Middle East Economic Survey

 

VOL. L

No 48

26-November-2007

 

IRAQ

 

Iraq’s Uncertain Oil And Political Prospects (Part 1 Of 2)

 

By Issam Chalabi

 

Issam Chalabi, former minister of oil of Iraq (1987-90) and former president of Iraq National Oil Company (1981-87) recently made two presentations covering Iraqi oil and politics. The first was at Princeton University on 13 November and the second at Columbia University on 14 November. The presentations covered a number of related issues that Mr Chalabi decided later to elaborate in the form of a two-part article for MEES. The second part will be published next week.

 

It is common knowledge that Iraq has the second-largest proven oil reserves in the world, with no less then 115bn barrels, and probable reserves of around 250bn barrels. But why is that Iraqi oil does not account for more than a fraction of global oil supply? In fact Iraq has made an average of no more than 2.0mn b/d of its oil available to the world market for almost 27 years, with the exception of a few spells when production exceeded that.

 

In order to understand the current situation of the Iraqi oil industry and its future outlook, we need to go back to the past. Iraqi oil was discovered in 1927 when the first oil well was drilled in Kirkuk (after smaller discoveries in 1905 in Naftkhana); but there was much delay in getting it to the world market through the Mediterranean due to conflicts of interest between the British and the French – who held the UN mandates over Iraq and Syria respectively. Later, during the Second World War, Iraq revolted against the British. Exports were in the range of few hundred thousand b/d, but were again halted in the late 1940s during the first war in Palestine. Only after the discovery of Rumaila oilfield in the southern part of Iraq in early 1950s did exports start to rise – and also after the crisis over nationalization in Iran.

 

During the 1950s, Iraq enjoyed a period of diversified and successful construction programs, covering many projects. In 1961 it issued law No 80, confiscating over 99% of Iraqi land not being explored by the international oil companies (IOCs) which had held the concessions since 1925. All exploration and development programs were stopped by the concessionary foreign companies. After the 17-30 July 1968 revolution, the relationship remained tense and culminated in the nationalization of the assets and operations of the Iraq Petroleum Company (IPC) in June 1972 of its northern sector, and then the rest of the concessionary agreements in 1973 and 1975.

 

Thanks to the first and second oil price increases of 1973 and 1979, Iraq utilized much of its revenue in building its oil industry, both upstream and downstream, with proven oil reserves rising considerably due to major discoveries of super-giant fields like Majnoon, Nahr 'Umar, Halfaiya, West Qurna, East Baghdad and others. Iraqi oil production peaked in 1979, with exports reaching around 3.5mn b/d and production capacity of around 3.8mn b/d. This continued until September 1980 when the 1980-88 Iraq-Iran war broke out.

 

Iraq-Iran War

The eight-year-long war inflicted severe damage to almost all export, production, refining, gas-processing and distribution facilities and networks. Exports were limited to those through the first Iraq-Turkey pipeline –  around 600,000 b/d, with production dropping to 800,000 b/d. Despite the heavy toll, Iraq’s oil industry gradually started to recover. It was able to complete: three major refineries within the Baiji complex (total of 290,000 b/d); the second Iraq-Turkey pipeline to bring export capacity to over 1.5 b/d, in two stages in 1987; the Iraq-Pipeline through Saudi Arabia in 1990, in two stages with total capacity of 1.6mn b/d; the south gas project; the north gas project; and many other projects, upstream and downstream. In 1990, Iraq’s proven oil reserves reached 106bn barrels. Iraq imported only limited quantities of oil products in 1981 then started its own exports through Turkey and Jordan. This continued until the war of March 2003. As the years went by and especially after the end of the war in August 1988, production and export figures started to climb again. By July 1990, production was around 3.2mn b/d, with total capacity climbing to almost 3.8mn b/d; but still the actual production and exports remained below those of 1979.

 

Invasion Of Kuwait

When Iraq invaded Kuwait on 2 August 1990, all exports were stopped and production was limited to supplying local refineries with no more than 300,000 b/d. Until December 1997, actual production hovered around 500,000-600,000 b/d due to the imposition of UN sanction on Iraq in August 1990.

 

The oil industry had hardly recovered from the Iraq-Iran war when the second Gulf War led by the US began in January 1991. Oil facilities were again the direct targets of heavy bombardment, resulting in damage that, in many cases, was even more severe than that inflicted during the Iraq-Iran War. In certain installations, damage was as great as 90%. But even under heavy UN sanctions, Iraqi oil workers and engineers were able to repair, cannibalize and maintain most of the facilities, bringing the refineries, as well as power generation and distribution networks, back into operation – with certain limitations and with the production of low-quality products – within two-to-three months of the end of military activities. The Iraqis were able to resume the use of oil products, water, power and other utilities with limited constraints (in contrast to the situation since the US-led war of 2003).

