Middle East Economic Survey
VOL. LI
No 15
14
IRAQ
Iraq’s Oil Industry: Five Years Of Occupation
By Issam Al-Chalabi
Mr Chalabi, formerly an Oil Minister of Iraq, is now an oil consultant.
Was the invasion of Iraq by the US and its allies all about oil? The US Administration denies that, but all the facts and later revelations prove without a doubt that oil was the main target. One could cite numerous quotations from US officials at the time of the invasion, but let us just mention a few:
At Stanford University a few months ago, retired Gen John Abizaid, the former CENTCOM Commander, said what we all know: “Of course it’s about oil, we can’t really deny that. We’ve treated the Arab world as a collection of big gas stations.”
Alan Greenspan, Ex-Chairman of Federal Reserve, wrote in his book: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.”
Paul Wolfowitz, architect of the invasion, admitted in 2003 in a speech to American soldiers that “Iraq floats on oil.”
Any observer will admit that the situation in Iraq has become chaotic and catastrophic by any standard, and in every aspect of life, as documented by international and humanitarian organizations. General Sanchez, who led the US/Multi-National Forces, said in a TV interview in late 2007 that the war on Iraq had turned into a nightmare. Similarly with the previous Chief-of Staff of the British Forces who ridiculed Tony Blair and the British government for their role and lack of vision. Many others can be quoted too.
The oil industry has suffered a major blow and deterioration, despite the fact that oil was the real goal for the invasion. The Bush Administration told the Americans prior to the invasion that Iraqi oil revenue would be sufficient to finance not only the war but also the reconstruction of Iraq.
Upstream Sector
Iraq’s proven reserves have
been estimated since 1990 (no further exploration was carried out since
then) at 115bn barrels, with an additional estimated 250bn in place, 50% of
which can be transformed to additional proven. Iraq has discovered over 530
anomalies and had already discovered over 85 fields. Iraq has the second
largest hydrocarbon reserves in the world. Its current proven reserves can
sustain production of up to 10mn b/d. Iraq produced nearly 3.5mn b/d in 1980
and was in the process of expanding its capacity to 6mn b/d.
Oil production in Iraq prior
to the invasion, despite 13 years of sanctions, had reached 2.8-3.0mn b/d.
It dropped to an average of less than 2.0mn b/d during the past five years,
with exports dropping to 1.2mn b/d, after reaching a high of 2.5mn b/d prior
to invasion. The maximum it reached in 2007 was 1.65mn b/d (export) and
2.18mn b/d (production).
The question of installing
offshore and onshore metering systems remains unsolved, confirming
suspicions about the deliberate smuggling and stealing of crude oil and oil
products by militias, mafias and gangs until the present day. US, UN and
Iraqi official reports (Ministry, Audit, local police and Transparency Body)
confirm these concerns, although they differ on the estimates. According to
Platt’s Oilgram, the missing barrels in 2005 totaled 60mn barrels,
44mn barrels in 2006, and 21.5mn barrels in 2007. Their value is about
$6.6bn.
According to an official
report by the Oil Ministry, the estimated value of missing oil products was
around $1.25bn, in 2005 alone.
According to UN reports, during sanctions the oil reservoirs were in a “lamentable condition” due to mismanagement, fuel injection, and the lack of work-over of producing and water wells. The decline has become even worse after five years of occupation, due to failure to maintain, upgrade, replace or add new facilities. It is claimed that such failure was due to lack of safety and security; but the majority of producing and export facilities are located in the southern part that was supposed to have enjoyed stable conditions. Until today, foreign companies refuse to work in Iraq or send staff there.
Downstream Sector
Prior to the invasion, Iraq
had a refining capacity of over 700,000 b/d and, despite sanctions, was
exporting three types of oil products. Current capacity is around 500,000
b/d, operating at 50-60% capacity. None of the fenced installations were
subjected to any direct damage from war or military activities thereafter.
Failure to maintain, upgrade and add new facilities cannot be justified. The
only valid cause is the damage of pipelines transporting oil to refineries,
which again proves the total failure of hundred of thousands of
multinational and Iraqi forces to protect them. The practice of tapping into
pipelines and depots by gangs and mafias is very common in the south and
Baiji area.
Since June 2003, Iraq has
been spending billions of dollars on importing oil products, costing nearly
$5bn every year, sufficient to build a big refinery every year. For years
(even, in some cases, dating back to before the invasion), plans to build
three refineries (Nahrawan 140,000 b/d, Nasiriya 250,000 b/d and Koy 70,000
b/d) still have not left the drawing board, despite bidding and re-bidding.
All the downstream and
upstream installations require urgent inspection, testing, proper
maintenance, partial replacement, and upgrading and capacity additions. None
is expected for at least the next few years.
