This report describes the current challenges facing Iraq’s energy sector and the opportunities presented by Iraq’s energy resources. It defines a vision and a set of national policy objectives for Iraq’s energy future. It then lays out a long-term plan of policy commitments, infrastructure development, and institutional reform designed to achieve that vision.
The scope of INES includes all the major components of Iraq’s energy sector: upstream and downstream oil, natural gas, power, and linked industries. The recommendations presented reflect the economic interdependency of these components and their collective impact on Iraq’s socio-economic and environmental welfare. It covers a time span extending from the present to 2030.
The INES has been developed over the past 18 months by Booz & Company under the guidance of a steering committee of Iraqi government officials established by the Prime Minister’s Advisory Committee (PMAC), representing the Ministries of Oil, Electricity, Planning, Finance, Mining and Industry, and Environment. This steering committee has held more than 40 workshops to review data and recommendations, and has played the lead role in setting the direction of the report, identifying areas for analysis, reviewing and modifying data and assumptions, and making policy choices.
The information used in developing the INES was gathered through extensive interaction with Iraqi government ministries. This interaction involved an iterative process of collecting, reconciling, and updating historical and current data. These data sources have been supplemented by more than 150 interviews with government officials in the Iraq federal government, with officials in Iraqi State-Owned Enterprises, with executives of international oil companies and oil service companies involved in Iraq, and with numerous technical consultants engaged in Iraq’s development plans.
Although nearly all the official data made available pertains to activities managed by the federal Government of Iraq, interviews conducted with several senior officials of the Iraq Federal Region of Kurdistan (IFRK) provided insight into that region’s policies and plans as well.
The study has been conducted in five phases.
Phase 1 consisted of planning: developing a detailed project plan, detailing data requirements, identifying interview subjects, scheduling interviews, and agreeing on mechanisms for information collection, verification, and management.
Phase 2 consisted of base-lining: developing a comprehensive understanding of the current conditions of each subsector within the energy sector, identifying the principal challenges and strategic choices facing each subsector, and framing those challenges in the context of Iraq’s socio-economic and environmental circumstances.
Phase 3 consisted of formulating the strategy: defining a vision and strategic evaluation framework, identifying broad strategic choices, and selecting an overall strategic design.
Phase 4 consisted of detailing the strategy: developing integrated infrastructure priorities, specifying the scope, timing, and sequence of investments, allocating resources to uses, and identifying the institutional reforms needed to effect these plans.
Phase 5 consisted of finalizing the report: preparing final documentation, reviewing conclusions with the PMAC and with Iraq Ministries, and clarifying recommendations.
Iraq is endowed with one of the world’s richest supplies of oil and gas. Properly developed, this endowment can be the foundation of a diverse, productive, and continually growing economy. In order to realize this potential, Iraq needs strategic clarity in two areas.
The first area is economic, involving resource allocation and capital investments. The second is institutional, involving accountabilities, capabilities, governance, and industry structure. Because multiple institutions must work together to accomplish the purposes of an integrated energy strategy, a clear economic roadmap is needed that sets a shared agenda. Because that agenda can be accomplished only through effective management of a large number of complex, interconnected tasks, strong institutional roles and capabilities also are needed. The INES recognizes this dual need for economic and institutional direction, and provides recommendations in both areas.
The INES is designed to provide a common strategic agenda for the various entities involved in directing and managing Iraq’s energy sector. Major planning efforts are still required to develop the technical, budgetary, and organizational details of this strategy. Decisions regarding site locations, infrastructure configuration, environmental remediation, and many other issues need to be made on the basis of detailed technical analysis. INES provides a framework for these further studies and decisions, and specifies many of the subjects they need to address, but it is not a substitute for them.
The current narrative document summarizes INES findings, analyses, and recommendations. The appendices to this document provide further supporting detail. The narrative and appendices together constitute the final INES report.
SUMMARY OF THE FINAL REPORT
This report recommends an Integrated National Energy Strategy (INES) for Iraq. It defines a vision for Iraq’s energy future, assesses the energy resources available to Iraq, and considers options for deploying those resources. On that basis it proposes a long-term plan of investment, infrastructure development, and institutional reform.
The report covers a time span extending to the year 2030. It includes all the major components of Iraq’s energy sector: upstream and downstream oil, natural gas, power, and linked industries. It takes an integrated perspective toward these subsectors, analyzing their interactions with each other and assessing strategic alternatives in terms of their impact on the sector as a whole rather than on any single subsector. Additionally, the report considers not only the energy sector’s internal economic dynamics but also its broader socio-economic and environmental context.
Iraq’s overall economy is closely linked to the performance of its energy sector. Both have suffered from forty years of intermittent warfare and international sanctions. Iraq today has oil and gas reserves that rank among the world’s largest, yet the infrastructure needed to take advantage of these resources is in disrepair, industries that depend on these resources are virtually non-existent, and Iraq’s electric power system is chronically unable to meet demand.
The aim of the INES is to define a plan that will reverse this deterioration and develop Iraq’s energy resources to their full potential. This aim is reflected in the INES vision statement.
