Iraq's oil: future prospects
Among the many uncertainties about the future of Iraq's oil industry in the aftermath of another war, there is at least one certainty, write
Walid Kadduri and Gerald Butt: there will be no overnight oil bonanza
While it is true that Iraq has huge oil potential (the second- largest reserves in the world after Saudi Arabia), predictions that the country will immediately be able to open up the export taps to double or triple the current rate are wildly over- optimistic. The effects of the two Gulf wars (1980-88 and 1991), combined with the fall-out from more than a decade of UN sanctions, have seriously damaged the oil sector in Iraq. Oilfields have been exhausted and routine maintenance has been neglected, while more spare parts and equipment urgently need to be imported, and new technology skills acquired.
Some analysts predict that Iraqi oil production could rise to four million barrels per day (b/d), eight million b/d and even 10 million b/d during the coming decade. Certainly, the potential is enormous: Iraq is known to possess around 526 hydrocarbon "structures". These have been mapped and their details recorded. So far, however, only 125 (20 per cent) have been drilled. Put in more simple terms, only 15 fields, out of 73 that have been discovered, are operating. And awaiting discovery, it is believed, are many more. But while it is true that Iraqi oil reserves might sustain optimistic projected levels of production in the coming years, the socio- economic and political facts on the ground warrant a more cautious outlook.
There are three reasons for suggesting a careful and pragmatic approach to the subject of future output predictions.
First, one needs to look at the political realities of the day. Press reports from Washington indicate that the US administration is contemplating a three-stage process for Iraq. Immediately after the war, direct and unilateral US military rule would be established to ensure local security and protect the borders from foreign interference by neighbouring countries.
The second stage would see Iraq governed by a US administration, with senior American officials running the ministries, and Iraqis acting in an advisory capacity only. Finally, and after several years, power would be handed over to an Iraqi civilian administration, based on free elections and a parliament.
Each of these steps raises many questions.
The first issue to consider is how the Saddam regime will react to the US military operations. Will stability prevail in Iraq within two-to-three weeks, two-to-three months, or even longer? Will there be significant damage to the oil installations as a result of the war, and what will be the status of the infrastructure and public utilities? The answers to these questions, and many others, will determine how smoothly the transition will be made to the second stage.
A major question mark hangs over the functioning of the planned US administration in Baghdad. The idea that this should be supported by Iraqi civilian advisory bodies has not met with a positive response from many, if any, Iraqi opposition groups. In fact, Iraqis in general, of all shades of opinion, have indicated their refusal of a foreign occupying power.
Instead, different ideas have been put forward by prominent Iraqis in exile. One is to have a UN administration with a clearly defined authority, timetable and list of responsibilities, working alongside an Iraqi administration. The purpose of this joint UN-Iraqi group would be to manage the basic necessities of the population, as well as the public facilities, and prepare for the drafting of a constitution, the establishment of a constituent assembly and the holding of elections. Another proposal is for the establishment of a provisional government immediately after the entry of US forces into Iraq. This has been opposed by Washington. There are also groups that favour the deployment of US troops for a considerable period of time to ensure local stability and to fend off any dangers emanating from neighbouring countries seeking to meddle in Iraq's domestic affairs at this critical time.
What is the significance of all the above factors in relation to the Iraqi oil industry -- in the immediate and longer-term future?
The answer is that the rate of progress of these political developments will impact on the time and scope of the oil decision-making process. The longer the period of direct military rule and the life-span of the transitional government (whatever its eventual composition), the longer will be the process of launching the rebuilding of the Iraqi economy in a viable and credible way.
Moreover, the very nature of any transitional government is such that it can only take decisions to run day-to-day affairs. Take, for example, the scope that a military occupation administration in Baghdad would have for exploiting Iraq's oil sector. Under international law, an occupying authority has the right to make use of existing oil facilities -- ie a US-run administration in Baghdad could sell oil from currently- producing wells and spend the revenue from it.
But an occupying power is not allowed to explore for more oil or grant concessions to other parties to do so. Therefore, it is highly unlikely that a US administration in Iraq could make or enforce long-term economic decisions, such as 25- year production-sharing agreements (PSAs) -- the kind of deals needed for the long-term development of the country's large oil reserves.
