Workers adjust a valve of an oil pipe in Tawke oil field near Dahuk, 400 km (248 miles) north of Baghdad, November 14, 2011. (photo by REUTERS/Azad Lashkari)

Iraq Seeks to Boost Production, Challenge Saudi Arabia in Global Oil Markets

Author: As-Safir (Lebanon) Posted February 17, 2012

Iraq’s oil revenues account for 95% of the government’s income. This fact affects the process of setting future oil policies and establishing organized strategies for the oil sector that could result in a fierce power struggle. Oil wealth in Iraq is and has always been regarded as the country’s primary asset. However, recent Iraqi statements confirm the emergence of a new goal, which could take the country in a new and dangerous direction: Iraq seeks to increase its oil production to 13 million barrels a day over the coming seven years, which would make it the world’s largest oil producer.

SummaryPrint In the coming years, Iraq seeks to become the world’s largest oil producer; but achieving this goal will involve overcoming numerous obstacles, both domestic and international. Haifa Zaaiter sheds light on the status of Iraq in global oil markets and explains how sanctions on Iran could affect other oil-producing countries.
Author Haifa Zaaiter Posted February 17, 2012
Translator(s)Nola Abboud

This is a lofty ambition intended to revitalize Iraq’s economy following the [US] occupation. Iraq has been given a golden ticket to move forward along the path it has envisaged for itself, which has been paved by others. This path will prepare Iraq to compete with the major oil-producing forces, which are also the two regional powerhouses: Iran and Saudi Arabia.

But how is Iraq supposed to play a role in the struggle between the major oil producing countries - or at least, what influence will it be able to gain in this struggle? Addressing these concerns, observers note that if Iran [follows through on] its threat to block the Strait of Hormuz in retaliation for the [European] ban on its oil imports, then Saudi Arabia will become the only ‘swing producer’ in the world. Keeping this in mind, an increase in Iraq’s oil production will enable Iraq to begin to compete with Saudi Arabia, which will lead to a change in the balance of power and the status quo of global oil markets.

Indeed, Iraq possesses elements that indicate that its investment boom will become a strong card to play in the geopolitical game. However, its internal crises and foreign interference in its affairs signal that “these aspirations [to become the largest oil producer] are mere dreams.  They were part of a verbal escalation to the benefit foreign sides, mainly the United States.” This was a statement by Kamal al-Kaissi, an expert on oil and economics, to Al-Safir.

Kaissi, who was a former official in the Iraqi Oil Ministry and OPEC, said that there are many factors that cast doubt on the practicality of these aspirations.

Kaissi believes that Iraq’s goal cannot be achieved on a technical level, for it is difficult to market the oil globally without facing obstacles placed by OPEC’s quota system, which sets a production ceiling for every country, based on factors of supply and demand. Accordingly, the talks about increasing oil production in Iraq could cause a conflict of interests in OPEC, in which the surplus in oil production will pull the quota rug out from under a number of OPEC members and cause them severe financial losses. It could also lead to the disintegration of OPEC.

This last point concerned the international arena; [but] there are also many internal factors that prevent the implementation of Iraq’s plan. These factors were discussed in a report entitled “Crude Awakening” in Foreign Policy magazine. The article said that Iraq’s current political crisis has underscored its failure to build the kinds of institutions -- [including] a credible judiciary and non-politicized security forces -- that support a stable, functional democratic state. In addition, there are internal disputes in Iraq between different political sides, namely the central government and the Kurdistan Regional Government [KRG].

2012: Reaching Deadlock

Ibrahim Bahir al-Oloum, former Iraqi Oil Minister, discussed the oil situation in Iraq with Al-Safir, and said that by 2014-2015 Iraq will achieve the ‘magic number’ of producing 4.5 million barrels a day.  He added that by the end of 2012, Iraq will produce 3 million barrels a day and will expand its export system in the next two years to produce 4 million barrels a day for the first time in 30 years.

According to Al-Oloum, 2012 will be a crucial year for the oil sector and the export industry.  If Iraq is capable of surpassing this stage, then by 2020 it will be able to produce 2 million barrels of swing capacity.

Al-Oloum bases his optimism on the fact that Iraq will be president of OPEC in 2012.  He affirmed that he will seek to negotiate with OPEC to increase his country’s shares in national production. “The goal is not to flood the international market, but instead shift to being a swing producer of oil.” Al-Oloum explains that his country is utilizing its current position to send an open letter to OPEC’s secretary general, urging him to call for an extraordinary meeting to convince OPEC member countries to avoid using oil as a weapon.  According to Al-Oloum “Iraqi oil cannot remain a strategic commodity.  Addressing Iranian threats to block the Strait of Hormuz can be done through strengthening Iraq’s ability to make up for the shortfall.” He notes that “in OPEC there are Saudi Arabia and the Gulf countries on one side and Iran, Venezuela, and Algeria on the other.  Iraq and Libya might be able to form an intermediary bloc between the two.”

