Iraq Ranks As One Of The Worst Countries To Invest In For Oil And Gas In Opinion Poll Of Energy Industry Officials

In June 2012, the Fraser Institute issued its latest report on investment in oil and gas around the world. The paper was based upon a survey of several hundred executives from the hydrocarbon industry. Iraq ranked near the bottom in almost every category. This souring of opinion on Iraq is quite a change as previously energy companies were eager to get into Iraq’s petroleum market since it had been cut off for over a decade by international sanctions. Now that some businesses have gotten a taste of working there they have found it difficult, and concerns about security and political instability are also pressing issues. For those reasons, Iraq ranked in the bottom ten in the opinion poll, which could limit future investment in the country’s oil and gas sector.

For the last few years Canada’s Fraser Institute has been polling executives and managers from oil and oil service companies about how they feel about investing in areas around the world. In June, they released their sixth paper on the topic entitled “Global Petroleum Survey 2012.” It interviewed 623 people from 529 different companies about 147 different countries, territories, and regions. Each place was given a score based upon 18 different factors including fiscal terms, taxes, environmental regulations, enforcement and costs of regulations, trade barriers, infrastructure, labor regulations and availability, political stability, corruption, the legal system, and security. For each topic there were five possible responses: 1. Encourages investment, 2. Is not a deterrent to investment, 3. Is a mild deterrent to investment, 4. Is a strong deterrent to investment, and 5. Would not invest due to this criterion. The more problems the responders had with an area, the lower its ranking. When all the scores were collated, the countries and regions were broken up into different indexes. The point of the survey was to determine which parts of the world were considered the hardest to invest in by people working in the oil and gas industry. That’s important, because their views obviously shape where they do business, and can affect others’ opinions as well. With petroleum dominating Iraq’s economy and budget, how energy executives and managers see it is of utmost importance to its future development.

Worst Ranked In All-Inclusive Composite Index

1. Bolivia

2. Venezuela

3. Iran

4. Russia – Eastern Siberia

5. Libya

6. Ecuador

7. Uzbekistan

8. Argentina – Santa Cruz

9. Iraq

10. Russia - other

Unfortunately for Iraq, it ranked at the bottom of nearly every index compiled by the Fraser Institute. In its composite index, Iraq was 139 out of 147, or ninth worse. That was actually the lowest score the country had received. In 2011 it was 128, in 2010 it was 125, and in 2011 it was 129. Iraq did no better in the more specific indexes. In the geopolitical risk index that covered politics and security for instance, and the regulatory duplication indexes, Iraq was number two in both. In security, it was number three, sixth in political stability, seventh in the fiscal index, tenth in legal system, 11 in the commercial index, 12 in regulations, and 15 in both the uncertainty about administration and regulations and infrastructure indexes. Various reasons were given for those scores, some of which included the lack of clear government regulations, lack of infrastructure, the lack of clear decision making by Baghdad, payment issues, the lack of rule of law, and the service contracts the Oil Ministry issues, which leave little room for growth or profits. Iraq obviously has problems at almost every level of its government and society, and all those came out in the survey.

Worst Ranked Geopolitical Risk Index

1. Syria

2. Iraq

3. Yemen

4. Pakistan

5. South Sudan

6. Bolivia

7. Venezuela

8. Nigeria

9. Libya

10. Papua New Guinea

Worst Ranked Regulatory Duplication Index

1. Russia – Eastern Siberia

2. Iraq

3. Russia – Offshore Sakhalin

4. Venezuela

5. Argentina – Santa Cruz

6. Russia – Other

7. Papua New Guinea

8. Indonesia

9. Nigeria

10. Russia – Offshore Arctic

Worst Ranked Security Index

1. Pakistan

2. Syria

3. Iraq

4. Yemen

5. Nigeria

6. Papua New Guinea

7. South Sudan

8. Venezuela

9. Libya

10. Chad

Worst Ranked Political Stability Index

1. Greece

2. Syria

3. Bolivia

4. Yemen

5. Ukraine

6. Iraq

7. Iran

8. Venezuela

9. South Sudan

10. Libya

Worst Ranked Fiscal Terms Index

1. Venezuela

2. Libya

3. Russia – other

4. Iran

5. Algeria

6. Bolivia

7. Iraq

8. Uzbekistan

9. Kuwait

10. Ecuador

Worst Ranked Legal System Index

1. Russia – Eastern Siberia

2. Russia – Offshore Sakhalin

3. Russia – Offshore Arctic

4. Bolivia

5. Kazakhstan

6. Cambodia

7. Venezuela

8. Republic of Congo

9. Uzbekistan

10. Iraq

Worst Ranked Commercial Index

1. Venezuela

2. Uzbekistan

3. Iran

4. Libya

5. Russia – other

6. Uruguay

7. Cambodia

8. Russia – Eastern Siberia

9. Bolivia

10. Yemen

11. Iraq

Worst Ranked Regulatory Index

1. Venezuela

2. Bolivia

3. Russia – Eastern Siberia

4. Argentina – Santa Cruz

5. Iran

6. Kazakhstan

7. Russia – other

8. Russia – Offshore Sakhalin

9. Ecuador

10. Nigeria

11. Russia – Offshore Arctic

12. Iraq

Worst Ranked Uncertainty Over Administration, Interpretation And Enforcement Of Regulations

