3. Banking

    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.

    4. Bureaucracy

    At a symposium on Iraq’s oil expansion held in July 2010, BP and Shell presented papers on behalf of sixteen oil companies that recently signed massive development contracts, outlining current and future roadblocks put in their way by Iraq’s government. The companies expressed concerns over byzantine visa and customs procedures. People complained about visas that took four months to be issued and visas that are still not issued after four months because of problems between the Foreign Ministry and the Interior Ministry. The oil companies complained that customs procedures are inconsistent; sometimes tariffs must be paid, other times not. The common theme was a lack of communication and coordination among the many government entities involved with the oil expansion. Among the ministries that will need to work together are Oil, Energy, Interior, Foreign Affairs, Transportation, Defense, Environment and Water. The situation grows worse as the delays continue; in March 2011 one friend of Oil Guy was quoted as saying “The visas are paralyzing us. We’ve got no new visas since early February. If we go out, when do we go back in?” One oil industry official estimated each company operating in Iraq’s southern oil hub of Basra is waiting on hundreds of visas. “The backlog is building, the backlog of sending people is growing,”

    5. Corruption

    Tied to the bureaucracy is corruption, which some now refer to as the “Second Insurgency.” The country is awash in bogus documents, meaning that people hired into technocratic jobs often do not have the expertise they need. Iraq has no nationwide metering system and so does not know how much oil it actually produces, which is a fine background for theft. It is much easier to steal oil when no one knows how much there is in the first place. A 2007 report suggested that some 100,000 to 300,000 barrels of oil a day were unaccounted for. The oil smuggling infrastructure has been in place since the UN sanctions of the 1990’s and continues to hum along nicely today, with new routes opening up between Kurdistan and Iran in response to US sanctions against the latter country.

    6. Contracts

    Former Prime Minister and Still-a-Playa Ayad Allawi stated paradoxically that existing oil deals should be honored, but also that they should be reviewable and alterable. Should the government in Iraq ever start real work, near the top of a long “to do” list is passing hydrocarbon legislation. This long-awaited package of legislation, comprising four separate laws, is essential to clarifying the regulatory regime that will govern the ongoing exploitation of Iraq’s hydrocarbon resources. There is no oil law in Iraq, ownership of oil in Kurdistan (especially near Kirkuk) is in dispute, Iraq has little in the way of contract law and no one is sure if the as yet incomplete current government (key ministry posts remain unfilled), or the unofficial Kurdish government, or whoever, will really honor the agreements signed over time. Foreign companies have no legal recourses should things turn sour, a big deal given that oil fields will cost between $2 and $15 billion dollars each to establish. It just gets worse with time: As of April 2011 Iraq’s Parliament was attempting to claim some authority over the country’s oil sector, challenging Prime Minister Maliki’s policy of centralizing control of Iraq’s energy policy within the executive. Adnan Janabi, the new chair of the Oil and Energy Committee of Parliament, said standing law requires oil and gas contracts to be approved by Parliament, including deals already awarded in the licensing rounds. Meanwhile, out in the boonies, the push and shove continues, as Karbala and Dhi Qar provinces seek to develop their own local oil fields while Iraq’s Oil Ministry says its stance has not changed and that they have no authority to sign oil contracts.

    More in Part Two

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