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

May 7, 2011

Tags: blood for oil, Kuwait, Oil, Syria, turkey
Posted in: Iran, Iraq, Other Ideas

See Part One if you missed it…

7. Export
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…

8. Infrastructure
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.

9. Water
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.

10. Electricity
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.

11. Time
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.

12. OPEC
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.

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