Middle East Economic Survey
VOL. LI
No 31
IRAQ
The Iraqi Oil Industry: Past, Present And Future
By Ali Hussain
The following paper was written for MEES by Dr Hussain, who is an oil consultant and former OPEC officer (e-mail alihussain27@gmail.com).
In the last few decades the Iraqi oil industry has been mismanaged and has suffered many problems, thereby losing out on many opportunities. This unfortunate situation continues to be the case for this industry. During the past two years, the present Iraqi Ministry of Oil has not had any effective policy to improve the severely bad conditions of its oil industry. Iraqi oil production remains low, and it is only due to improved security in the north of Iraq that oil is once again flowing in Kirkuk and being transported to Turkey, bringing Iraqi oil production to 2.5mn b/d.
In order to further increase oil production by 500,000 b/d in the next two years the oil ministry is currently trying to sign service contracts with some major international oil companies (IOCs), even though some of these companies have been providing free advice to the ministry without any real progress or benefit to the oil industry. Prior to pursuing this strategy the ministry should study and seek to learn from the experience of other major oil producing countries, which tried service contracts without success. One of them is Iran, which used to produce 6mn b/d in the 1970s and now produces 4 mn b/d. The other country which failed to benefit from implementing such contracts is Kuwait.
At present, to increase oil production substantially, Iraq’s ability to benefit from service contracts alone is very limited due to the fact that the Iraqi oil industry has been neglected for a sustained period of time in terms of capital, technology and manpower. In fact, a large portion of Iraq’s best talent in the oil industry left the country many years ago and failed to return, because of concerns about security. Even with the establishment of the Iraq National Oil Company (INOC), Iraq will not benefit greatly from service contracts, until it is known who will run INOC and how it will be managed. The ministry must realize it is constrained by the standard of its staff and their capability to expand the oil industry. Therefore, the ministry must be realistic with respect to its ambitions for the Iraqi oil industry and what it can deliver, and not deceive itself or the nation.
What Iraq desperately and imminently needs is foreign investment in its oil industry. The best way to achieve this would be to sign production sharing agreements (PSAs) with IOCs. Inside and outside Iraq many people have voiced strong concerns about these kinds of agreements, as in their view they might put Iraqi oil under the control of IOCs, who may subsequently reap a large share of Iraqi oil revenues. These concerns clearly derive from some individuals who are ignorant about oil contracts and especially PSAs. It should be noted that such agreements were first signed by Indonesia and are now being used by Algeria, Libya, Angola and other countries, with clear success and benefits to the countries involved. The Ministry of Oil should therefore seek to learn from these positive experiences rather than falling victim to unfounded concerns surrounding such agreements.
As PSAs are tailor-made agreements, Iraq can put its own terms and conditions into these contracts, including its sovereignty over its oil, in such a way as to maximize Iraqi interests. International consulting companies specializing in these kinds of contracts can assist the ministry in drafting these agreements accordingly. The ministry could thereafter seek to tender these PSAs in the international oil market and let the IOCs compete to secure such contracts. With the present conditions of the international oil market (which is very tight resulting in relatively high oil prices), Iraq is in a very strong position to impose its conditions on IOCs, with a fair return to these companies. One further condition, which such contracts could also include, is that preference would be given to IOCs that could also construct oil refineries and petrochemical plants in Iraq, under terms which again maximize Iraqi interests. Iraq must aim to increase investment not only in its upstream operations but also in its downstream operations, and not only to satisfy domestic demand but also for exports. In this way Iraq can add value to its oil resources.
Moreover, it is time that the Ministry of Oil tried its best to ensure that the draft of the Iraqi oil law is passed in the Iraqi Parliament, provided that it includes the best terms and conditions to benefit the country from foreign investment. This law has been waiting for two years to be passed in parliament, while the Iraqi economy needs much more oil revenues to revive its damaged and deteriorating infrastructure. Visiting villages and towns across Iraq shows very clearly the misery of the Iraqi people, which they have been experiencing during the last few decades. Further delay in the passing of this law is a cruel injustice against these people, as their country sits on one of the largest national oil resources globally.
Under the present economic conditions in Iraq foreign investment, especially through PSAs, is the only way the country can realistically expand its oil production substantially and in a relatively short time frame. Iraq currently cannot provide enough capital, manpower and technology to its oil industry. The reason for this is twofold: the oil industry is capital-intensive; and the Iraqi economy and in particular its infrastructure needs significant investment. Thus, as the financing needs are immense due to both of these factors, Iraq cannot rely on its current oil revenues to cover both of these issues. Hence Iraq cannot expand its oil production substantially without foreign investment.
With its significant oil reserves and in the present international oil market conditions, Iraq has a new and big opportunity to benefit from its oil resources. To capitalize on this, Iraqi oil policy must be based on realistic facts and figures, and be designed in such a way as to benefit from foreign investment to maximize its interests while keeping Iraqi oil reserves, production and exports under its supervision and control. Iraqi oil policy makers must ask themselves how did Iraq benefit from law No 80 in 1961 and the nationalization of the Iraqi oil industry in 1972. The reality is that Iraq was not able to benefit from these acts and the oil industry was left to suffer, with huge negative consequences for the industry, the Iraqi economy and consequently the Iraqi people. We must learn from our past mistakes and seek rational (rather than emotionally charged) solutions to ensure that the nation optimizes the returns from its single most important industry in the future.
All Iraqis know that sitting on large oil reserves without proper utilization is of no use to them at all. It is time for the Iraqi politicians and the Ministry of Oil to realize this fact and start taking and implementing measures that will speed up the rehabilitation and expansion of the Iraqi oil industry for the benefit of all Iraqis.