by Ali Hussain
04-07-05
The following paper was delivered by Dr Hussain, Oil Consultant and former OPEC Officer, at the Iraqi Petroleum Conference 2005 in London on 30 June. He can be reached at ahussain@emirates.net.ae
Introduction
Iraq is considered one of the biggest oil producers and exporters in the world.
However, since 1980 its oil industry has suffered significantly from wars,
sanctions, negligence and lack of maintenance, and, since the last war, from
sabotage and looting.
Consequently the industry faces a number of challenges; but with the provision
of security and finance it has huge positive prospects.
Iraq’s oil industry
Oil was first found in Iraq in the north in 1927 and started to be exported
through a pipeline to Lebanon in 1934. In the south the giant South Rumaila
oilfield was discovered in 1954 and its oil was exported from the Gulf.
Before the nationalization of the oil industry in 1972, Iraq’s oil was under the
control of international oil companies (IOCs) from the US, UK and France which
were represented by the Iraq Petroleum Company (IPC). IPC was responsible for
exploration, development, production and exportation of Iraqi oil. Law No 80,
issued in 1961, limited the areas where oil companies could operate and hence
excluded 99 % of the country from the control of the IPC.
In 1964 the Iraq National Oil company (INOC), was established. It was responsible for building the infrastructure of the industry including exploration, drilling, development, the construction of pipelines, depots, terminals, operating a fleet of tankers and the construction of gas filling and petrol stations.
According to official figures Iraq has estimated oil reserves of 115 bn barrels,
making them the second largest in the world. Iraq’s oil production reached its
peak prior to the Iraqi-Kuwaiti war of 3.5 mm bpd. Immediately after the war and
due to the imposition of sanctions it fell drastically, and production was
limited to cater for domestic demand of around 700,000 bpd. However it started
to increase once again after the implementation of the UN Oil-for-Food Program
and reached around 2 mm bpd in 2002. Iraq’s gas reserves are estimated at 3.1
tcf, ranking them the 10th largest in the world.
The Iraqi economy relies heavily on the oil sector. As is the case with other major oil exporters, the oil industry is considered the “engine of growth”. Oil exports have generated no less than 90 % of foreign currencies and contributed more than 50 % to Iraq’s GDP.
There are many challenges facing the oil industry. However, there are also some
good positive prospects. These challenges and prospects can be analysed as
follows:
A. The challenges
1. Security:
This is the most important challenge. During the last two years the industry has
suffered more than 200 attacks, leaving negative effects on the industry and
consequently the Iraqi economy in the following ways:
-- The loss of oil revenues and damaged oil facilities has been in the order of
$4-5 bn annually;
-- Interruption of crude supplies have affected the flow of oil to refineries
and power plants;
-- Continuous attacks on the northern pipelines have affected the flow of oil
exports to Turkey;
-- Iraq’s oil production and exports have become difficult to predict;
-- Foreign and local investments in the oil industry are discouraged;
-- Rehabilitating/expanding upstream and downstream operations and facilities
have become difficult;
-- It has been estimated that almost 40 % of the total costs of economic
projects in Iraq goes to security; and
-- Lack of security encourages smuggling of both crude oil and oil products.
2. Rehabilitation:
Another challenge is to rehabilitate oil facilities, downstream and upstream, in
order to bring Iraq’s oil production to the pre-Iraqi-Kuwaiti war level of 3.5
mm bpd:
Downstream facilities include; refineries, petrochemical industry, storage
tanks, pipelines, distribution facilities, etc.
Upstream facilities include: oil wells, drilling facilities, pipelines,
terminals, pumping stations, etc.
3. Expansion:
In order to revive its economy, increase its investments and solve the high rate
of unemployment, Iraq needs to expand its upstream and downstream activities to
satisfy its domestic needs from crude oil and oil products, and increase its oil
exports and hence oil revenues which accrue in foreign currencies:
Expansion of the upstream facilities to increase crude oil production capacity.
