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Iraq - land of opportunity and adventure?

A new life awaits you in the off-world colonies, the chance to begin again in a golden land of opportunity and adventure -- from the film Blade Runner.

Imagine a peaceful, stable Iraq, an oil-rich nation which welcomes foreign investment and acts as a model of democracy in the Middle East. This must have been the vision of Bush administration policy makers before the invasion in March of 2003, and the dream dies hard. As sectarian violence escalates in a de facto civil war, the Iraqi parliament considers a draft hydrocarbons law, and IHS Energy announces the Iraq Atlas, the "first detailed report on Iraq's oil reserves and production potential since the start of the Iraq conflict." Geopolitical circumstances dictate that the world will likely wait a long time before it sees substantial new E&P in a nation cobbled together by the British from remnants of the Ottoman Empire in 1921. Oil consumers should plan accordingly.

Iraq_oil_mapSalman Banaei provides a detailed analysis of the draft oil law. The proposed legislation divides Iraq's oil wealth into four categories. Control of producing fields (for example, Kirkuk, Rumaila), or undeveloped satellites of such fields within the same petroleum system, will be controlled by a revamped Iraqi National Oil Company (INOC). The graphic shows Iraq's current oil fields, pipelines and refineries (left, click to enlarge).  Discovered, undeveloped reservoirs which are not extensions to existing fields, and prospective areas, are open to competitive bidding by international or national oil companies, including INOC. As Banaei points out, there is no "standard contract" to guide the bidding, but fiscal terms for new developments would involve production sharing agreeements overseen by Iraq's newly created Federal Oil and Gas Council (FOGC).

The New York Times' Iraqi Blocs Opposed to Draft Oil Law reports on the Kurdish and Sunni resistance to the draft oil law.

In Iraq, the Kurds have taken issue with a new provision that was quietly packaged with the draft oil law by the Shiite-led Oil Ministry last month. The measure would essentially cede control of the management of nearly all known oil fields and related contracts to a state-run oil company to be established after passage of the law, said a spokesman for the Kurdish regional government.

The [Kurdish] spokesman, Khalid Salih, said the provision violated a clause in the Constitution that says the central government must work with regional governments to determine management of known fields that have not been developed. The Kurds, who have enjoyed de facto independence in the north since 1991, have been arguing for maximum regional control over oil contracts.

“Acceleration in presenting it [the law] is inappropriate since the security condition is not encouraging,” said the legislator, Saleem Abdullah. He said Sunni Arabs were also worried that the law would give foreign companies too large a role in the country’s oil industry. Sunni Arab political leaders supported cabinet approval of the draft law, but appear ambivalent now.

It appears that the new measure "quietly packaged" into the law in April extends control of discovered but undeveloped fields in new petroleum systems to the INOC. Debating the final form of the law —  if legislation is passed at all — misses the point made by Saleem Abdullah. While the security situation continues to deteriorate, no IOC would seriously consider doing business in Iraq. "Lack of security is already keeping out the international oil companies and the added public objections to the oil law will make the situation even worse," said Muhammed-Ali Zainy from the London-based Centre for Global Energy Studies.

The Kurds want "maximum" control of Kirkuk and all other fields — discovered or not — in their autonomous area. Their stance is a significant roadblock to passage of the draft. There is a proposed Kurdish Petroleum Law, and the Kurds have already signed PSA agreements with several smaller oil companies, including Norway's  DetNorske Oljeselskap (DNO), who are developing the Tawke field. Wood Mackenzie believes Kurdistan is a region to watch in 2007

The [Wood Mackenzie] report states that the region is largely unexplored but there are five oil fields and two non-associated gas fields within its borders. Brown said: "Speculative estimates for total reserves potential of the region are between 12 billion and 45 billion barrels of oil, and 100 tcf of gas, which would put Kurdistan on a par with prolific producing regions such as the Caspian and North Sea. Whilst this may be over-stating its potential, there remains a high probability of significant discoveries."

IHS Energy also remains optimistic.

“The market has not had access to this level of data and analysis on Iraq’s oil reserves and production capabilities for many years,” said Ron Mobed, president and chief operating officer of the energy segment of IHS. “Clearly, the sourcing of accurate data is invaluable in planning, negotiating and contracting for the rebuilding of Iraq’s oil infrastructure...

“In 2007, the Iraqi government is expected to launch a bid round for 65 exploration blocks and 78 fields are also to be offered for development,” Mobed added. “The Iraq Atlas will help companies evaluate these blocks and fields quickly and accurately.”

