Oil's not well in Iraq

Iraq's economy

Apr 20th 2007
From The Economist Intelligence Unit ViewsWire


Oil's not well in Iraq

The announcement of a study that suggests that Iraq's oil reserves could be almost as large as those of Saudi Arabia, the world's leader, has come amid fresh evidence of the monumental difficulty of realising that potential, as bombs in Baghdad left 200 people dead in a single day and Iraqi MPs wrangled over the details of new oil legislation.

The reminder of the scale of Iraq's unrealised oil wealth has come in the form of a report by IHS, an industry consultant, providing details of existing oil reserves and of more than 400 undrilled prospects and undeveloped discoveries. The Iraq Atlas estimates that Iraq has proven reserves of 116bn barrels (slightly higher than the standard industry figure), which could be supplemented by a further 100bn barrels in the barely explored desert region to the west of Baghdad. Saudi Arabia's reserves are put at 264bn barrels, with Iran occupying second place in the world ranking with 138bn barrels.

The IHS study confirms what most analysts of the Iraqi oil sector have long suspected. The giant oilfields discovered in the Kirkuk area in the north in the 1920s and in the southern region in the 1950s required the drilling of relatively few, shallow, wells, and there was consequently little incentive for major exploration and development efforts to be deployed elsewhere. The seizure of power by Saddam Hussein at the end of the 1970s ushered in a period of wars and sanctions that prevented any significant development of the Iraqi oil sector for more than a quarter of a century. Iraq's oil production capacity has fallen from a peak of 3.6m barrels/day to little more than 2m b/d, as the industry has suffered a further battering in the chaos and violence of the post-Saddam era. Iraq has the dubious distinction of having the highest reserve/production ratios in the world.

Since the US-led invasion in 2003 there has been only limited exploration drilling, mainly in the Kurdish region, and just three contracts have been let for existing oilfield development work—to Turkish and Canadian firms in the north and to Ireland's Petrel Resources in the south. These three schemes will add a total of some 350,000 b/d of production capacity by 2009. Further progress awaits an improvement in the security situation and the establishment of a robust legal framework that will allow foreign companies to invest.



Kurds object
The civil conflict that continues to tear Iraq apart has not stopped the government from addressing the critical question of passing a new oil law. In February the cabinet approved a draft law, allowing provincial authorities to negotiate development contracts, subject to review by a Federal Oil and Gas Committee. The oil minister, Hussein Shahristani, has said that the law will be submitted to parliament for final approval in the next few weeks. However, the Kurdish Regional Government (KRG), which has attracted strong interest from international companies to explore for and produce oil in its relatively secure region, has voiced its objections to a number of items in annexes attached to the law since it was passed by cabinet. According to remarks attributed to its chief oil official, Ashti Hawrami, the KRG has been particularly exercised by the placing of virtually all of Iraq's oilfields under the control of the Iraqi National Oil Company (INOC, which is to be re-incorporated under another law likely to be passed as part of a package, also including a law on distributing oil revenue to Iraq's 18 provinces based on population). This would have a damaging impact on the production-sharing contracts that the KRG has already signed and on new agreements that are under negotiation.

The KRG has been anxious to ensure that the law is sufficiently flexible to deal with the very different conditions obtaining in its region, compared with the rest of Iraq. In Kurdistan, investors are taking on considerable exploration risk, which does not apply to the numerous fields elsewhere in Iraq that have been discovered but not developed. The law requires the KRG to submit its contracts for review, but this process could be compromised if the fields in question are designated as being under INOC control in the annexes (which have yet to be published). The law itself provides for a number of commercial frameworks, including service contracts, exploration and development contracts and risk exploration contracts. It also recognises the need to provide adequate returns and incentives to investors, within the context of best serving the national interest.

According to Al Hayat, a London-based Arabic daily, one of the annexes specifies the different categories of fields. These include 27 in production and 25 close to production, all of which come under INOC's remit, as well as 26 that have been discovered but not exploited, which will be offered to investors and contractors. The annexes also provide details of 65 blocks to be offered for exploration, according to Al Hayat.

Mr Shahristani suggested that any remaining differences about details of the law can be ironed out by the end-May deadline for its passage. However, persuading international companies and financiers to commit resources to Iraqi oil projects in the current political and security circumstances will be another matter entirely.