This will depend on the formulation of an upstream policy, security and
financial availability. With its huge oil reserves Iraq can expand its
production level to at least 6 mm bpd and even higher.
Expansion of the downstream capacity involves expanding existing refineries,
petrochemical industries etc, and building new ones, not only to satisfy
domestic demand but also for exports.
4. Financing:
To achieve security, rehabilitation and expansion, the Iraqi oil industry needs
financing. As the industry is capital intensive, large investments, particularly
in hard currencies, are needed. Such financing will come from the Iraqi
Government which in turn can receive finance from the following sources:
-- Oil revenues from oil exports: during the period April 2003 to April 2005
Iraq’s oil revenues were in the order of $ 31 bn. In 2004 alone Iraq’s oil
revenues were $ 17.5 bn;
-- Multilateral finance: such as loans from the World Bank and the IMF --
recently the IMF granted Iraq financial assistance of $ 436 mm;
-- Loans from regional and international banks;
-- Financial assistance from Arab countries;
-- Financial aid from other countries, such as the $ 18.6 bn the US allocated to
Iraq to help revive its economy;
-- The donations Iraq will get from the Madrid Conference donor countries of $
13.5 bn -- so far Iraq has received only $ 1 bn of these promised donations;
-- Privatisation of some sectors of the downstream operations such as refinery
and petrochemicals; and International investments in the upstream operations.
B. The prospects
The future prospects of the Iraqi oil industry will depend on security, finance
and some positive elements of the industry.
1. Security
With the election of the parliament and government there is a lot of hope that
security will be restored and improved. In addition, the Ministry of Oil is
implementing a plan to provide its own security. A special military force has
been formed to protect all oil installations.
2. Finance
Once security has been established -- given that Iraq is a major oil exporting
country -- the prospects for financing the oil industry are very positive.
Finance will be needed to both rehabilitation and expansion.
a. Rehabilitation
Spending on the rehabilitation of the Iraqi oil industry to restore downstream
and upstream operations to the pre-Kuwaiti war production level of 3.5 mm bpd
started immediately after the war with the US, with allocation of $ 1.2 bn to
Kellogg Brown & Root of Halliburton to rehabilitate the oil sector in the south
and another $ 800 mm to the US’s Parsons to develop the industry in the north.
However, only a few projects have been implemented and work may not finish
before the end of 2006. The Iraqi government also allocated $ 3 bn to the
Ministry of Oil for 2005. It remains to be seen whether or not such investments
will be sufficient.
Recently Iraq signed two new contracts, one with an US company to improve
gasoline produced by Daura Refinery at an estimated cost of $ 67.3 mm, and
another with a Czech company to increase the capacity of the same refinery from
90,000 bpd to 170,000 bpd at a cost of $ 43 mm.
b. Expansion
How much finance will be needed to expand downstream and upstream facilities
will depend on how much Iraq intends to expand these facilities and whether such
expansion will be to satisfy only domestic demand or to include exports as well.
It will also depend on how much finance Iraq will be able to allocate to this
industry from domestic sources and foreign investments.
Iraq has already started to plan the expansion of its oil sector. For example it
has invited numerous international oil companies to bid by the end of this year
for a 300,000 bpd refinery at an estimated cost of $ 2 bn. The contract is
expected to be commissioned in early 2008. The refinery is badly needed to meet
growing domestic demand due to the importation of more than 1 mm cars during the
last two years, while Iraq’s existing refineries are working at only 60 % of
their capacity. During this year Iraq is expected to import oil products worth $
200 mm a month.
As for the upstream operations, according to a statement by the present minister of oil, Iraq is planning to increase oil production capacity to reach 5-6mn bpd by the end of this decade.
Furthermore, Iraq has recently signed contracts with Shell and BP to evaluate
some of its oilfields. Other IOCs from Canada and Turkey have also signed
agreements with the Ministry of Oil to develop some fields such as Khurmal and
Hemrine in the north, and Subha and Luhais in the south with a planned total
production capacity of 340,000 bpd. It is also planned to develop the giant oil
fields of North Rumaila and West Qurna.
c. How much finance will be needed?
