Iraq retains major oil, gas potential amid challenges, AC forum told

Feb. 26, 2018
Iraq's oil and gas potential remains considerable despite a wide range of challenges the country faces, speakers agreed at an Atlantic Council forum for the US launch of a new report.

Iraq's oil and gas potential remains considerable despite a wide range of challenges the country faces, speakers agreed at an Atlantic Council forum for the US launch of a new report. "With the exception of the US, Iraq mounted the biggest production increases of any producer in the world between 2011 and 2016, which is a pretty significant achievement," said the report's author, Ellen Scholl, deputy director at the AC's Global Energy Center.

"That said, when you start distinguishing between capacity and actual production, I think things get a bit more difficult. Some of the reasons have to do with Iraq, some are reasons related to global markets," she said.

Under the Organization of Petroleum Exporting Countries' current production curtailments, Iraq, which the International Energy Agency forecast in 2012 could reach 5-6 million b/d of production, will be limited to a 4.35 million b/d limit through yearend, Scholl said. Continued production growth of oil from tight shales and talk of peak oil demand also are factors, she said during the Feb. 13 discussion.

Former US Ambassador Frederic C. Hof, the event's moderator who also directs the AC's Rafik Hariri Center for the Middle East, said that Scholl's report goes beyond many others because it also considers Iraq's natural gas potential. Fully realizing that will depend heavily on reducing the flaring of production associated with crude oil, he observed.

"While Iraq has made commitments to reduce this to various global initiatives, the flaring has risen along with oil production in recent years," said Scholl. "There obviously are economic opportunities in reducing flaring. I think the World Bank puts the loss at around 2.5 bcf, a volume which could help Iraq meet its domestic power needs."

Incentives, markets needed

Iraq's huge opportunity to reduce flaring will involve providing incentives for companies that are operating the major fields to actually capture and monetize that associated gas, Scholl said. "The other question is where that gas is going to go. If it is to be used domestically, the market will need to be developed. If it is to be exported, that's another entire set of questions about both authority and infrastructure," she said.

Luay Al-Khatteeb, founding director of the Iraq Energy Institute in London and a nonresident senior fellow at Columbia University's Center for Global Energy Policy in New York, said there is greater potential for Iraq's gas to develop a petrochemical industry that would not only meet local demand, but also make the country a regional petrochemical player.

But Iraq will have to resolve a wide range of political, social, and economic challenge before it begins to realize its oil and gas potential, a third speaker emphasized. "New investors obviously would not be interested in projects in a politically unstable country. Probably, the next threat to Iraq's stability will not be coming from another jihadi insurgency like ISIS, but from socioeconomic complaints and grievances," said Harith Hasan Al-Qarawee, a nonresident senior fellow at the AC's Rafik Hariri Center for the Middle East.

About half of Iraq's population is under 24 years old, and hundreds of thousands of these youths find fewer opportunities when they enter the job market each year because crude oil prices have dropped, Al-Qarawee said. This has led to protests both in Baghdad and in Erbil, the seat of the Kurdish regional government, he said.

"There's some sense of optimism after the defeat of ISIS and liberation of areas that it controlled. ISIS is weaker than it's been since any time after 2014, partly because there are other unstable forces in the region," he said.

Violent nonstate actors

The rise of armed nonstate actors, such as paramilitary, militia, and organized criminal groups, also is a growing threat, Al-Qarawee said. "For stability, you need a state strong enough to defy illegitimate violence," he said. "In areas of Iraq where there are significant oil operations, there are many tribal armed groups which use or threaten to use violence against companies. Others simply try simply to get jobs for their people. There are informal economies that can make developing fields and infrastructure very difficult."

Responding to Hof's question about disputes between Iraq's federal government in Baghdad and the Kurdistan regional government in Erbil, Scholl said both sides will need to address the current investment climate for oil and gas and the need to create more certainty. "One way to do that is to resolve this overhanging question of resource management. Revenue-sharing might be a way to do that," she said. "There any number of cases where a line could be drawn between unresolved issues and a brief production stay-say, in Chevron's case-that started its operations in Kurdistan in January but taking a pause between October and January."

Iraq's investment certainty would be helped by the presence of a national hydrocarbons law, Scholl said. "If companies are reducing their upstream investment and making those decisions in part based on payback time and in part on political risk, and if there are still questions about the political and legal dynamics and about payments, something we saw between 2014 and last year, that doesn't bode well despite Iraq's incredibly low-cost production," Scholl said.

"First of all, we have to make it clear that a fractured, broken Kurdistan region is no good for Iraq. It has to be stable," said Al-Khatteeb. "At the same time, a fractured, unstable federal Iraq will be no good for the stability and future of Kurdistan."

'Only about 20 years'

Al-Khatteeb suggested that if Iraq is to move forward, it will need to do so with resolve instead of desperation for cash it needs immediately. "Time is not on the side of oil producing countries. Technology is evolving by the day. New sources are contributing to the energy mix from all over the world. Economies in the future will reshape borders between countries, not geopolitics. These will be the common interest, and we only have about 20 years to invest every single resource for rebuilding Iraq," he warned.

Without taking a long view and adopting the correct policies, Iraq won't have an economic and energy policy that takes its state-building seriously instead of resorting to short-term political deals that collapse in a few days or weeks, Al-Khatteeb said, adding that this could lead to further fragmentation.

"A lot needs to be done," said Al-Qarawee. "At the same time, when we talk about federalism and decentralization, especially when it comes to energy, we should also be careful in a country that is highly dependent on oil and gets about 90% of its revenue from oil. There is a risk of making a system more problematic if you fail to decentralize authority over energy."

Al-Qarawee said most oil-dependent countries have a centralized management system that requires accountability and transparency to limit corruption. "A problem in the Iraqi constitution framework that was formed after 2003 was that it was formed with very little consideration for the nature of Iraq's economy. Institutions are supposed to be decentralized under a constitution that is centralized," he said. "The idea that Baghdad gets everything and then distributes it to the states is very primitive. There's inconsistency between the nature of Iraq's economy and its institutions."

One idea circulating in the past year has been to establish a council to develop an energy strategy that includes implementation of new contracts and investments, Al-Qarawee said. It would be headed by the prime minister and include representatives of the regions and producing provinces, and ultimately be accountable to Iraq's parliament. "This council will also have to avoid the very dysfunctional system of the Iraqi bureaucracy which makes investors complain about the many cycles that make it difficult to work there," he said.