Iraq always has the capacity to disappoint. Despite enormous efforts, production has recovered now to only 2.3m bpd, compared with the 1979 peak of 4m barrels per day (bpd) achieved under Saddam Hussein. Political infighting, the squabble over regional autonomy with the Kurds, and the still difficult security situation have conspired to prevent the country achieving anything near its true resource potential. Just before US forces invaded in 2003, deputy defence secretary Paul Wolfowitz forecast that with US hands on the taps Iraqi oil revenues would be $50bn-$100bn within two or three years, enough to pay for the country's reconstruction without recourse to the US taxpayer. At current prices, Iraqi annual oil revenues are just touching $50bn a year, but that has taken six years to achieve.
But perhaps this shouldn't come as a surprise. Iraq is a country riven with tension. From its formation in 1921, emerging from Ottoman rule as a British protectorate, it was already a melting pot of ethnic divisions between Kurds and Arabs, and religious schism between the majority Shia Muslims and the minority Sunnis. These differences, suppressed under the tyranny of Saddam Hussein, re-emerged with a vengeance after the American-led invasion of 2003. This happened first in a vicious and bloody insurgency, which cost at least 100,000 lives. Later, after elections for a new Iraqi government, it echoed in rivalries between political factions, between ministries, and in a resurgent (and entirely understandable) oil nationalism. Oil, after all, has never been far from the top of the agenda of the powerful throughout the country's turbulent 90-year history. And for the first time in their history, Iraqis are democratically in control of it.
Oil nationalism
That oil nationalism can still be seen at work in the failure of the recent oil field auction, the first in 30 years, and which took place on the same day that US forces handed over control of Iraq's cities to the country's army.
The bidders were a who's who of the most powerful oil firms in the industrialised world, from BP and Exxon to CNOOC of China. The 20-year service contracts on offer would pay the developers a fee for each barrel produced above the minimum output stipulated. However, there was an enormous gulf between the terms envisaged by the Iraqi oil minister Hussain al-Shahristani and what western companies were willing to offer. The price initially requested by oil majors was at least twice and, in a couple of cases, 10 times Iraq's maximum offer. Only one out of eight fields was sold to BP after it agreed to a late cutback in fees to $2 a barrel from the $3.99 it originally wanted.
But, perhaps having set a political line in the sand, Mr al-Shahristani may become more pragmatic. "The minister has now proved he is not making giveaway deals, so it is possible that softer terms will be on offer if a second round of auctions is brought forward (from the end of the year)," notes Mr Ciszuk.
The Kurdish question
That won't be the end of the difficulties, though. The Kurdish regional authorities are objecting to each contract until a broad deal is agreed, which will legalise the contracts it has separately entered into. Parliamentary elections are due in December, and this could once again shake up the delicate political balance. Growing political instability in Iran could easily spin off into the Shia groups, such as those led by Muqtada Al-Sadr, who look to Tehran for their religious guidance, or a renewed insurgency in the most troubled Sunni provinces. The biggest undiscovered reserves are expected to lie in the far west province of Anbar, a fiercely tribal Sunni area in which the American writ rarely ran. No one knows whether huge discoveries there would fan efforts to form a separate Sunni statelet, modelled on Kurdish lines.
So, nothing can be taken for granted, but there remains huge potential. In the run up to the failed bidding round last month, in which only existing producing fields were offered, the Iraqi oil ministry had wanted production to reach 6m bpd in six years' time. Despite the impasse over prices, the oil companies said they could reach 8m bpd.
"If Iraq, even without additional discoveries, could produce 8m bpd in seven years' time, this clearly would alter everything," says Mr Ciszuk. Production at that level would account for almost 10 per cent of global oil output, and that is without counting a single drop of the tens of billions of barrels that lie under the western desert. Despite bloodshed and disappointment, the lure of Iraqi oil remains.
Oil reserves in context
Iraq has the world's third-largest proven oil reserves, at 115bn barrels, but it may turn out to have up to another 100bn barrels depending on how much oil lies underneath the unexplored western desert. US consultants IHS visited 438 undeveloped fields, and used new technologies to come up with updated reserves on existing fields in a groundbreaking 2007 report.
