Political turmoil could hurt Iraq oil plan

June 29, 2012 at 1:53 PM
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BAGHDAD, June 29 (UPI) -- Iraq is pressing ahead with its ambitious drive to boost oil production to some 12 million barrels per day and challenge Saudi Arabia as the world's top producer.

But security problems, worsening political instability and fractures in the all-important oil industry could still throw the plan off track.

"Iraq's economy is growing fast but it has a long way to go," the Middle East Economic Digest reported.

"In order to attract more foreign investment, the government needs to find a way to improve security and hold the many factions and interests of national politics together."

The country's halfway through its 5-year National Development Plan, which calls for $186 billion in investment, mostly foreign, by 2014.

"But while the economy has been growing on track since the plan was introduced, Iraq's security situation remains fragile and progress could easily be thrown off course," MEED observed.

"Political instability also threatens to stall economic recovery."

Since 2009, the Baghdad government has signed 20-year production agreements with major international oil companies who are committed to investing billions of dollars in developing long-neglected oil fields.

These companies are primarily responsible for the significant increase in Iraqi crude production since then, from just more than 1 million barrels per day to 3 million bpd now.

But the continuing absence of a regulatory Oil Law, long stalled in the country's fractious Parliament, and a steadily worsening dispute with the semiautonomous Kurdish enclave in the north over drilling rights and revenue-sharing threaten to seriously disrupt the oil and gas industry, the key to Iraq's reconstruction and future prosperity.

Prime Minister Nouri al-Maliki's government was particularly hit -- possibly grievously damaged -- in October 2011 when the U.S. giant Exxon Mobil defied Baghdad and signed an exploration agreement with the Kurdish Regional Government.

That boosted the campaign by the Kurds, who sit on an estimated 45 billion barrels of oil, to be their own masters, a decades-old drive that many see as aimed at establishing an independent state.

It also sharpened rumblings in other regions, most notably the southern Basra oil fields that contain two-thirds of Iraq's stated reserves of 143.1 billion barrels, for greater autonomy.

If unchecked, that would leave Baghdad without oil revenues and signal the breakup of the federal system introduced after the fall of Saddam Hussein's regime in 2003.

But possibly most worrying is that other foreign oil companies, including the Anglo-Dutch Shell, unhappy with the low-profit deals imposed by Baghdad and lured, like Exxon Mobil, by the more lucrative offers available from the Kurds, might side with the KRG and defy Baghdad.

That would mean an immense setback for the central government at a time when Maliki, a Shiite increasingly under the thumb of Iran, is accused by his political rivals -- with more than a little justification -- of seeking to establish a dictatorship now that the U.S. military has gone.

Maliki's political ambitions have alienated the minority Sunnis, who ruled the roost under Saddam, and even his many rivals in the Shiite majority.

The Sunni jihadists of al-Qaida, meantime, have unleashed a constant stream of bombings and assassinations, clearly intended to ignite sectarian warfare. The violence is far less than the bloodletting of 2006-09 but it's steadily undermining the government and scaring off badly needed investment.

The government's fourth auction of oil and gas zones in May was a complete fizzle, in part because of Baghdad's tough contract terms and because of the deteriorating security, particularly in the remote exploration zones on offer.

This has impeded the government's plans to open up new production areas, even though Iraq is pumping oil at the highest level since Saddam seized power in 1979.

With U.S. and Western corporations central to Maliki's drive to make Iraq an oil colossus with the geopolitical clout of Saudi Arabia, some observers ponder whether these entities might not come to hold sway over the increasingly dysfunctional Baghdad regime.

It has recently backed off threats to punish Exxon Mobil, the key to developing the giant West Qurna Phase 1 field in the south.

"This reversal," observed the U.S. global security consultancy Stratfor, "illustrates one avenue the United States may use to counter Iran's considerable influence in Iraq …

"Iran cannot compete with the investment capital and technologies of U.S. firms, given Iraq's dependence on international investment to develop its vast oil reserves."

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