FROM THE ECONOMIST INTELLIGENCE UNIT
With one of Iraq’s senior leaders on the run, political tensions are running high. Will a worsening political climate and other problems undermine progress in the country’s oil sector?
The dominant narrative of Iraq’s oil industry in the past few years has been a positive one. Improved security has given foreign oil companies the confidence to funnel significant resources into Iraq through government service-contracts. The fourth round of bidding for these since 2009 will take place on May 30th-31st, as Iraq pursues ambitious oil output targets. It wants to produce 12m barrels/day (b/d) by 2017, up from around 2.7m b/d last year. (This includes only production at fields in the south of the country, not that of the autonomous Kurdistan Regional Government (KRG) in the north.)
Also slotting into place is the infrastructure needed to bring millions more barrels of Iraqi oil to overseas markets. Notably, Basrah port’s oil-export capacity will jump by 900,000 b/d with the opening of a new “single point mooring” (SPM) terminal that will allow tankers to load and offload oil. This is expected in mid-February, following a delay. Two further SPMs are due to come online later this year, raising export capacity from the country’s southern oilfields, currently about 1.7m b/d, by 2.7m b/d. Abdul Karim al-Luaibi, the oil minister, says that these developments and production increases will allow Iraq to boost exports by as much as 400,000 b/d by March. Yet a rise in political instability threatens to make conditions for oil companies in Iraq more problematic.
Pulling out
In mid-December, Iraq’s judiciary served one of the most prominent Sunni Arab leaders, vice-president, Tareq al-Hashemi, with an arrest warrant. The charge, which he denies, was directing hit squads to target rival political leaders. Mr Hashemi promptly fled to the KRG enclave, where he remains under the protection of the KRG leadership.
The move against Mr Hashemi, which coincided with the final withdrawal of US troops from Iraq, has raised fears that the president, Nouri al-Maliki, is bent on amassing power for his Shia-dominated Dawa party. Even nominal allies are worried. Many in Iraq fret that the attempted arrest of such a senior Sunni politician augurs further sectarian conflict. Recent efforts by three Sunni-majority provinces to become autonomous regions underscore the risks; violence has spiked since the American pull-out.
Despite massive investment in security, oil infrastructure also remains vulnerable to attack. On January 12th, militants damaged an installation used by Angola’s Sonangol, near Mosul, the capital of the restive Ninawa governorate. Sonangol is developing two fields in the area, Najmah and Qaiyarah, with a combined production target of 230,000 b/d.
Some companies working in Iraq appear to be getting the jitters. Iraqi oil officials said last week that a deal under which Norway’s Statoil would dispose of its 19% share of the Lukoil-led West Qurna phase 2 oilfield was in its “final stages”. The joint venture has targeted initial production of 400,000 b/d by 2013, eventually rising to 1.8m b/d.
On top of these political and security risks, some oil firms that have signed contracts with Baghdad are reportedly troubled by more mundane aspects of doing business in the country. Red tape and the slow-moving bureaucracy attract fewer headlines than bombings and assassinations, but are nonetheless off-putting. ExxonMobil, which signed a controversial six-block deal with the KRG to explore in Kurdish areas in October, is understood to be particularly frustrated with tardy payments for work at its West Qurna phase 1 field. Some wonder whether the hold-up is politically motivated: Baghdad does not recognise the Kurds’ right to award oil licenses and has threatened to kick Exxon out of West Qurna phase 1 and replace it with Royal Dutch Shell.
A law unto itself
Then there is the protracted quest for an oil law to set a framework for the industry. A first draft was submitted to parliament in 2007, but legislation is bogged down in political disagreements. Hopes rose recently that the hydrocarbons law would be passed in February, but appear to have faded. Mr Maliki’s top adviser, Thamir Ghadhban, on February 2nd dampened expectations. “I am not optimistic that the energy law will be adopted in the coming months and I would be happy if it is adopted by the end of the year,” he said.
Differences over the proposed hydrocarbons legislation remain in five areas, according to a member of parliament who sits on the legislature's oil and energy committee. They concern the agency that will oversee Iraq’s oil and gas sector; the responsibilities and composition of a Federal Oil and Gas Council; the role of the Ministry of Oil; contractual and licensing procedures for foreign oil companies; and how to resolve the differences between the KRG and Baghdad over contracts already signed with foreign operators in the north. It is an imposing list.
Silver lining?
While Mr Maliki’s attention is elsewhere and the Baghdad government is mired in chaos, the KRG is forging ahead with deals like that with Exxon. It wants to raise oil production within its borders to 200,000 b/d this year and 1m b/d by 2015.
To do so, KRG officials want to whittle down a minnow-dominated roster of oil companies to a smaller group of stronger, better-capitalised players. With virtually all of the KRG’s oilfield blocks parcelled out among several dozen operators, the time seems ripe for larger firms to begin bolstering their presence. UK-listed Genel Energy, for instance, announced in mid-January that it is taking over the entire foreign interest in the Chia Surkh block. The KRG oil sector appears to be due for a surge in mergers and acquisitions that will deepen the involvement of big players—a development that could further antagonise Baghdad.
Kurdistan’s independent approach to promoting its oil industry has strained relations with Baghdad and appeared to put back progress towards an oil law. Yet, ironically, it is possible that the KRG-Exxon deal could be just what is needed to force a way through the impasse. Given that MR Maliki is fighting battles on more than one front, he could be willing to forgo his deputy and hardline stalwart on the Exxon issue, Hussein al-Shahristani, and agree terms on a law that recognises deals already signed by the KRG. An outcome along these lines would mark a happy turn in the Iraqi oil story.