Prepared jointly by the World Bank, the IMF and the UN, a report issued in early
2004 estimated that Iraq needed $ 55 bn in economic aid overall for the period
2004-07 to finance its infrastructure and get the oil industry on its feet.
The Coalition Provisional Authority (CPA) in Iraq estimated that in 2004-07,
Iraq would need to invest $ 19.4 bn including $ 8 bn for the oil sector.
According to the previous Iraqi Minister of Oil Thamir al-Ghadhban, increasing
production to 5 mm bpd would require investment of $ 20 bn.
d. Foreign investments
Despite receiving some oil revenues, Iraq’s financial difficulties and its need
for large investments to develop its economy, especially its infrastructure,
mean that its choices to invest in the oil sector (which is capital-intensive)
are very limited.
Consequently Iraq may find it necessary to invite IOCs to invest in both
downstream and upstream operations. However, foreign investment in the oil
industry is a very sensitive issue. Among Iraqis there are those for and against
such a move.
Those who are in favour of foreign investments argue that:
-- With its huge economic problems Iraq cannot provide enough finance for its
oil sector;
-- Investments in the oil industry will be provided by IOCs;
-- Such investments will help to expand output of crude oil and products;
-- These investments will help Iraq to expand its crude oil exports;
-- Additionally, such investments will help to expand the production of oil
products not only to satisfy domestic demand but also for export;
-- IOCs will provide the latest technology for the oil industry, and these
companies will subsequently buy the extra crude oil.
However some Iraqis argue that due to the importance of the oil sector to the economy itshould be kept under the control of the government and financed from Iraqi sources. Others may ask: if Iraq cannot finance its oil sector, is it wise to keep the oil underground, even though the economy desperately needs finance for reconstruction and development?
In any event, invitations to IOCs to invest in the oil sector would need to be
approved by the elected Iraqi government and parliament. Also needed is a law
regulating foreign investments, including those in the oil industry. These
issues are very important not only to the Iraqis but also to the IOCs.
3. Other positive factors
Provided there is security and enough finance, the Iraqi oil industry has
excellent prospects due to the following factors:
Iraq has huge oil reserves, which are officially estimated at 115 bn barrels. With the use of new technology such as enhanced oil recovery reserves may rise, according to some reports, to more than 300 bn barrels.
With these huge reserves production can be increased to as much as 10 mm bpd.
This is due to the fact that Iraq has already discovered 75 oilfields, but only
15 have been developed and in operation. The cost of oil production in Iraq is
the lowest in the world ranging, $ 1-2/bbl.
Iraq also intends to re-establish the Iraq National Oil Company (INOC) with functions similar to the ones of the previous company. The country has the possibility of exporting oil via various routes such as the Gulf, Turkey, Syria, and Saudi Arabia, and possibly through Jordan, Iran and Kuwait.
Iraq’s oil is located in the north, middle and south of the country. And the
manpower in the Iraqi oil industry is considered among the best in the region.
Furthermore the Ministry of Oil has recently decided to train more than 3,000 of
its staff outside Iraq, in particular with IOCs, to obtain and learn about the
latest technology used in the oil industry.
4. The future prospects of the Iraqi oil industry
So, provided there is security and enough finance the prospects for the Iraqi
oil industry are very positive. With its huge reserves Iraq can play a very
important role in the international oil market and supply much needed oil to it.
For example it is estimated by the IEA that global demand will increase from 84
mm bpd in 2005 to 120 mm bpd in 2030, thus encouraging Iraq to raise its own to
reach perhaps 10 mm bpd or even more.
This expansion, against the background of a well-educated nation living in
freedom and democracy, will in turn help Iraq to reconstruct its economy and
become one of the richest countries in the region.
Source: Middle East Economic Survey