Article by: THE ECONOMIST
June 18, 2012 – 9:31 PM
New pipelines stretching into the Persian Gulf near the city of Basra promise to shower Iraq with wealth and turn the nation into one of the world’s biggest oil exporters.
Leighton Offshore, an Australian firm, is installing additional oil-loading buoys to fill tankers with Iraq’s abundant crude.
The country claims to have reserves of 143 billion barrels, the third-largest in the world. In April Iraq exported more than 2.5 million barrels a day, more than at any time since the 1980s, earning its treasury almost $9 billion. Total production is now almost 3 million barrels per day, according to OPEC, the oil producers’ cartel.
More loading buoys are in the works and, as oil firms invest billions of dollars in Iraq, the industry is booming. By the end of the year, reckons Peter Hitchens, an analyst at the bank HSBC, Iraq’s output will reach 3.5 million barrels a day, a torrent of new oil to quench global markets.
Iraq’s production targets are even bolder. Hussein al-Shahristani, deputy prime minister for energy, says that contracts with foreign oil firms should lift output to an outlandish 12 million barrels per day by 2017, a level that would put Iraq on a par with Saudi Arabia, both as an exporter of oil and, if crude prices maintain their recent heights in coming years, as a global spending power.
It is unlikely to get anywhere close to that level. Saudi Arabia spent 80 years building its oil industry amid relative peace and stability. Iraq enjoys neither.
Sectarian violence persists. A series of bombings on June 13 killed more than 80 people. The government of Prime Minister Nuri al-Maliki depends on a feeble coalition. Despite years of negotiations, Iraq still has no petroleum law, leaving thorny disputes between the federal government and the regions over the control of oil revenue.
“All of this recent progress has happened against a backdrop of dysfunction,” said Keith Myers, a Revenue Watch Institute consultant working with the Iraqi parliament on the oil law.
Although the country’s crude is cheap to pump, Iraq hardly provides the bonanza that foreign companies such as BP, Lukoil and Royal Dutch Shell hoped for when they signed deals to develop its big fields. Unrest and crime can impede operations. Trucks being used by one company to conduct seismic surveillance recently disappeared overnight.
Graft taints much of the dealmaking. Transparency International, a Berlin-based activist group, ranked Iraq 175th out of 182 countries in its corruption-perceptions index last year.
Apart from the tiny coastline near Basra, Iraq is landlocked. So, aside from the new loading buoys, any increase in export capacity depends on pipelines through neighboring countries. One from Kirkuk to Ceyhan, a Turkish port, could be expanded — but with difficulty.
Other options are even harder. In recent years the governments in Baghdad and Damascus have talked of a new pipeline to Banias, on the Syrian coast, but civil strife in Syria makes that unlikely for the time being. A pipeline to a port in Saudi Arabia was shut down when Iraq invaded Kuwait in 1990. Saudi Arabia now uses it for natural gas and will not free it for a rival’s oil.
Export bottlenecks will keep Iraq’s ambitious production targets a ways off. Hitchens predicts Iraqi output of 7 million barrels per day by the end of the decade — a significant rise, but less than America produces today. At some point Iraq also plans to rejoin OPEC’s quota system, which might further limit exports.
Two other issues have the potential to undermine Iraqi production. Some analysts believe Iran, a rival producer increasingly hit by sanctions, could yet use its sway over Iraq’s Shias to spark more unrest. But would Iraqi Arabs really undermine their own prosperity in order to benefit Persian co-religionists?
Meanwhile Iraq’s autonomous northern province of Kurdistan has signed dozens of oil contracts with foreign companies, outside central government control. The region holds less oil than Iraq’s south, but the production-sharing agreements being offered to investors are far more enticing.
Kurdish leaders believe that, with such big firms involved, they can build their own oil industry. Kurdistan’s regional government has proposed a new pipeline to Turkey, allowing it to bypass the one belonging to the federal government.
This could be seen as a step toward Kurdish secession, however, unraveling federal Iraq and creating yet more sectarian fighting. Turkey may be unwilling to support such a move, not least given its own restive Kurdish population.
© 2011 Star Tribune