Monday, March 22, 2010

Analysts Say Impossible For Iraq To Reach Oil Production Goals

After Iraq successfully completed its second round of oil bids with international companies in December 2009, Iraqi officials were quick to announce a huge increase in production would occur in just a few years, which would help remedy Iraq’s problems. Oil Ministry Hussain al-Shahristani for example, said that Iraq could produce up to 12 million barrels a day in six years. Prime Minister Nouri al-Maliki claimed that the new oil revenue would pay for Iraq’s reconstruction and debts. While the new petroleum contracts promised 13.23 million barrels a day in capacity, which would make Iraq the largest oil producer in the world, experts do not think that this is possible.

Various analyses of Iraq’s current oil industry show that a huge influx of money from the new oil deals will result in a more modest increase in production than what the Oil Minister and others talked about. The World Bank for example, estimates that Iraq needs $1 billion in investment just to maintain its current production of around 2.4 million barrels a day because its ports, pipelines, etc. are so old and decrepit. To upgrade to 5 million barrels a day would cost as much as $30 billion over the next eight years. Observers think it’s just not physically and financially possible for Iraq to reach 10-12 million barrels a day in six years. Saudi Arabia for example, which has the capacity to produce that much, has spent the last 75 years developing its industry to achieve that level at the cost of hundreds of billions of dollars. That has occurred with a stable government, a unified oil strategy, no wars, and a working bureaucracy, all things that Iraq lacks.

Oil experts think that the Oil Minister and Prime Minister’s statements were political in nature, rather than about what Iraq is actually capable of achieving. That would be understandable since the first bidding round held in June 2009 was considered a failure when only one contract was agreed to. The second round garnered seven deals, and the government considered it a sign that Iraq was returning to its once prominent status in the world oil market after thirty years of war and sanctions.

Many believe that the major impact of the new oil deals inked by Baghdad will be the updating and modernization of the country’s aging and deteriorating infrastructure rather than a revolution in the industry.  Iraq’s petroleum sector has suffered from decades of neglect because it couldn’t improve on its facilities due to the Iran-Iraq War, the Gulf War, the resulting United Nations sanctions, and then the aftermath of the U.S. invasion in 2003, which included insurgent attacks upon pipelines. Iraq lacks the capacity as well to increase production much above what it is currently making. Hopefully the foreign companies will be able to repair equipment and provide a more modest increase in output in the coming years than what the government has been talking about. This will help improve services and perhaps development as well since Iraq has a state-run economy that depends upon oil for over 80% of its funds.

SOURCES

Aswat al-Iraq, “Oil revenues optimization would solve Iraq’s problems – Maliki,” 2/28/10

BBC, “Iraq oil capacity ‘to reach 12m barrels per day,’” 12/12/09

Gerson Lehrman Group, “Iraq’s Oil Infrastructure Defies Political Rhetoric,” 3/19/10

Shekhar, Shashank, “Iraq unlikely to meet oil target,” Emirates Business, 3/4/10

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