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Bloodletting, bureaucratic bungling hamper Iraq's oil plans

Sept. 19, 2013 at 1:54 PM   |   Comments

BAGHDAD, Sept. 19 (UPI) -- Iraq, on paper one of the world's oil giants, is struggling to boost its energy production amid a deteriorating security crisis that could seriously curtail Baghdad's drive to exploit its vast oil and gas reserves.

It has made remarkable progress since Saddam Hussein was toppled in the March 2003 U.S. invasion, largely due to the expertise and investment of Western oil companies.

But it has failed to reach targets it set itself, in part because of the violence that has wracked the country for the last decade, but also because of persistent logistical problems, bureaucratic bottlenecks, weak government, deep-rooted corruption -- and a lack of drilling rigs.

Analysts say these problems remain, and are likely to do so for some considerable time, with a debilitating feud with the semi-autonomous Kurdish region in northern Iraq over its burgeoning oil production and export direct to neighboring Turkey a constant impediment.

When the Americans invaded, Iraq's oil production was around 2 million barrels per day. Now it's around 3 million bpd.

In 2012, Iraq overtook its longtime rival Iran to become the second biggest producer in the Organization of Petroleum Exporting Countries.

But, as government ineptitude and infrastructural problems persist, says energy analyst Guy Chazan, "the big ramp-up in output seen between 2010 and 2012 has now stalled.

"The continuing standoff between Baghdad and the Kurdish Regional Government has not helped, and neither has the increase in sectarian violence...

"The companies were initially gung-ho," he wrote in the Financial Times.

"But the infrastructure challenges, the worsening security and the poor returns on their contracts -- they receive a fee of just $1.59-$2 per barrel -- has made them more cautious about pouring money in."

Some majors, led by Exxon Mobil and Chevron Corp. of the United States, Total of France, have moved to the Kurdish enclave where production contract terms are more lucrative and bureaucratic interference much less.

In terms of oil reserves, Iraq currently ranks fifth in the world with 150 billion barrels. But industry analysts believe there's probably as much again lying in untapped fields.

That would challenge Saudi Arabia, the world's leading producer, which has stated reserves of 267 billion barrels. The kingdom had the largest reserves until January 2011 when Venezuela declared it possessed 297 billion barrels.

Majid Jafar, chief executive of the Persian Gulf-based Crescent Petroleum, which has operated in Iraq for 20 years, believes Iraq could be the next Saudi Arabia.

Given the under-exploration in Iraq, he says its reserves will likely be higher than Saudi Arabia's.

"Reaching 10 million bpd and beyond is achievable for Iraq," he maintains, but poor management and the Baghdad parliament's failure to approve a long-delayed Oil Law, first mooted in 2007, to regulate the industry and apportion revenues, is holding back development of the energy sector.

Baghdad has had to reduce the ambitious plan it announced six years ago to boost oil production to 12 million bpd by 2017.

That's four times its current output, and would involve an unprecedented expansion of its drilling program. But oil business insiders wrote that off as impossibly ambitious, and way beyond the capabilities of Iraq's oil sector.

In June, the Oil Ministry produced an Integrated National Energy Strategy, or INES, that maps out the development of Iraq's energy sector over the next two decades.

It has yet to be published, but oil industry analysts who have seen the INES say it proposes scaling back the production target to a more realistic 4.5 million bpd by the end of 2014, moving up to 9 million bpd by 2020.

But even that's still seen in some quarters as overly optimistic.

The International Energy Agency, the West's energy watchdog based in Paris, predicted in December 2012 Iraq would only be able to hit 6.1 million bpd by 2020.

To reach its stated target of 9 million bpd by 2020, Baghdad estimates it will need investment worth $629 billion.

The IEA estimates that $125 billion will be needed over the next five years to achieve the 9 million bpd target, yet Iraq's energy sector attracted only $9 billion in 2011.

Industry analysts say hitting that target will require drilling about 1,500 new wells by 2016, for which dozens of extra rigs would need to be brought in from other regions of the world -- and they're just not available.

© 2013 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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