Oil accounts for nearly 85% of Iraq's GDP but so far drillers have merely scratched the surface of the country's vast reserves. With only 15 of Iraq's 74 discovered and evaluated oil fields developed, the government has thrown open the doors to foreign investors in a bid to garner enough funds to rebuild the war-ravaged country.
International firms have been jockeying for years to get their hands on Iraqi oil and in February the government announced that over 70 companies had registered to compete for tenders to develop the country's reserves. Royal Dutch Shell, Total, Repsol YPF, ConocoPhillips, BP and StatoilHydro were all said to be amongst the runners and riders.
"We are going to carefully study and check the documentation," Iraq oil ministry spokesman Asim Jihad said as the registration deadline for tenders passed. "In March we will declare which companies are permitted to work in the Iraqi oil fields."
However, a bitter internal dispute surrounding a proposed oil law and ongoing security fears threaten to stop foreign investment plans in their tracks. Can the problems be surmounted? When? And who will win the contracts?
IRAQI OIL RESERVES
Iraq has the third-largest conventional oil reserve in the world. Proven reserves are pegged at 115 billion barrels and there is an estimated 45 to 100 billion barrels of recoverable oil in unexplored Iraqi territory. With current production hitting 2.4 million barrels a day, there's a lot of black gold yet to be mined.
"Most people would agree that Iraq has the third-largest oil reserves in the world," says Samuel Ciszuk, Middle East and North Africa energy analyst at Global Insight. "Some estimates suggest there is enough potential oil in the western desert to take the total above 200 billion barrels, although this speculation may have a political motive to get the Sunnis, who manage that region, to lay down their arms. Either way, Iraq has a lot of oil."
Iraq's oil fields are operated and managed by the state-owned Iraqi National Oil Company (INOC). After years of destruction and degradation caused by lack of investment in the Saddam Hussein years, Iraq's oil industry is in desperate need of investment if it is to begin to realise its enormous potential.
In 2007 an Iraqi minister said up to £75bn in investment would be needed to develop the country's vast untapped reserves. The only way to raise that kind of cash is through foreign investment but there's currently a giant law-related spectre in the way.
An oil law was submitted to parliament in 2007 that sought to clearly define how revenue from Iraq's vast oil reserves would be split internally.
The intention was to give some kind of equity to the country's Shi'ite, Sunni and Kurdish populations. However, the bill is now on its fourth rewrite and there is no sign of an agreement being reached.
Tired of waiting, the Kurdish regional government begun signing its own deals with overseas companies including the American Hunt Oil Co, the Canadian Heritage Oil Corp and the French Perenco SA. In response, Baghdad has threatened to declare the deals illegal and launched its own tenders for contracts, a messy scenario that may put off the major foreign investors they crave.
"The oil law is a prerequisite for foreign investment," says Ciszuk. "You need that framework otherwise what will guarantee ownership of what? Will people own reserves or have stakes in them? Without those kinds of regulations, you can't strike deals. But there's not much pointing in the way of a resolution at the moment. It's completely jammed."
The other great barrier to overseas investment is security. Up to 25% of the price of oil exported from the region is attributed to a security premium, which reflects the frequent attacks on oil installations and workers from insurgents. In the period April 2003 to August 2007 over 800 workers and more than 1,000 pieces of energy infrastructure were attacked.
The Oil Protection Force, which includes Iraqi air force and ground troops, do their best to protect assets but safety fears have contrived to push prices up in the oil industry.
Orhan Duran, general manager of Turkish company Genel Enerji, who operate a field in the Kurdish region of Iraq, said prices were two to three times higher than they would be if the region were stable. Will that put the major companies off investing in the region?
"There's an element of physical security that's so obvious it doesn't really bear discussion at great length," says ExxonMobil corporate vice president Daniel Nelson. "More important is that you have confidence in a system of laws and a system of fiscal stability that's going to be together for not only the six to nine years that it takes from the time you start up working in a venture to the time you have significant production and through that 30-year period you really need to get the
TECHNICAL SUPPORT AGREEMENTS
In the absence of a hard-and-fast oil law, the oil ministry has begun talking to the major international companies about coming to Iraq on a service contract basis, to get the ball rolling and get something going on in the fields. Shell, ExxonMobil, BP and Chevron are already in discussions about entering the country on special Technical Support Agreements (TSAs) on the understanding that these will be converted into major contracts once the law is passed.
"Shell along with other major international oil companies are quite interested in future possibilities in Iraq," says Shell gas and power executive director Linda Cook. "We have stated that we are interested in pursuing those when the conditions are right. Conditions meaning safety and security of our own staff plus making sure that we're doing it in accordance with the laws that would be enacted by the country including the new oil law which has yet to be put through final legislative
It is hoped that the TSAs will pave the way for Iraq to push through its oil law and follow through on its opening of the tender process by offering bigger contracts for the development of some of its prized oil fields.
Presuming the oil law will actually get through at some stage soon, because the Iraqi oil industry will perish without it, who can we expect to see getting the big gigs in Iraq?
"All the majors will be there," says Samuel Ciszuk. "These are some of the biggest oil fields in the world. The Iraqis need the knowledge and expertise of the major companies to develop them. For their part, the majors have wanted to get into Iraq for years. Few places in the world have such potential."
Iraq's crude oil exports averaged 1.63 million barrels a day in 2007, an increase of 9.2% on 2006. By February 2008 production had soared to 2.4 million barrels a day. If they can secure the foreign investment they are targeting they can improve the dilapidated infrastructure and increase production even more, which will give them the funds they need to rebuild the country.
"As long as the violence continues to fall, production will go up," says Samuel Ciszuk. "With the right investment production could raise substantially very quickly. They'd only need to improve the infrastructure and re-drill the wells. But that can't happen without the oil law. Most companies, although eager to get into Iraq, will also want to wait and see what happens when the armies draw back. After an initially optimistic timetable, the signs are that the whole process is going to drag out a bit."