Oil in a week - Iraq: Increasing Oil Production Capacity to 10 million Barrels per Day

Iraq is planning to increase its production capacity to approximately six million barrels per day within 80 months, following the singing of service contracts with a number of major international oil companies. This is in addition to the other agreements which are expected to be reached by next December, whereby Iraq’s production capacity may be increased to reach around 10 million barrels per day at the end of the next decade, compared to 2.5 million barrels per day at present. The overall cost that will be borne by the international companies investing in developing the Iraqi oil fields will amount to about one hundred billion dollars. Needless to say, these agreements are considered to be a historic event (both economically and politically), not only for Iraq, but also for the oil industry itself in the Middle East, and for the global oil industry.

Service contracts were thus agreed upon with international oil companies, but not concession agreements (which means that these companies will not have stakes in Iraq’s oil like in concession contracts or production sharing agreements, but that instead, these companies will work in return for a fee of around two dollars for each additional barrel, while giving 35 percent of their profits to the finance ministry, in addition to 25 percent to their Iraqi partner, i.e. the National Oil Company.) The oil fields associated with these contracts are mostly in the South of Iraq, including Rumaila, West Qurna, Nasiriyah, Majnoon, al-Zubayr, Halfaya, al-Gharraf and east Baghdad. As for the companies involved in the agreements so far, they are: BP, Shell, the Chinese National Petroleum Company, ExxonMobil and ENI. It is noteworthy to mention here that this move represents the first return of foreign oil companies to the country since the nationalization in the seventies, and six years after the occupation of Iraq.

Of course, it is expected that these companies will face some obstacles and delays as a result of terrorist attacks against their employees and sabotage against its installations. Also, the need arises to increase export capacity that can accommodate the ensuing increase in production, in addition to attracting a sufficient number of professionals and technicians to work in Iraq under the current circumstances, and procuring the necessary machinery and equipment on time. Despite all these potential obstacles, the delays in these projects are not expected to be significant, since similar experiences in other oil producing countries have shown that such delays only cost a relatively limited and not long amount of time.

If we take into account the lack of consensus in the country regarding the return of international oil companies, there remains the possibility of a radical change taking place in the political process, whereby power falls in the hands of political parties that consider it more expedient that national oil companies develop the country’s production capacity, instead of foreign companies. This may possibly be implemented by drafting new legislation or by pressuring and restraining international oil companies, similar to what had previously happened in Russia under Putin, or in Venezuela under Chavez.

There are, without a doubt, many positive and negative impacts for the augmentation of Iraq’s production capacity to this record level, and which will ultimately place Iraq in the same production levels of Saudi Arabia, Russia and the United States, the top three oil producing countries in the world today:

First, the return of foreign oil companies in Iraq has coincided with the occupation. The association between these two will thus remain fresh in the mind of the Iraqi public, regardless of the huge additional financial resources which Iraq will incur, especially in light of the political pressures and bargains which took place at the highest levels, in order to award those contracts to this or that company.

Secondly, there is the problem of the flagrant corruption beleaguering the country, and which will have an impact on the increase in financial revenues. Moreover, there is also the problem of an expanding bureaucracy throughout the ministries, especially given the pressures of the sectarian quota system; here, it may be again resorted to the “Development Council” which was established in the early fifties, and which was administratively separate from the traditional branches of government, and which was not affiliated with any particular ministry. Most importantly, a very high percentage of oil revenues was placed at the disposal of this council, in lieu of the public operational budget. The council thus managed in only one decade to accomplish a number of very important infrastructure projects in the country, away from the bureaucracy plaguing the ministries.

Thirdly, the importance of the Iraqi National Oil Company being given a key role in the partnership with foreign companies is thus highlighted, and more importantly, the reinstatement of the national petroleum cadre after a campaign of dismissal and exclusion against it for this or that reason, not to mention the training of a new cadre that bears the new responsibilities.

Fourthly, questions arise such as how will Iraq’s production policy be drafted? What will the objectives of such a policy be? Will they include the coordination with the rest of the members in OPEC, or will it be centred on setting production at full capacity, whenever it becomes available, regardless of the interest in price levels? Finally, how will the needs of national economy and those of the production policy be reconciled?

*. Mr. Khadduri is an energy expert