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Iraq boosts oil output but trouble brews

Aug. 2, 2012 at 3:29 PM   |   Comments

BAGHDAD, Aug. 2 (UPI) -- Iraq's oil production is expected to double to 6 million barrels a day by 2020, posing a significant challenge to a divided OPEC while meeting about half the world's incremental demand for oil.

But internal turmoil, with independence-minded Kurds seeking their own oil industry and a new bombing offensive by al-Qaida, could cripple Baghdad's ambitions to become the world's top oil producer.

In the last year, Iraq's oil industry, and the country's reserves of 143.1 billion barrels of oil with possibly as much again in untapped reservoirs, has become highly politicized. It's a key element in an increasingly acrimonious tug-of-war between Tehran and Washington for influence in Baghdad, a geopolitical contest sharpened the U.S. military withdrawal from Iraq last December.

Iraqi Prime Minister Nouri al-Maliki's Shiite-dominated government wants to boost oil production higher than Saudi Arabian levels to 10 million-12 million barrels per day within the next seven years. That depends on investment of some $150 billion by major international oil companies over the next decade under 20-year production contracts first awarded in 2009.

But the deepening split between Iraq's Shiite majority and its once-powerful Sunni minority is becoming a serious threat to oil development on the scale Baghdad envisions.

The recent waves of deadly bombings by the Sunni jihadists of al-Qaida in Iraq, primarily targeting Shiites and the centers of political power, are taking their toll and Maliki and his Shiite-dominated security forces seem unable to stop the bloodletting.

That's likely to continue until Maliki gives in to Sunni demands for a more equitable share of political power. Right now there's no sign of that happening.

Iraq has boosted oil production to its highest level in 20 years -- thanks to the foreign companies -- to some 3 million bpd and hopes to double that by 2015. But there are growing doubts it will be able to.

There are good reasons to doubt these projections," observed analyst Ben Val Heuvelen writing in Foreign Policy.

"For one thing the current political crisis has underscored Iraq's failure to build the kind of institutions -- a credible judiciary, non-politicized security forces -- that support a stable, functioning, democratic state.

"Even if Iraq weren't plagued by daily bombings and political dysfunction, it would be hard pressed to achieve what would be the most rapid oil expansion in world history."

What Maliki and his government want is nothing less than challenging Saudi Arabia, the world's leading oil producer, and undermining the kingdom's economic and political power as the world's only "swing producer."

The Saudis, and only the Saudis, have an excess production capacity of 2 million-3 million bpd more than their normal production level.

With this they can push down the price of oil, part of Riyadh's strategy of keeping the Americans, Chinese and other major imports happy.

At the same time, this thwarts efforts by the Organization of Petroleum Exporting Countries' price hawks, led by Iran, the Saudis' main rival, who're constantly seeking to keep prices high.

If the Iraqis achieve that level of production capacity, that "could pave the way for a regional rivalry" between Saudi Arabia, the leading Sunni monarchy in the Persian Gulf, and Shiite-majority Iraq, Van Heuvelen says.

Maliki, a Shiite ally of Iran for decades, may not see himself as an Iranian puppet but he's dependent on Tehran to stay in power.

Iran's striving to ensure its dominance of post-Saddam Hussein Iraq, particularly since it seems set to overtake the Islamic Republic, its oil industry slowly being crippled by Western sanctions, as OPEC's longtime No. 2 producer.

The growing animosity between Maliki's administration and the semiautonomous Kurdistan Regional Government is also getting in the way of Baghdad's oil ambitions.

In recent months, four oil majors -- Exxon Mobil and Chevron of the United States, Total of France and Russia's Gazprom -- have defied Maliki's administration and signed exploration deals with the KRG that are potentially more lucrative than contracts with Baghdad.

Other major companies may follow, seriously undermining Baghdad's ambitious production plans, a target industry insiders say is unrealistic anyway.

Iraq depends on international oil companies to achieve its goals by using their investment power and advanced technology to build up production.

The breakaway deals with the Kurds by Exxon Mobil and the others indicate that grounds for compromise with Baghdad are slipping away fast.

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