Seven years after the invasion of Iraq, the country’s oil industry at last looks as if it will get back on to its feet, albeit with foreign companies doing much of the legwork.

But with insurgent attacks on pipelines and with a shaky government to support it, will the price foreign companies pay to pump oil out of Iraq be too high to pay?

High stakes

Iraq has the third-largest oil reserves in the world and has historically been the second-biggest global producer of oil. After dipping to zero during the invasion, oil production has risen in fits and starts back to around 2.5 million barrels a day, more or less pre-invasion levels. Boasting 73 oil fields, including six "giant super fields", which each produce five million barrels of oil a day, and 22-23 "giant fields", which produce a million barrels a day, Iraq has the potential to overtake neighbour Saudi Arabia as the world’s biggest oil producer.

The country’s oil reserve source may be even richer than expected if fields in the Western Desert region yield additional resources.

“Will the price foreign companies pay to pump oil out of Iraq be too high to pay?”

Last year, after years of opposition, Iraqi President Nouri al-Maliki pushed through a series of oil field auctions, with the intention of opening up the country’s biggest resource to companies with the money to extract it.

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By GlobalData

International oil majors jumped at the chance to bid for production rights to Iraq’s oil fields. Following an inconclusive general election in March 2010, the government opened up an auction for 11 oil fields, inviting foreign investors to partner with local companies to reinvigorate the industry.

The bidding rounds saw companies awarded 20-year service contracts worth $150bn and $200bn for fields in the north and south of the country. Occidental Petroleum Eni, and Korean Gas Corp were granted contracts for the Zubair oil field, Rumaila was won by BP and the Chinese National Petroleum Corp and West Qurna phase 1 by ExxonMobil and Royal Dutch Shell.

Viewed broadly as a success, Oil Minister Hussain Al-Shahristani’s auction was the first Baghdad has held in decades. Seen as a new beginning for the Iraqi oil industry, the auction has secured private foreign investment in the redevelopment of the industry in what remains a very dangerous country.

Security problems

Iraq’s oil infrastructure has become a prime target for insurgent attacks. The pipeline that exports Iraqi oil to neighbouring Turkey and Syria has been bombed numerous times over the past six months, leading to the ramping up of the oil industry’s special police force. The cultural value of the land around the towering rigs could also pose a problem to foreign firms operating in the country as tribal leaders demand recompense for the loss of ancestral grounds. The land around the wells is also used for farming by local Iraqis. Agriculture makes up less than 10% of Iraq’s GDP but provides over 20% of the country’s jobs.

While government threats to send in the army may have put a temporary halt to attacks, tensions remain high. Oil may be Iraq’s biggest cash crop, but the industry is notorious for providing jobs to only a tiny body of employees relative to the profits it makes, and those jobs that it does provide are for highly skilled professionals. Iraqis, lacking the skill sets desired by the Western oil giants moving into their land, are unlikely to benefit from jobs in the oil sector any time soon.

Jumping the hurdles

An oil law was submitted to Iraq’s parliament in 2007 looking to clearly define how revenue from Iraq’s vast oil reserves would be split.

The thinking behind the bill was to give some kind of equity to the country’s Shi’ite, Sunni and Kurdish populations. The Kurdish Regional Government however, began signing its own contracts with foreign companies including the Perenco SA, American Hunt Oil Co and the Canadian Heritage Oil Corp. In response, Baghdad threatened to declare the deals illegal and launched its own tenders for contracts.

“Iraq has the third-largest oil reserves in the world and has historically been the second-biggest global producer of oil.”

Arburthnot Securities oil and gas analyst Dougie Youngson believes this year has seen the first significant uptick in activity since the invasion. "Elections this year have influenced the recent upsurge of interest in Iraq’s gold fields quite significantly. Kurdistan has massive oil reserves and a security situation that is about a million times better than that of Iraq."

The wrangling over the legality of regional contracts continues to plague foreign companies operating in the region. Just this week, the Kurdish Regional Government announced a deal signed with Germany’s RWE, a utilities company, to export natural gas from northern Iraq to Europe.

"Iraq is exclusively exporting crude oil and gas through the State Oil Marketing Organisation (SOMO) and there is no other side authorised to sign contracts with local and international companies regarding this issue," the Iraqi Oil Ministry said in a statement condemning the deal.

Iraq’s continuing inability to draw clear lines as to where federal and regional power lines lie in terms of governing the country’s natural resources makes the legality of contracts signed with international companies debatable.

"Post invasion the majority of international oil companies were awarded government contracts by the Kurdish Government and now what we are seeing is a conflict over the validity of these contracts," said Youngson. "Investors either believe that these contracts are fine or that they are not valid. In reality it is a lot more complicated than that. I would say that this year has seen the first significant uptick in activity in the oil industry in Iraq since the invasion. I imagine it is only going to get more complicated from here on in."

With no firm government in Iraq to uphold the very frail laws that exist to protect its interests, the likes of BP, Exxon and Petronas can only hope that their gamble pays off and that extracting the oil from Iraq proves easier than setting up a democracy in the country.