Iraq’s Oil Industry

This is a guest crosspost by Aymenn Jawad Al-Tamimi

Iraq’s release of its full statistics for oil production in August 2010, illustrates the continuing decline of its oil industry since the end of 2009. In August, total output stood at 55.4 million barrels, compared to 61.3 million barrels in December, 2009. Consequently, government revenue from petroleum has dropped, with earnings at $3.9 billion in August compared to $4.4 billion only half a year earlier.

The reality of these trends lies in stark contrast to announcements from Iraqi officials that followed the completion of the second round of petroleum bids, which resulted in ten contracts being signed with foreign companies such as the Russian firm Lukoil and Royal Dutch Shell. The Oil Minister Hussein al-Shahristani had claimed that Iraq could boost production capacity from the current level of approximately 2.5 million bpd (barrels per day) to around 12 million bpd in six years, rivaling Saudi Arabia’s capacity of 12.5 million bpd. Similarly, Prime Minister Nouri al-Maliki has affirmed that additional revenues generated by increased oil production would not only help to pay off Iraq’s foreign debts of roughly $120 billion, but also solve problems of reconstruction.

It is extremely unlikely, however, that Iraq will meet these targets for expansion of the petroleum industry. Current trends aside, the World Bank estimates that $1 billion in investment is required just to maintain present production levels because of the outdated and damaged infrastructure such as ports and pipelines, among others. Meanwhile, a boost to 5 million bpd will cost $30 billion over the next eight years. By contrast, Saudi Arabia’s production capacity is the result of 75 years of development worth hundreds of billions of dollars, without the problems of three decades of warfare and sanctions, or a corrupt and inefficient bureaucracy from which Iraq suffers.

Further, where Saudi Arabia ranks 13th out of 183 countries in the World Bank’s 2010 “Ease of Doing Business Index,” Iraq stands at 153rd (a drop of three places from the 2009 index). The reasons for such a large difference include the fact that Iraq’s economy is still largely centralized and state-managed — a legacy of what Daniel Pipes describes as the “Stalinist nightmare of Saddam Hussein”– as well as the general lack of security and stability in the country caused by an Al-Qaeda insurgency of around 2000 members as well as the ongoing political stalemate.

These are all big obstacles to attracting the investment needed to develop the oil industry, despite the contracts signed with international firms: the Organization for Economic Cooperation and Development (OECD) gave Iraq the worst score of seven (on a scale from zero to seven) on its credit risk classification system. Likewise, a July survey of 300 business executives by the Economist Intelligence unit in July found that 64% believed that Iraq was too dangerous to invest in right now.

It is not surprising that certain analysts considered the various pronouncements from Iraq’s politicians mere rhetoric — perfectly understandable as the second round of bidding was relatively successful in terms of the number of deals agreed to. The government therefore saw the event as a sign of Iraq’s return to a prominent position in the world’s oil-market after 30 years of war and sanctions. After all, the first oil-bidding round in June 2009, which was broadcast liveon Iraqi television and began with 22 companies placing bids, turned out to be an almost complete failure as only one deal, with a consortium from British Petroleum (BP) and China’s CNPC, was agreed to.

This lack of success arose from the fact that the Iraqi government was thinking far more in terms of profits for the state, rather than on creating workable business deals that foreign firms could accept.

While it is to be expected that foreign firms will be able to increase petroleum production and repair damaged equipment and infrastructure in the coming years, Iraq’s political elite might do well to think about toning down their unrealistically high ambitions for the nation’s oil industry, and make it a priority to move the country away from sole dependence on petroleum revenues, which presently account for 70% of GDP and 90% of government income.

The best way to go about this would be to diversify Iraq’s economy by gradually liberalizing the predominantly centralized, command infrastructure. Such a policy might entail reducing the number of permits required to build on a given site: at present, 14 permits are required to build anything in the country, on average, and take 215 days to complete.

Streamlining this bureaucracy would not only allow reconstruction efforts to proceed more swiftly and mitigate Iraq’s housing crisis, but also reduce corruption by introducing more transparency into the system. It would be a shame if Iraq fell victim to the oil curse that afflicts many of its neighbors: the sooner dependency on oil revenues is reduced, the better for the country’s future.