1. New Brunswick

2. Iran

3. Argentina – Santa Cruz

4. Venezuela

5. Bolivia

6. Russia – other

7. Russia – Eastern Siberia

8. Argentina – Tierra del Fuego

9. Libya

10. Argentina – Salta

11. Kazakhstan

12. Greece

13. Cambodia

14. Argentina – Chubut

15. Iraq

Worst Ranked Quality Of Infrastructure Index

1. Cambodia

2. Uzbekistan

3. Chad

4. Ethiopia

5. Kenya

6. Madagascar

7. Mali

8. Somaliland

9. Bolivia

10. Bangladesh

11. Mozambique

12. Papua New Guinea

13. South Sudan

14. Uganda

15. Iraq

Those low rankings were due to Iraq consistently scoring badly in the 18 factors included in the poll. One of the categories that it did the worst in was in terms of its legal system where 42% said it was a strong deterrent to investment or they would not invest at all because of it. 42% also said that about Iraq’s fiscal terms, and administration and enforcement of regulations. 44% felt that way about Iraq’s infrastructure, and 47% said that about following best practices. Iraq received the worst scores for regulatory duplication and inconsistencies, 60%, political stability, 64%, and security, 69%. Foreigners working in Iraq have made similar remarks about Iraq’s overall economy. For example, some have complained about contradictory laws and regulations, which hold up doing business. Iraqis feel the same way. A 2009 survey of 120 Iraqi businessmen released by the Center for International Private Enterprise found that the main problems with Iraq’s economy were the lack of an effective legal system and regulations, poor protection of property rights, corruption, red tape, and problems getting credit. Most of these issues stem from the fact that Iraq still has a state-run economy. The Baath Party created a command economy partly based upon its socialist ideology that was expanded by Saddam Hussein who used the state to enhance his power and control over the country. Institutionally therefore, Iraq is not set up to encourage investment or the private sector. Baghdad has talked about carrying out reforms, but has done little substantive. This remains the major impediment to doing business in Iraq.

Iraq’s Scores On 18 Indicators

Possible Responses: 1. Encourages investment, 2. Not a deterrent to investment, 3. Mild deterrent to investment, 4. Strong deterrent to investment, 5. Would not invest because of this factor

Taxes: 1. 4%, 2. 35%, 3. 42%, 4. 15%, 5. 4%

Environmental Regulations: 1. 7%, 2. 59%, 3. 14%, 4. 16%, 5. 5%

Cost of regulatory compliance: 1. 0%, 2. 39%, 3. 33%, 4. 25%, 5. 3%

Uncertainty concerning protected areas: 1. 14%, 2. 64%, 3. 19%, 4. 3%, 5. 0%

Trade barriers: 1. 3%, 2. 30%, 3. 38%, 4. 22%, 5. 8%

Labor regulations and employment agreements: 1. 0%, 2. 29%, 3. 50%, 4. 21%, 5. 0%

Quality of geological database: 1. 12%, 2. 33%, 3. 45%, 4. 6%, 5. 3%

Labor availability and skills: 1. 0%, 2. 27%, 3. 48%, 3. 24%, 5. 0%

Disputed land claims: 1. 0%, 2. 38%, 3. 41%, 4. 16%, 5. 6%

Socioeconomic agreements: 1. 6%, 2. 36%, 3. 22%, 4. 31%, 5. 6%

Legal system: 1. 0%, 2. 12%, 3. 45%, 4. 36%, 5. 6%

Fiscal Terms: 1. 8%, 2. 18%, 3. 32%, 4. 32%, 5. 10%

Administration and enforcement of regulations: 1. 0%, 2. 26%, 3. 33%, 4. 35%, 5. 7%

Quality of infrastructure: 1. 5%, 2, 5%, 3. 46%, 4. 41%, 5. 3%

Best practices: 1. 3%, 2. 20%, 3. 30%, 4. 30%, 5. 17%

Regulatory duplication and inconsistencies: 1. 0%, 2. 12%, 3. 27%, 4. 48%, 5. 12%

Political stability: 1. 0%, 2. 8%, 3. 28%, 4. 50%, 5. 14%

Security: 1. 0%, 2. 3%, 3. 29%, 4. 49%, 5. 20%

2009 was the first year that major oil companies returned to Iraq en mass in two rounds of auctions for oil fields in southern Iraq. Oil companies were excited about Iraq’s potential, because it had been under international sanctions since 1990, and had huge untapped reserves as a result. Those high hopes have slowly, but surely been scuttled. First, the service contracts offered by the Oil Ministry severely limited the profits open to the companies, and did not allow them to claim the reserves in the fields they were working on in their books. Second, they ran into Iraq’s infamous bureaucracy that held up almost everything from simple things like getting visas for foreign executives to enter the country to slowing down equipment arriving. These in part explain why some foreign firms have decided to invest in Kurdistan instead, even though the fields are much smaller, and there is uncertainty over whether they will be able to export oil any time soon. Baghdad is slowly but surely beginning to understand the dilemma it is in. It is starting to discuss making its contracts more attractive, but that won’t solve the regulatory mess and red tape that is involved whenever a business has to deal with any of Iraq’s ministries. Iraq still has a lot of oil and gas fields yet to be developed. It might find it harder to market them however, because of how difficult it is to work there, and the fact that most of the major fields have been auctioned off. This might mark a plateau in investment in the country’s energy blocs, with future business focusing upon infrastructure instead.

SOURCES

Al-Ansary, Khalid, “Iraq investors bemoan red tape and lack of credit,” Reuters, 3/29/09

Economist, “No promised land at the end of all this,” 3/4/10

Fraser Institute, “Global Petroleum Survey 2012,” June 2012

McArdle, Megan, “Doing Business In Iraq,” Atlantic, 2/10/11

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 10/30/09