Oil reserves by country
| Country | Reserves | Share | R/P ratio |
|---|---|---|---|
| Saudi Arabia | 264.1 | 21.00% | 66.5 |
| Iran | 137.6 | 10.90% | 86.9 |
| Iraq | 115 | 9.10% | >100 |
| Kuwait | 101.5 | 8.10% | 99.6 |
| Venezuela | 99.4 | 7.90% | >100 |
| United Arab Emirates | 97.8 | 7.80% | 89.7 |
| Russian Federation | 79 | 6.30% | 21.8 |
| Libya | 43.7 | 3.50% | 64.6 |
| Kazakhstan | 39.8 | 3.20% | 70 |
| Nigeria | 36.2 | 2.90% | 45.6 |
As at end-2008. Source: BP Statistical Review of World Energy 2009 | |||
However, getting the oil out of Iraq is much more about political and legal problems than geological or engineering difficulties. Although the country is suffering much less violence than at its peak in 2004, it is easy to be too glib about the terrible toll still endured by the Iraqi people. The Omagh bombing in Ulster in 1998 killed 29. Iraq is still suffering each week one or two bombings that kill at least as many. And while pipeline and installation sabotage is less common, the kidnapping of key staff still remains a threat. Above all, there are many legal and political difficulties. There is still a lack of clarity about who would have the final say on the reconstruction of damaged infrastructure. All of which means that output lags way behind potential.
Oil production by country
| Country | 2008 output (000 barrels/day) |
|---|---|
| Saudi Arabia | 10,846 |
| Russian Federation | 9,886 |
| US | 6,736 |
| Iran | 4,325 |
| China | 3,795 |
| Canada | 3,238 |
| Mexico | 3,157 |
| United Arab Emirates | 2,,980 |
| Kuwait | 2,784 |
| Venezuela | 2,566 |
| Norway | 2,455 |
| Iraq | 2,423 |
| Nigeria | 2,170 |
| Algeria | 1,993 |
| Brazil | 1,899 |
Source: BP Statistical Review of World Energy 2009 | |
Things are perhaps least bureaucratic, but most legally uncertain, in Kurdistan. The Kurdistan Regional Government has had production sharing contracts repudiated by the national government, which has teeth because most fields in the semi-autonomous Kurdish region still need access to national oil pipelines. A few deals, signed before the 2007 mandate for all production agreements to have federal approval, have been allowed to stand. Companies that have deals in Kurdistan have been blacklisted from working in the rest of the country.
Peak oil
If Iraqi production could reach the levels postulated by the oil companies, the notion that we have already passed 'peak oil' would be largely discredited. Peak oil theory refers to the point in time when global oil extraction begins to decline. It is nothing to do with reserves per se, and is not a theory about oil actually running out. The concept was developed by American geologist Dr M King Hubbert, and is based on the agglomeration of observed production characteristics of individual oil wells, which normally grow exponentially from inception until a peak after which decline is fairly rapid. Dr Hubbert turned this geologically observed model into a predictive curve, which is equally applicable to wells, to fields or to global output. The real controversy isn't about whether peak oil exists – it is obvious that there must be some point in time at which this would occur – but whether we are yet there or not, and whether reaching that point would represent a global economic challenge or not. It would be possible to have oil production peak, but with a lower trajectory of economic growth and good progress on energy efficiency and alternative fuels to find that demand peaked, too. The role of price transmission would clearly be key.
Abdullah Jum'ah, chief executive of Saudi Aramco, has been quoted as saying that peak oil will not arise for 100 years, once unconventional sources of oil (such as tar sands) are accounted for. His views are relevant because he is one of the tiny number of top energy executives privy to Saudi Arabia's best kept secret: the real size of its giant Ghawar field, which is alone assumed to have 70bn barrels of oil left. However, the Association for the Study of Peak Oil (www.peakoil.net) asserts that oil output has already peaked. It points to evidence that new oil fields being discovered are smaller, technically harder and much more expensive to access than the giant oil fields of the Middle East, which it presumes are now in decline. Clearly, if the most optimistic estimates for the size of Iraq's undiscovered oil fields are borne out, then, given their relative ease of access, we won't have to worry about peak oil for a long time to come.