Iraqis still suffer from shortages of oil products and had to queue in long lines until recently, despite the fact that actual consumption had declined. Prices, due to IMF and World Bank pressure, were increased around 20-fold, and the black market continues to flourish.
The New Proposed Oil Law
Much has been said about issuing a new oil and gas law, but despite numerous attempts and drafts, as well as pressure by the US, one remains to be finalized. Sharp political, economic and technical differences remain unsolved. The main target, especially of the US, is to allow foreign oil companies to participate in the development of the oil fields under a production-sharing model, whereby such companies would retain a percentage of the reserves of the field, resulting in huge profits over the life (over 30 years) of the field.
The first draft was adopted by the Maliki government and KRG (Kurdistan Regional Government) in February 2007, but sharp disagreements surfaced thereafter between the two and, despite making changes, the Iraqi parliament is yet to receive a final draft. The major differences include:
Right of regions and
producing governorates to negotiate and sign oil deals with foreign
companies.
Role (or not) of
production-sharing models.
Role of parliament, central
government, Ministry of Oil, Iraq National Oil Company (INOC – to be
re-established), as well as the region(s) and producing governorates.
The February agreement was a
package, including various laws to be adopted: Oil and Gas Law, with
appendices outlining discovered oil oilfields and their allocations (to INOC
or KRG, or to be released for bidding), models of contracts with foreign oil
companies, Law for Distribution of Revenues (separate from the Oil and Gas
law), Restructuring Oil Ministry and Re-establishing INOC Law. None has ever
been published or forwarded to parliament for legislation.
The highest legal body in the
country revised the first draft to be legally compatible and voiced 13 major
objections. Both versions were rejected by KRG.
The said law deals only with
the upstream sector and ignores the downstream that is of critical
importance to relieve the shortages and misery of the Iraqi people.
KRG issued its own law in
August 2007 and during a period of few weeks signed over 15 deals with
companies, all based on production-sharing. Not only that but some deals
covered areas outside the jurisdiction of KRG to include parts of Ninewa,
Tamim, Salah al-Din and Diyala provinces. KRG considered that they were
acting as per the constitution which contains two related articles written
in a contradictory and vague manner. These must be amended to avoid any
wrong interpretation.
Almost all political blocs and parties voiced strong objections to the KRG
action, believing it was leading to the fragmentation of Iraq.
KRG even seized Khormal (one of three producing domes of Kirkuk field) and
Khor More gas field, even though the Oil Ministry was in the process of
developing them.
The Ministry of Oil declared then that all the KRG deals were illegal and blacklisted the foreign companies involved. The ministry declared that the production-sharing agreement (PSA) model was a red line that would not be crossed. It embarked recently on a two-track policy: firstly, to negotiate with five major IOCs for Technical Support Agreements to upgrade production from five currently producing fields; and secondly, to call for pre-qualification of companies to bid later for about 10 oil and gas fields spread all over the country.
Recent US Push For the Law
US Vice President Dick Cheney visited Iraq on 17 February and said he was pressing Iraqi leaders to move the controversial legislation forward. After his departure, it was said that he had given an ultimatum to Iraqi leaders to expedite the adoption of the law. Charles Ries, US State Department minister for economic affairs and coordinator for economic transition in Iraq, said the proposed law was not necessary to produce oil “but it would clearly be much, much better and incentivize private investment to help Iraq produce more if a bill would pass.” He added that Iraq’s oil law debate was political, not technical. Further down the road, Mr Ries said Iraq would sign PSAs to develop areas not currently producing. “That is the likely course for the upstream industry in Iraq,” he added, pointing to Syria and Indonesia as examples of countries that utilize PSAs to garner investment. He said “all parties, with a few exceptions of parties that are not in government” back PSAs. (This is completely false and he should check his contacts).
International Judgment On Current Situation In Iraq
Five years after the US led an invasion of Iraq, millions of people there are still deprived of clean water and medical care, the International Committee of the Red Cross (ICRC) said on 17 February. In a sober report marking the anniversary of the 2003 start of the war and deep sectarian tensions, the humanitarian body said Iraqi hospitals lacked beds, drugs, and medical staff. Some areas of the country of 27mn people have no functioning water and sanitation facilities, and the poor public water supply has forced some families to use at least a third of their average $150 monthly income buying clean drinking water. “Five years after the outbreak of the war in Iraq, the humanitarian situation in most of the country remains among the most critical in the world,” the ICRC said, describing Iraq’s health care system as “now in worse shape than ever.”
Almost a century ago, Iraq was at the center of post-WW1 politics because of its oil resources. Now Iraq seems to be once again at the center of turmoil, with its destiny to be decided by foreign powers, again because of its oil wealth.