Iraq and the Regional Oil Game

Saudi Arabia knows that it is the only “swing producer” in the world because it has a capacity that far exceeds its current production. This situation gives the kingdom enormous power.  If oil sanctions were to be imposed on Iran the world economy would be exclusively reliant on Saudi Arabia and its oil wealth to prevent prices from skyrocketing. Saudi leverage forces OPEC countries to adhere to their assigned production quotas, because they fear that Saudi Arabia might flood the market with a punitive deluge of crude oil [in response to any deviations].  In this case, oil prices and profits would decrease.

According to the Foreign Policy report, Iraq is currently seeking to storm into the oil sector, which already includes major oil-producing countries: It will compete with Saudi Arabia to become the world’s ‘swing producer.’ If it succeeds it will be able to develop 2 million to 3 million barrels a day of swing capacity, which is what Saudi Arabia claims to have. OPEC will suddenly have a second enforcer. That could pave the way for a regional rivalry between Saudi Arabia and Iraq. Relations between the two are already strained, as Saudi leaders have characterized Prime Minister Nouri al-Maliki as an Iranian puppet and continue to refuse to send an ambassador to Baghdad.

In this context, the report considers that if Iraq succeeds in its plan, it will anger both Iran and Saudi Arabia.  For this reason, pressures will continue to hinder the implementation of this project, which has been facing immense internal pressures to prevent its implementation.

Internal Crises and the De facto Partnerships

Al-Kaissi states that one of the main reasons behind the occupation of Iraq was control of oil strategy. The [occupying] forces were intending to make Iraq capable of covering any shortfall in global oil markets. More specifically, they sought to make Iraq play a role similar to that of Saudi Arabia.

According to this analysis, the major [oil] companies are currently controlling the oil strategy in Iraq.  They are utilizing the absence of a legal framework that organizes this sector, along with the internal power struggle, to present the world with a fait accompli.

In previous years, international companies rushed to control oil reserves through production sharing contracts.  The real problem is in the nature of these contracts, which allowed the companies in question to control oil-related decisions -- namely oil development, production, and strategies -- instead of the central government. Based on these contracts, the companies get $2.5 for every barrel of oil.  This is a high number, considering that the oil companies are handling oil wells that had already been discovered, barrels some of which have already been produced. It is worth noting that the Iraqi fields do not require a lot of efforts since they are close to the earth’s surface and do not require advanced technologies [for extraction].

Another dark spot in these contracts: The major companies, like British Petroleum, Exxon Mobil, Shell, and others, are responsible for oil production, while the marketing process is the responsibility of the government. If the government then fails [to sell the oil], they have to compensate the oil companies. This is because the contract requires Iraq to pay for the amount mentioned in the agreement and not the amount produced. Thus, in case Iraq decides to decrease production for any reason – such as market pressures, OPEC policy or logistical constraints – it will be forced to pay for barrels that were not even produced.

According to Kaissi, the more serious issue is the contracts that were signed with non-legal companies. Until now this issue has not been discussed by the parliament or the people. Moreover, the content of these contracts, which included technical details, have remained confidential. Some of the terms of these contracts were modified following their signature due to local and foreign political pressures and ongoing visits by Joe Biden and others.

In the same context, Al-Oloum shed light on how these companies are exploiting the dispute between the central government and the Kurdistan region to benefit their own interests. He confirms that “if the conflict continues and no solution is reached, it will allow the major companies to force both sides into their desired situation.  At first, the central government attracted the major companies while it deprived the region of oil. When both sides failed to reach a settlement, the companies succeeded in breaking the monopoly of the oil ministry over the agreements.  The companies became active in the Kurdistan region and that forced the government to decide between canceling the contracts or turning a blind eye. The case of Exxon Mobil is a perfect example of the latter.
Al-Kaissi affirms that the absence of a legal framework is intended to paralyze politics within Iraqi institutions.  Furthermore, many sides wanted the situation to remain the same. Today, there is more than one draft for the oil law, which was not yet presented to parliament. The Kurdistan Region and the United States are pushing towards passing the oil law so that the contracts in the Kurdistan region become legal. It is worth noting that the region is attempting to exploit the ongoing political struggles to push for the adoption of this law.

For his part, Al-Oloum said that in 2007, Iraqis lost a chance to reach a consensus agreement over the draft oil law, and the issue has thus persisted until this day. Al-Oloum regretted that the issue remains without any prospect of a solution. He stressed that the absence of legal framework led to the aggravation of the problem concerning [oil contracts with] the Kurdistan Region. 

Read More: http://www.al-monitor.com/pulse/business/2012/02/oil-reserves-of-iraq-enable-it-t.html

Published Beirut, Lebanon Established 1974
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