The top priority for a provisional government running oilfield operations and the refineries would be to carry out rehabilitation and maintenance, as well as to restart many of the idle sectors of the industry. This, in itself, after three devastating wars and 12 years of sanctions, would be no insignificant task and would need much focus and funding. As for the bigger question of determining the direction of the Iraqi oil industry in the long term, this, logically, would seem to be a matter for the Iraqis to decide after elections and the formulation of relevant state policies.
Furthermore, one can assume that international oil companies would want to wait to see how Iraq tackled its major economic crisis before committing billions of dollars to investment in the country. Sorting out the economy will not be easy. Iraq has financial obligations of around $200 billion in the form of compensation demands, loans and commercial contracts. Inflation is rampant and the currency has collapsed. Any future government would be hard pressed to provide the necessary funds -- several billion dollars, in round figures -- just to raise oil production capacity to the pre-1990 level of 3.5 million b/d, from the present level of around 2.8 million b/d.
Hence, until stability is established and Iraqi civilian rule begins, it will not be possible to make an accurate assessment of how soon the much-predicted oil bonanza will appear on the horizon.
Under Iraqi civilian rule, several issues relating to the oil sector need to be addressed. The first is whether Iraqi civil society and political parties will be allowed to discuss freely a future oil policy. Assuming this is the case, one can expect different schools of thought to emerge.
This debate has already surfaced among Iraqi oil experts abroad. There are calls, variously, for: continuing with nationalisation; introducing partial privatisation (similar to Norway where a percentage of the national oil company was sold to the public); leaving currently-producing fields in the hands of the national oil company, while opening up new fields to international oil firms in participation with local public and private companies; opening the industry up to the Iraqi private sector, similar to the process in Russia; and privatising the downstream (the refining and distribution sector) first, and then following it with the privatisation of the upstream (exploration and production).
These ideas, and many more, relating to the future of the Iraqi oil industry will remain in the air until the subject is debated and legislated upon by parliament. Then, and only then, will one know the nature of any future oil regime in Iraq, and how long it might take to raise capacity to 5-10 million b/d. After agreement on a future oil strategy will come the arduous process of negotiations with the international oil companies, which, based on the experience of other producing states, will take many months -- if not years.
The prevailing opinion among Iraqi oil experts is that an opening should be offered to the domestic and international private sector to invest in the local oil industry -- both upstream and downstream. But it is impossible to guess at this stage how much time might be needed for the new authorities in Iraq to take a decision of this kind.
Whatever the eventual outcome, it is highly unlikely that one company, or firms from one nation, will dominate the Iraqi oil scene. This has not happened anywhere else in recent history and there is no reason why it should happen in Iraq -- despite widespread reports that US firms might monopolise future contracts.
While it is true that there would be a US administration in Iraq, it is also the case, as mentioned above, that international law governs the ownership and utilisation of natural resources under occupation, while WTO rules require open bidding and transparency. Furthermore, there are market determinants that oblige firms to diversify their portfolios, rather than concentrating all their investments, or a majority of them, in one project or one country -- especially if it might be politically risky, as is the case here.
In light of all the above, what can one foresee?
Iraq is in no position to rehabilitate its ailing oil industry, let alone develop its huge reserves, without outside help. The country needs finance, technology, systems, management and marketing -- all things lacking in Iraq after the events of the past two decades. But one needs to stress the point that this whole process will take years rather than months. Hence one can foresee Iraqi oil capacity returning to 3.5 million b/d by 2005 and perhaps reaching 5 million b/d by 2010.
Aside from the uncertainty over the practical aspects of Iraq's oil development, there remains the political one. The assumption is that a future Iraqi government will decide to remain in OPEC but work hard to increase its quota allocation. Again, despite media reports to the contrary, it is very unlikely that Iraq would leave the organisation or enter into a price war to achieve its aims. Iraq would probably be the country in OPEC most in need of cash; and a price collapse would not be in its national interest.
Such a collapse would put off still further the day when Iraq could look forward to enjoying the benefits of an oil bonanza.
Walid Khadduri and Gerald Butt are editor-in-chief and Gulf editor respectively of
