Iraq’s
Uncertain Oil And Political Prospects (I)
By Issam Chalabi
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:
The rehabilitation program (RIO I, RIO II) initiated by the US
through some of its companies has not resulted in notable improvements.
There are still some projects initiated in June 2003 that await
completion. Recent US records show that while $7bn was spent on
oil/power projects there is almost nothing to show for it.
The Ministry of Oil has had limited success in rehabilitation
and maintenance due to security reasons, lack of funds, foreign
EPC companies leaving the country, bureaucracy, mismanagement,
corruption and other reasons.
There has been only a limited program to assess the status of
reservoirs. One major study, completed in early 2006, relates to
Kirkuk and Rumaila oilfields but no action was taken to implement
the recommendations. The reservoirs of major fields (Kirkuk, Rumaila,
Zubair and others) still need an immense program of rehabilitation,
as do most of the surface installations, pipelines, storage, and
export facilities
There has been very limited drilling and workover activities at
the oil wells. The Iraq Drilling Company and SOC issued many tenders,
but few were fulfilled for various reasons.
Most water-injection
and wet crude facilities await rehabilitation. Increasing production
of heavy oil and mixing it with Basra crude
resulted in lowering of °API of exported oil by 3-4 points.
Sabotage of pipelines continues, particularly in the center and
north, despite all military efforts and the hundreds of millions
of dollars spent to protect them.
Refineries are operating at 50-60% of their capacities due to
lack of major maintenance and disruption of supplies through pipeline
sabotage.
Shortage of fuel has resulted in a black market controlled by
mafia and militias, with some belonging to various political groups
and gangsters, causing prices to increase. Thanks to the IMF, official
prices have been continuously increased. For example, the price
of gasoline jumped from ID25 to ID450, and further increases are
due. Rationing continues, and Iraqis most of the time still have
to wait for hours to get their rations.
Since June 2003, Iraq has been importing gasoline, gas oil, LPG
and kerosene, costing sometimes, according to the latest Oil Ministry
figures and senior governmental officials, more than $500mn a month.
That means Iraq is spending $4-6bn a year, with imports expected
to continue for another four-to-five years at least. There have
also been claims of corrupt deals involving this trade. The ministry
has issued a number of tenders for new refineries, but none has
progressed beyond the stages of tendering, re-tendering or feasibility
study.
Smuggling,
particularly through the narrow Shatt al-Arab and Khor al-Zubair
continue, despite the presence of multinational and Iraqi
forces. To cite a simple example of the volume that such smuggling
generates, consider a figure of 1,000 b/d that can be handled by
three-to-four road tankers or a very small barge and at an average
of $60/B. This will generate around $22mn a year, hence the struggle
in the south for the control of this trade by various groups and
militias. According to Brigadier Khalaf Badran of Basra police
force, government officials in the city assist smugglers to illegally
ship crude oil to Iran. He confirmed on 25 October that the officials
issue certificates to oil tanker drivers ostensibly to allow them
to transport oil products inside the country. “But,” he
added, “they use these permits to pass through checkpoints
and security controls on their way to unload their cargo onto special
boats along the shores of the Shatt al-Arab waterway.” He
said customs officials and the police forces charged with cracking
down on smugglers had no right to seize oil tankers whose drivers
carried official permits. In his view, there must be some coordination
with the Iranian side as the boat owners and Iraqi drivers know
where and when to meet. The 100km waterway divides the southern
section of the border between the countries. “It is a large
area. It stretches from Ras al-Beesha on the head of the Gulf to
Mina al-Maaqal close to the city of Basra. It is very difficult
to control,” Brigadier Badran said. Smuggling of crude oil
remains a lucrative business and the recent surges in prices on
international markets is tempting to smugglers. The smuggled crude
is not taken directly from oil wells or storage tank. Instead,
smugglers bore pipelines and load the crude into their tankers
using diesel-driven pumps.
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.”
A strange and alarming issue is the lack of metering of crude
oil and oil products, despite numerous reports by various UN and
international auditing agencies and reports in local and international
media. Senior Iraqi officials and many US reports admit there are
huge irregularities and a lack of compatibility between export
figures and revenue. In 2005, the oil minister said his ministry
would be contracting for supply and erection of such meters, and
a week later the alternate Iraqi Ambassador to the UN, in a written
reply to the body, said that the ministry had agreed in principle
with Shell to carry out the installation. The metering at export
terminals remains incomplete or out of operation, while that at
wells, depots, refineries and other places is missing.
The Ministry of Oil has awarded a few EP projects within Daura
and Basra refineries, but has experienced long delays in the awarding
process, the opening of letters of credit and contract execution.
None is expected to be completed before 2009, although they were
supposed to be completed during 2006.
Under the pretext of de-Ba?thification, the Ministry of Oil has
undergone continuous changes in structure and personnel, resulting
in disruption and discontinuity. Almost 3,000 staff members have
been dismissed and most senior staff has left the industry for
one reason or another. Many had been kidnapped and are assumed
dead.
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.
Issam
Chalabi is a former minister of oil of Iraq (1987-90) and former
president of Iraq National Oil Company (1981-87). Petroleumworld
not necessarily share these views.
Editor's note: This
commentary was originally published by Middle
East Economic Survey, VOL. L, No 48, 26-November-2007. This
article was first presented in a lecture about Iraq and its oil by
Mr. Chalabi, at Princeton University on November 13th. A second
prsentation was made 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. Petroleumworld
reprint this article in the interest of our readers.