“Develop the Energy sector in a coherent, sustainable and environment-friendly manner to meet domestic energy needs, foster the growth of a diversified national economy, improve the standard of living of Iraqi citizens, create employment, and position Iraq as a major player in regional and global energy markets”
From this vision statement, five dimensions of evaluation have been defined which shape the strategic choices of INES.
The program of investments and reforms set forth in INES provides major gains on all these dimensions and lays a foundation for future national prosperity. Accomplishing this program, however, will require purposeful and coordinated government action and institutional commitment.
>INES requires immediate infrastructure development across all energy subsectors: oil (upstream and downstream), gas, power, and industry. Development must be rapid, but also balanced. These subsectors are interdependent. Each depends for its own advancement on advances in the others. They need to evolve in parallel.
> The delivery of INES benefits cannot begin until the basic infrastructure for all of these subsectors is in place. The next three years of infrastructure development are critical to the success of INES. Once effective linkages have been established among the various energy subsectors, enormous benefits will begin flowing to the people of Iraq.
On the other hand, breakdowns in those linkages will create supply bottlenecks that waste time, resources, and opportunity.
>In order to accomplish the ambitious short-term INES infrastructure program, Iraq’s energy-sector ministries will need to focus intensely on specific critical tasks. These tasks are enumerated in the INES.
> Rapid, sustained, and balanced growth in the medium - and long-term phases of INES will require fundamental institutional reforms. Energy-sector ministries will need to reorganize. They also will need to establish regulations, programs, and institutions that encourage private-sector participation in the energy sector.
International investment needs to be encouraged in order to introduce world-class standards of technology, performance, and transparency. Local private investment needs to be encouraged in order to build domestic skills and entrepreneurship and to diversify economic development.
> Along with managing large and immediate growth in infrastructure, Iraq’s Ministries also will need to foster rapid growth in institutional capabilities. In particular, they will need to employ a variety of tools to stem and to reverse the flight of talent from Iraq, and to build professional capabilities in such areas as accounting, engineering, planning, contracting, law, and general management.
>Implementation of INES will require a strong INES governance mechanism that sets benchmarks, monitors progress, addresses obstacles, adapts plans to new circumstances, and ensures continual coordination among ministries. Such a response system of governance and coordination will mitigate the downside risk of not achieving the full benefits of INES by minimizing slippages and under-performance.
Iraq is endowed with great resource wealth. Its challenge is to unlock that wealth through a coordinated plan of development, managed through capable institutions. INES sets forth a strategy for meeting that challenge.
THE UPSTREAM OIL SUBSECTOR
Iraq’s economy is closely linked to oil production. Forty five percent of Iraq’s GDP and ninety percent of the federal government’s revenue in 2010 came from oil exports. Iraq’s prosperity depends on a sustained revival of oil production and prudent use of the wealth it creates.
Iraq estimates that it has 143 billion barrels of conventional oil reserves, the third largest national reserve of conventional oil in the world after Saudi Arabia and Iran. Three-quarters of these reserves are concentrated in seven super-giant fields: West Qurna, Rumalia, Majnoon, Kirkuk, East Baghdad, Zubair, and Bin Umar. All of these fields except Kirkuk and East Baghdad are located in the country’s southern region.
Iraq’s oil resources have not yet been fully explored, and they may turn out to be much higher than current estimates, possibly in excess of 200 billion barrels.
In the past three years Iraq has taken major steps to increase future production. Most importantly, the federal government has awarded technical service contracts (TSC’s) to several major international oil companies in order to develop or increase production from twelve large oil fields.
Projections of future production from these fields are necessarily uncertain, and a range of production profiles therefore has been considered for planning purposes.
Iraq’s primary upstream strategic objective now is to ensure that the development of these fields proceeds expeditiously, aiming for production by the end of 2014 at a rate between the medium and high production profiles. The minimum target production level should be 4.5 mn b/d in 2014. To accomplish this objective, the Ministry of Oil (MoO) will need to pursue three initiatives:
>Monitor and facilitate the execution of upstream development, particularly in the five critical fields (West Qurna 1 & 2, Rumaila, Zubair, and Majnoon) constituting 75% of incremental production.
> Fast-track the Common Seawater Supply Facility (CSSF) project. Possibly expand that project or define alternative schemes to cover additional fields. Ensure that produced water from wells is appropriately treated and made available for reinjection.
> Ensure that field evacuation infrastructure from wellheads to the trunk pipelines is built on time and conforms to Iraq’s crude segregation strategy.
Iraq’s secondary upstream objective is to develop within the next three years a basis for setting long-term production targets. It is recommended that the MoO develop for this purpose a Petroleum Reserve Management System to organize and analyze the information gathered from current oil-field activities, in particular the Final Field Reports and Enhanced Recovery Reports that will be submitted by TSC operators in 2013. Using this system the Ministry will be able to set production levels that optimize the interplay of reservoir conditions, field-management best practices, long-term production potential, project economics, and world market dynamics.
Until the time, likely in 2015, when those revised production levels are defined, INES plans are based on the assumption that production will occur at the level of the Medium production profile.
Thereafter Iraq’s primary upstream objective will be to manage production and develop reserves in accordance with its long-term production targets.