The IHS Energy study confirms the standard Iraq reserves number of 115 billion barrels, and "estimates that there could potentially be another 100 billion barrels of oil in the Western Desert of Iraq." The atlas' release now neatly coincides with Western pressure on Prime Minister Nouri Al-Maliki's government to pass the oil law. In February, 2007, the New York Times set the stage in Iraqi Sunni Lands Show New Oil and Gas Promise, stating that such estimates are "likely to have significant political effects: the lack of natural resources in the central and western regions where Sunnis hold sway has fed their disenchantment with the nation they once ruled." The Times concedes that E&P in western Iraq is many years away. The timing of the IHS Energy report is curious — the prospectivity of the western desert has long been known, and has been derisively labeled the Holy Grail of the oil industry.

A complete list of the reasons why the prospects for increased Iraqi production are dim would fill a long book. Here is a summary of two of the complex problems in the north —

  • The Kurdish area does not yet include the ethnically diverse city of Kirkuk, but the regional government will likely assume control there after the referendum scheduled in December, 2007. A victory by the Kurdish factions will insure control of the Kirkuk oil field. However, exporting Kurdish oil is difficult. UPI's Energy Watch reports
    A pipeline from Kirkuk to Ceyhan, Turkey, is attacked so often when it dips into Sunni areas it's considered inoperable. (Royal Dutch Shell, in partnership with the state-owned Turkish Petroleum Corp., wants to build another more direct pipeline.)

    Almost all Iraqi exports come from the Basra area in the south. Kurdistan is landlocked (see the graphic above). With its main export pipeline out of service, the Financial Times (Iraq’s Kurds to go it alone on oil deals) tells us how the Tawke oil will be transported —

    DNO, the Norwegian oil company that has signed one of the five existing contracts with the Kurdish government, expects to produce the first new oil out of Kurdistan, and for that matter Iraq, in May. It has provisions to truck as much as 10,000 barrels a day, but even 20,000-25,000 b/d would be possible, though logistically difficult and about 10 times more expensive than moving the oil by pipeline.

    Turkish cooperation in exporting Kurdish oil is uncertain. Turkey opposes an independent Kurdistan and the annexation of Kirkuk.

  • Iraq's northern oil fields are old and damaged. The supergiant Kirkuk field, where production began in 1927, has a high water cut, which the EIA attributes to overpumping. The forecast recovery factors are dropping. Oil Experts See Long-Term Risks to Iraq Reserves (New York Times reprint, November, 2003) reports that —
    Fadhil Chalabi, a former top Iraqi oil executive now based in London, said Kirkuk's expected recovery rate had dropped to 15 percent from 30 percent. An American oil executive said Iraqi engineers recently told him that they were now expecting recovery rates of 9 percent in Kirkuk...

    Before the American invasion, the Iraqis mistreated the Kirkuk oil field. From the EIA —

  • In addition, some analysts believe that poor reservoir management practices during the Saddam Hussein years --including reinjection of excess fuel oil (as much as 1.5 billion barrels by one estimate), refinery residue, and gas-stripped oil -- may have seriously, even permanently, damaged Kirkuk. Among other problems, fuel oil reinjection has increased oil viscosity at Kirkuk, making it more difficult and expensive to get the oil out of the ground.

    Shell is now studying the state of Kirkuk to determine what the level of damage is and how production there might be increased.

It seems an obvious point to make: Iraq will not contribute much new oil to the world's supply for many years, or perhaps decades, to come — Iraq is a failed state. This divided nation could have been the 3rd or 4th largest oil supplier in the world. They could have been a contender. Geopolitical conflicts such as those in Iraq or Nigeria are one kind aboveground risk threatening the future oil supply. Such factors, along with geologically determined production declines, conspire to accelerate the timing of peak oil.

Would the timing of the peak be delayed if Iraq were a "golden land of opportunity and adventure" for foreign oil companies? Perhaps, but there is no meaningful answer to a counterfactual question which posits a world in which peace breaks out, not the one we live in. Oil is the lifeblood of the world's economies, so people fight over it. Tight oil supplies and huge oil revenues exacerbate the conflicts. Any possible human world would contain geopolitical disruptions of the oil supply.

Debates about the details of the draft oil law, and reports about Iraq's prospectivity, fail to acknowledge the chaos in Iraq. Policy makers, analysts, and media should present a realistic assessment of future Iraqi oil production to the public.

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