Thursday, May 3, 2012

Iraq’s Critical Juncture

Iraq is torn by its own contradictions again. For the first time since 1989 it is enjoying the highest level of oil production and exports, which averaged 2.51 million barrels per day (mbpd) in April 2012 with $8.8 billion in revenue, according to the Iraqi State Oil Marketing Organization. It anticipates oil exports to go up to 2.75 mbpd by the end of 2012.  Relying on oil exports for 95 percent of its income, petrodollars are important for this war ravaged country’s reconstruction efforts.  Iraq’s oil boom also helped make up the loss of the Iranian oil, as the West began tightening its sanctions on the latter. In fact, the major boost in OPEC oil supplies were from Iraq in April 2012.  As the country prepares for its fourth energy licensing auction to be held May 30-21 in Baghdad, it is bullish about becoming “the world’s biggest source of new oil supplies over the next few years,” particularly when one of its largest oil fields, West Qurna-2, comes online.

But there is a good chance that Iraq’s internal problems may hijack its growing role in the oil market.  Recent tensions between the country’s central government and the Kurdish regional administration exhibit signs of a brewing conflict that necessitate a comprehensive solution to the management of Iraq’s oil wealth and binding legal measures before it is too late.  Efforts of the Kurds to sign contracts with foreign oil companies and to sell oil and gas without Baghdad’s authorization have led to the central government’s hard line to foreign firms operating in Kurdistan, including denial of a bidding opportunity to ExxonMobil in the next round of licensing auctions.  Exchange of accusations of corruption, greed, fraud and illegal oil smuggling between the Kurds and the central government signals a potential conflict, which may activate secessionist attitudes of the Kurds as well as drive a wedge between delicate sectarian and ethnic relations. 

In this context, the influence of neighboring Iran, which is suffering from sanctions over its reported nuclear ambitions, on Iraq’s mostly Shi’a population is likely to grow given its vested interests in weak Iraq.  Adding public discontent to the mix due to the lack of security and dire living conditions in view of growing oil revenues may be another source of tensions.  Iraq appears to be at a crucial point in its petroleum production when it should heed the advice of one of its oilman who has been behind Norway’s oil success – exploit energy sources slowly to avoid resource curse and build institutions, transparency, and legislation to insure against it. 

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