Iraq Takes First Step Towards Becoming The World’s Biggest Oil Producer
By Simon Watkins - Jul 11, 2023
Iraq’s parliamentary oil and gas committee plans to increase the country’s oil production to more than five million barrels per day, according to the release of committee minutes last week.
As analysed in full in my new book on the new global oil market order, not only could this be done with relative ease by Iraq but it could also easily be the precursor to further oil production increases to 13 million barrels per day (bpd) if handled correctly. This would make Iraq the biggest oil producer in the world.
In broad terms, Iraq remains the greatest relatively underdeveloped oil frontier in the world.
Officially, according to the EIA, it holds a very conservatively-estimated 145 billion barrels of proved crude oil reserves (nearly 18 percent of the Middle East’s total, and the fifth biggest on the planet). Unofficially, it is extremely likely that it holds much more oil than this.
In October 2010, Iraq’s Oil Ministry increased its own figure for the country’s proven reserves to 143 billion barrels. However, at the same time as producing the official reserves figures, the Oil Ministry stated that Iraq’s undiscovered resources amounted to around 215 billion barrels. This was also a figure that had been arrived at in a 1997 detailed study by respected oil and gas firm, Petrolog.
Even this figure, though, did not include the parts of northern Iraq in the semi-autonomous region of Kurdistan. This meant, as highlighted by the IEA, that most of them had been drilled during a period before the 1970s began when technical limits and low oil prices gave a narrower definition of what constituted a commercially successful well than would be the case now. Overall, the IEA underlined that the level of ultimately recoverable resources across all of Iraq (including the Kurdistan region) at around 246 billion barrels (crude and natural gas liquids).
Given the true scale of Iraq’s oil reserves – and the fact that the average lifting cost per barrel of oil in the country is US$1-2 pb (the lowest in the world, along with Iran and Saudi Arabia) – what sort of oil output could reasonably be expected?
Back in 2013, the Integrated National Energy Strategy (INES) was produced, and this analysed in detail three realistic forward oil production profiles for Iraq and what each would involve. As also analysed in my new book, the INES’ best-case scenario was for crude oil production capacity to increase to 13 million bpd (at that point, by 2017), peaking at around that level until 2023, and finally gradually declining to around 10 million bpd for a long-sustained period thereafter.
The mid-range production scenario was for Iraq to reach 9 million bpd (at that point, by 2020), and the worst-case INES scenario was for production to reach 6 million bpd (at that point, by 2020). Consequently, the 5 million bpd figure announced last week can be regarded as the first easily achievable stepping stone toward those figures.
Indeed, according to Iraq’s Oil Minister, Hayan Abdel-Ghani, last week, the country’s oil production capacity already stands above this level - at 5.4 million bpd – although it is still only producing around 4.3-4.5 million bpd overall.
The question at this point is, with these enormous reserves in place, and specific plans on how to turn these into up to 13 million bpd in the Oil Ministry’s files, why is Iraq not already producing a lot more oil than it is? The reason is the ongoing endemic corruption that lies at the heart of Iraq’s oil and gas industry.
This not only removes enormous amounts of money from Iraq’s coffers that could fund much-needed infrastructure investments but also deters Western companies with the required technology, logistical expertise, and personnel from becoming too involved in the country. Although commissions are standard practice in the Middle East – and indeed across many business around the world – the practice has become something else entirely in Iraq.
This has been highlighted repeatedly by OilPrice.com and independently over many years by Transparency International (TI) in various of its ‘Corruption Perceptions Index’ publications, in which Iraq normally features in the worst 10 out of 180 countries for its scale and scope of corruption.
“Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state building and service delivery,” TI states. “Political interference in anti-corruption bodies and politicisation of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption,” it concludes.
The sums of money that Iraq has lost could have funded all the major projects needed to boost oil production up to at least 7 or 8 million bpd to begin with, notably the crucial Common Seawater Supply Project (CSSP), as also analysed in my new book. According to a statement made in 2015 by then-Oil Minister – and later Prime Minister of Iraq – Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” from the beginning of 2011 up to the end of 2014 as “cash compensation” payments to international oil companies and to other entities.
In basic terms, the way in which such a staggering sum was lost relates to the way in which gross remuneration fees, income tax and the share of the State partner was deducted and accounted for in the compensation paid out over reduced oil production levels.
The sheer scale and scope of this corruption created the unwillingness of major Western firms to become too heavily involved in the country. In June 2021, U.K. oil super-major, BP, said it was working on a plan to spin off its operations in Iraq’s supergiant Rumaila oil field into a standalone company. The statement was highly reminiscent of the withdrawal of the U.K.-Dutch oil super-major, Shell, from Iraq’s supergiant Majnoon oil field in 2017 and of its withdrawal from Iraq’s supergiant West Qurna 1 oil field in 2018.
Each of these announcements also bore a startling similarity to U.S. super-major ExxonMobil’s earlier announcement that it also wanted to get out of West Qurna 1 and to its withdrawal from the Iraq’s crucial CSSP before that.
Indeed, ExxonMobil’s withdrawal from the CSSP is a template on why major Western firms believe operating in Iraq poses too many risks to their business. According to sources who work closely with the Oil Ministry spoken to exclusively by OilPrice.com at the time, the central problem for ExxonMobil was that the risk/reward elements of the CSSP contract as laid out by Iraq’s Oil Ministry were profoundly unbalanced.
In terms of the general risk/reward matrix that formed the basis of these negotiations, there were three key elements: ‘cohesion’, ‘security’ and ‘streamlining’. Cohesion related to ensuring that building the facilities connected to the CSSP were completed in full and in order. Security related not just to the on-the-ground security of personnel but also to the soundness of the basic business and legal practices involved in the agreement. Streamlining meant that any deal should continue as had been laid out in the agreement, regardless of any change in government in Iraq.
On the first point, hurdles had already arisen on several projects before in southern Iraq relating to the approval of contracts for service work, such as building new pipelines and drilling wells, as well as for obtaining visas for workers and customs clearance for vital technical equipment. Concerns surrounding such issues were shared by ExxonMobil. The second part of the risk/reward matrix was the lack of a meaningful legal structure relating to the origination, monitoring and administration of business agreements would have opened the company up to a plethora of problems in the future, especially when the third part of the risk/reward matrix was factored in.
This third major risk in the risk/reward matrix was that many leading politicians on the opposite side of whoever is prime minister at any given time in Iraq are frequently not inclined to stand by the decisions relating to the oil and gas industry made by the previous administration.
Even more dangerous for ExxonMobil – and any other major Western company attempting to operate in Iraq – was that any realignment of Iraq with the U.S. that had been seen from time to time could have been reversed at any point in the future.
At such a point, any questionable practices that ExxonMobil might have been forced into to move the CSSP forward could well have been publicised across the world if Iraq’s key sponsor, Iran, decided it wanted to embarrass the U.S. government, with ExxonMobil portrayed as a corporate proxy of Washington.
By Simon Watkins for Oilprice.com LINK
