Violence, bottlenecks threaten Iraq's new oil strategy

July 12, 2013 at 3:44 PM
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BAGHDAD, July 12 (UPI) -- Iraq's troubled government is drawing up a new energy strategy that envisions investment of $620 billion in the next 17 years to triple production to 9 million barrels per day by 2020.

But, just as global industry experts decried Baghdad's original target of 12 million bpd by 2017 as way too ambitious, they're now saying the new blueprint is beyond reach as well.

They blame crippling infrastructure bottlenecks, abysmal governance, a lack of skilled workers and the ever-present security crisis, in which hundreds of people are slaughtered every week.

Iraq has crude oil reserves estimated at 150 billion barrels, the fourth-largest reserves of conventional oil in the world, and gas reserves of 122 trillion cubic feet, the 12th-largest in the world.

The country's long-neglected oil industry, battered by decades of war, insurrection and international sanctions, has made a remarkable recovery since Saddam Hussein was overthrown in the U.S.-led invasion of 2003.

Much of that is due to international oil majors who signed 20-year production contracts with Baghdad in 2009-10, marking foreign oilmen's return to Iraq for the first time since Saddam nationalized the industry in the 1970s.

The companies -- including BP, China's CNPC, Royal Dutch Shell and France's Total -- have restored and expanded fields, particularly the megafields across southern Iraq, where two-thirds of Iraq's oil lies.

Production has risen from around 1 million bpd to about 3 million bpd today, and in 2012 Iraq overtook traditional foe Iran to become the second-largest producer in the Organization of Petroleum Exporting Countries.

The International Energy Agency, the West's Paris-based energy watchdog, predicts Iraqi production will hit 6.1 million bpd by the end of the decade as Baghdad strives to challenge Saudi Arabia's production rate.

"But storm clouds threaten Iraq's revival," oil analyst Guy Chazen cautioned in The Financial Times. "Bottlenecks are undermining continued production growth: weak government institutions mean contracts for crucial infrastructure projects are not being awarded quickly enough. A deficit of skilled workers is dogging the industry."

Jessica Brewer of the Edinburgh-based energy consultancy Wood Mackenzie said, "There are a lot of issues that are out of Western oil companies' hands, such as Iraq's infrastructure constraints.

"There's a shortage of pipeline, storage and pumping station capacity."

This impedes building up vital export levels, which bring in the revenue that will pay for reconstruction.

All this has meant that the increase in production levels over the last two to three years has stalled.

The slowdown has been worsened by a bitter feud between the central government in Baghdad and the independence-minded Kurds in their semiautonomous northern enclave.

They sit on reserves of 45 billion barrels of oil, the fourth-largest in the world, which they are starting to export through northern neighbor Turkey rather than via Iraq's state-owned pipeline network.

On top of that, the Kurds claim the northern Kirkuk oil fields, which hold about one-third of Iraq's reserves, as part of their historical territory. Baghdad refuses to relinquish these fields, and there's now an armed confrontation between the federal government and the Kurds across the north.

Exxon Mobil, Chevron Corp. and Total, along with Russia's Gazprom, have all defied Baghdad and defected to Kurdistan, where they get more lucrative terms and few of the infrastructure problems that plague the rest of the Iraqi industry.

Under the tough production contract terms imposed by Baghdad's Oil Ministry, international companies only get about $2 per barrel produced.

That was an important issue in the defections by Exxon Mobil and the others to Kurdistan. Baghdad is only now starting to think about sweetening the contracts, but whether it will offer enough to keep the international companies happy is another matter.

The issue has played a big part in the foreign companies' reluctance to make further massive investment to boost Iraqi production rates on which Baghdad is clearly is counting.

And it's widely seen as one reason why Baghdad has had to revise downward the ambitious production targets it announced four years ago.

"The majors are entering a period of very large spending decisions as they move to full field development," one Western consultant observed. "But they won't risk huge investments in oil that might not make it to market because of export bottlenecks."

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