Iraq’s Oil Boom: Pie in the Sky or a Cautionary Tale

 

Iraq can become Saudi Arabia of today in terms of size the economy and wealth in the next couple of decades, if it develops its hydrocarbon potential. Those were the words of Fatih Birol, chief economist with the International Energy Agency (IEA), who presented the agency’s new “Iraq Energy Outlook” report at the Center for Strategic and International Studies on October 22, 2012. Iraq has been steadily increasing its oil production, now ranking as the second-biggest producer after Saudi Arabia. According to an Iraqi oil official, “oil exports were expected to rise above 2.8 million barrels per day (mbpd) this month [October 2012] with shipments on the rise from both the north and south of the country. Exports of 2.6 mbpd in September were already the highest in more than 30 years.” IEA’s central scenario predicts that oil output in Iraq would increase to over 6 mbpd in 2020 and reach 8.3 mbpd by 2035, largely driven by developments of super giant fields in the south.

Although cautiously optimistic about Iraq’s ability to fulfill its oil potential, given its currently dire political, security and economic challenges, Fatih Birol predicts that this Middle Eastern country will account for nearly 45 percent of the growth in global oil production between 2011 and 2035, if it does it right. The rest of the members of the Organization of Petroleum Exporting Countries (OPEC) will provide 42 percent, with non-OPEC nations filling about 12 percent of global oil production. According to Birol, Iraq is set to play a crucial role in global oil markets, even with conservative estimates about its oil production.

Meanwhile, Iraq’s Kurdish autonomous began selling its oil to global markets this month through independent export deals with two of the world’s major trading houses, Trafigura and Vitol. This move presents a further challenge to the central government’s attempt to exert its full authority on trading oil and gas in the country. With little leverage on the trading houses because of its own dependence on them to import refined oil products, Baghdad is basically powerless to rein in on them or on Kurdish trading. Kurdistan’s latest move drives a wedge to the already tense relations with Baghdad, after they recently survived a major dispute over payments for oil exports.

In Fatih Birol’s view, political consensus on oil governance and legal framework, such as the long-awaited hydrocarbon law, speed and coordination of investment along the supply chain, Iraq’s long-term oil and natural gas strategy as well as international market conditions would be determinants of the country’s pace of oil and gas development. It appears that without addressing the Kurdish question in the short to medium term, production of oil and gas in Iraq will be uneven and chaotic. What is worse, Baghdad could find itself in a potential real clash with the north if it keeps ignoring de facto energy deals of the Kurds with foreign companies and does not work out a mutually beneficial deal with the autonomous region.