 

Once the UN oil-for-food program was initiated in December 1996, oil production started to climb, as did exports, although they were limited by a ceiling for over 18 months. Once the ceiling was lifted in 1999, Iraq increased its production and exports gradually and at times output exceeded 2.8mn b/d and exports around 2.5mn b/d, plus exports (though was not legitimized by the UN) of a good amount of oil products through Turkey, Jordan, Syria and the Gulf. Those figures were admittedly detrimental to the oil industry and particularly to the state of the reservoirs, since Iraq almost halted its maintenance, drilling and upgrading programs due to the sanctions, a state of affairs that continued until March 2003, and also due to the over-production policy that was adopted in order to maximize oil revenues.

 

The UN, from 1998 onwards, issued many reports warning of the deteriorating situation in Iraq’s oil industry. But Iraq was being shut off from the outside world and companies were not willing to cooperate for fear of being in violation of sanctions. The Sanctions Committee in New York was reluctant to allow many materials, equipment and chemicals to go to Iraq on the assumption that they could be of multiple uses. In its report of June 1998 the UN said that the Iraqi oil industry was in a lamentable state, adding that “thanks to over-production policies, 20% of wells have been irreparably damaged.” And in its July 1999 report it said: “Productivity of existing oil wells has been seriously reduced, in some cases irreparably. Decline of annual 2% has resulted in new fields and up to 15% in old fields, as in Kirkuk.”

 

Gulf War Of 2003

The oil facilities this time escaped direct bombing. Only about seven oil wells in Rumaila were damaged and were set on fire for unknown reasons, and the pipeline complex near Baiji refineries at al-Fatha and Haditha crude oil tank farm were bombed. Some have said that the aim of the multinational forces was to protect Iraqi oil. In my opinion, that is untrue. The Ministry of Oil headquarters in Baghdad was protected by US-led forces, but only after two days of limited ransacking and the theft of documents, and computer hardware and software. The real damage was in almost all production facilities in the south and the north including the South Oil Company (SOC) and North Oil Company (NOC) headquarters where looting, ransacking and burning continued for several weeks without any protection, despite the presence of the occupation forces nearby. Even the Habibiya center in Baghdad was looted and all its storage of documents, well logs and other records, along with equipment and vehicles, were destroyed, including those belonging to Schlumberger which had managed to maintain a non-working service center throughout the 1990s. The refineries within their fences were saved, but mostly thanks to Iraqi workers who courageously defended the facilities against attacks by hooligans. The occupation forces later provided protection.

 

In June 2003, Iraq resumed limited oil production, and crude stored at the Ceyhan oil terminal in Turkey was sold through auction. Iraqi oil by then had entered a new phase that some, mistakenly has expected to be a promising one.

 

Current State Of The Oil Industry

Over 56 months since the occupation of Iraq, we can describe the current state of the oil industry as follows:

According to a Dow Jones report on 29 October quoting ΄Abd al-Basit Sa΄id, head of the Iraqi Board of Supreme Audit, Iraq is losing at least 15,000 b/d of crude oil smuggled from its southern fields to Iran and the Arab Gulf states: “The smugglers open holes in the crude oil pipeline networks and load their trucks.” The smugglers unload these trucks into small boats that take the oil to Iran or nearby ports in the Gulf. At current prices the crude is worth more than $40mn a month in lost revenue to the war-torn country. Mr Sa΄id blamed the smuggling on “organized gangs who are more strong and influential than the government and political officials.”

As for production and exports, senior US officials expected immediately after the war that by end-2003 output would rise to at least 3mn b/d; but so far the figures have been well below this. Current sustained average production is around 2mn b/d and exports around 1.5mn b/d. Exports from the north through Turkey resumed during the past few weeks at a much lower rate than original figures.

 

All indications show that Iraq’s oil production could fall, in the absence of new investment and the overhaul of current producing fields. It would be extremely difficult for Iraq to maintain output of nearly 2mn b/d due to lack of proper maintenance as well as lack of security, corruption, chaotic policies and lack of enthusiasm, according to Muhammad-Ali Zainy of the CGES in London who pointed out that that despite the infusion of hundreds of millions of dollars into the oil sector, the country’s production was not stable and had all but failed to meet pre-war levels (MEES, 29 October). The oil ministry was in turmoil because it could not carry out any of its plans in the years since the US invasion of Iraq. Producing fields were aging, and no measures were being taken to revitalize them. Hence a decline has been the pattern.

 

So Iraq, with current world oil prices, is losing billions of dollars that might have substituted for the need for grants, loans and accumulating debts. Had Iraq been enable to produce 3mn b/d, it would have been generating over $85mn at $80/B.

 

[Next week Mr Chalabi will be discussing the current state of the draft energy law, and the KRG’s policy of signing production-sharing agreements with IOCs and its impact on Iraqi politics.]