Analyst On Iraq’s Oil Plans: Don’t Expect Much Until A New Oil Law Is Passed

The following commentary originally appeared in Musings On Iraq

The public radio show Living On Earth recently interviewed Peter Zeihan, the director of analysis at Stratfor, an on-line intelligence and foreign policy research group, on Iraq’s oil plans. This comes on the eve of an initiative to open up long-term oil contracts by Iraq’s Oil Ministry. Zeihan said that until Iraq passes a new oil law, nothing major much would come of this policy.

Iraq has great potential when it comes to oil. Currently it has 115 billion barrels of known oil deposits. Analysts believe it might have up to 300 billion if sites in the west and north are explored. That would not only give Iraq a quarter of the known reserves, but it would posses the largest deposits in the world. The Stratfor analyst Zeihan noted that most of Iraq’s oil is also in the South, which gives it easy access to the Persian Gulf, and would mean low investment costs to increase its output.

Iraq wants to exploit these reserves and boost its production. Currently, Iraq produces around 2.4 million barrels a day, but the Oil Ministry wants to increase that to 4.5 million. As reported earlier, Oil Minister Hussein al-Shahristani had a two-part plan to sign deals with major international oil companies to achieve this. The first half, signing consulting agreements, was scrapped recently, so the minister is moving ahead with the second part. That will begin Monday, October 13, when the Oil Minister is scheduled to meet with executives from major petroleum companies in London to discuss long-term oil contracts. Zeihan said that while Iraq has the infrastructure and know how to exploit its existing oil fields, it needs new investment to reach its potential, and open up the suspected reserves in the north and west.

The problem is that the major groups in Iraq, the Shiites, Sunnis, and Kurds, can’t agree on a new oil law. They have to come up with a plan to share the profits. Until then, it is illegal for foreign companies to operate in Iraq on major projects. Oil Minister Shahristani’s meeting with oil companies then, is a way to get around the lack of legislation, but all companies can do now is surface work. That’s not what they want. They want to invest large amounts to boost production so they can make major profits, and that requires a new oil law. The analyst noted that Iraq has had these types of meetings before, but nothing really happened afterwards. In fact, Zeihan warned that corruption could be the result. Iraq wants to create relationships with petroleum companies for when a new law is passed. Until then, he suspected that Iraqi officials would be asking for bribes from corporations who will be looking for an edge once parliament agrees on legislation.

The analyst’s comments continue to place a cloud over Iraq’s oil plans. The Oil Ministry already failed in the first part of its program. It is now moving ahead with oil deals even though there is no law to regulate them. The London meeting is in fact, extra-legal, and any deals made could be invalidated later. The fact that the Kurds, and the rest of Iraq’s political parties have fundamental differences over the exploitation of its resources makes passage of a petroleum law anytime soon highly questionable. That means the Oil Minister will have to continue to make haphazard moves until then, and that opens up more opportunities for corruption, which is endemic throughout the government.

SOURCES
Living On Earth, “Raising Iraq Oil,” 10/10/08
Smith, Grant, “Iraq to Favor National Oil Companies in Bid Round, Analyst Says,” Bloomberg, 10/10/08