Friday, November 30, 2012
Thursday, November 29, 2012
October 2012 Saw A Rise in Overall Iraq Oil Exports, But A Drop In Southern Production
For the last four months, Iraq has seen record highs in
petroleum exports. Still, the figures for October 2012 missed government
targets, and southern Iraq, the workhorse of the country’s energy industry,
actually saw a drop in output. The growth that month was actually due to the
return of Kurdish oil to Iraq’s foreign sales, and production from some of the smaller and older fields.
October saw another modest improvement in Iraq’s oil sector.
There was a 26,000 barrel a day average increase in exports, which reached 2.624 million barrels a day overall. That was up from September’s 2.598
million barrels. That was the highest amount since the 1990s, but didn’t meet
the Oil Ministry’s goals. It wanted to reach 2.8 million barrels for the month,
and was expecting a large boost from the southern fields. Instead, exports
through the southern pipeline in Basra were actually down to 2.172 million
barrels a day from 2.178 million the previous month. That was due to a drop in
production in the south from 3.235 million barrels in September to 3.035
million in October. All of the major fields there, Rumaila, West Qurna 1,
Zubayr, and Halfaya, witnessed declines. That compared to the northern pipeline
from Kirkuk to Turkey going from 420,000 barrels a day in September to around
452,000 barrels in October. Total exports for October were 81.3 million barrels, up from 77.8 million in September. The source then of October’s
rise was not the south, but the north as the Kurdistan Regional Government
(KRG) began exporting once again after it came to a new agreement with Baghdad in September. The Kurds had shut down their exports through the northern
pipeline for several months over a payment dispute with the central government.
With that seemingly resolved for at least the short term, the Kurds exported
146,000 barrels a day in October. That was up from 113,000 barrels a day the
month before. There was also a jump in output from the Kirkuk and Ahdab fields. At the same time, bad weather shut down the southern pipeline for several days in the middle of October. Despite that temporary setback,
Iraq has seen four straight months of expansion in its petroleum industry.
Exports have not been steady with a dip in February and a second one from May
to June. Still, the country has now far surpassed last year’s average of 2.16
million barrels a day in exports with 2.405 million for the first ten months of
2012.
Iraq Oil Exports And Profits 2011-2012
Month
|
Avg.
Exports
(Mil/
Bar/
Day)
|
Avg. Price Per Barrel
|
Revenue (Bil)
|
Jan. 11
|
2.16
|
$90.78
|
$6.082
|
Feb.
|
2.20
|
$98.44
|
$6.064
|
Mar.
|
2.15
|
$107.13
|
$7.167
|
Apr.
|
2.14
|
$114.26
|
$7.342
|
May
|
2.22
|
$108
|
$7.45
|
Jun.
|
2.27
|
$105.17
|
$7.173
|
Jul.
|
2.16
|
$108.79
|
$7.311
|
Aug.
|
2.18
|
$104.91
|
$7.124
|
Sep.
|
2.10
|
$104.89
|
$6.619
|
Oct.
|
2.08
|
$104.04
|
$6.742
|
Nov.
|
2.13
|
$106.59
|
$6.833
|
Dec.
|
2.14
|
$106.18
|
$7.061
|
2011 Avg.
|
2.16
|
$105.00
|
$6.913
|
Jan. 12
|
2.10
|
$109.08
|
$7.123
|
Feb.
|
2.01
|
$112.92
|
$6.595
|
Mar.
|
2.31
|
$117.99
|
$8.472
|
Apr.
|
2.50
|
$116.79
|
$8.795
|
May
|
2.45
|
$103.03
|
$7.831
|
Jun.
|
2.40
|
$90.09
|
$6.487
|
Jul.
|
2.51
|
$97.14
|
$7.577
|
Aug.
|
2.56
|
$106.22
|
$8.445
|
Sep.
|
2.59
|
$107
|
$8.371
|
Oct.
|
2.62
|
$105.51
|
$8.578
|
Oil Exports Through Basra 2012
January 1.711 mil/bar/day
January 1.711 mil/bar/day
February 1.639 mil/bar/day
March 1.917 mil/bar/day
April 2.115 mil/bar/day
May 2.086 mil/bar/day
June 2.085 mil/bar/day
July 2.216 mil/bar/day
August 2.252 mil/bar/day
September 2.178 mil/bar/day
October 2.172 mil/bar/day
Oil Exports Through Kirkuk 2012
January 395,000 bar/day
February 375,000 bar/day
March 400,000 bar/day
April 393,000 bar/day
May 366,000 bar/day
June 318,000 bar/day
July 294,000 bar/day
August 313,000 bar/day
September 420,00 bar/day
October 452,000 bar/day
The boost in production helped with a decline in prices in
Iraqi crude. The average price for an Iraqi barrel of crude went from $107 in
September to $105.51 in October. The nation was still able to earn $8.578
billion in October compared to $8.371 billion in September, because of the
return of Kurdish oil. October’s revenue was the second highest of the year,
only being behind April’s $8.795 billion. For two months this year, June and
July, prices dropped below $100 a barrel. Tensions in the Middle East however,
have kept the valuations above that mark for 18 of the last 20 months, and Iraq
has been the beneficiary. It has also been able to increase its output without
having any major affect upon international prices.
Iraq can expect to see more incremental increases in its
exports for the next several months. The growth may not be consistent from
month to month, but at the end of the year, Iraq will see a large overall boost
from last year. This is because of new pipelines and two single point mooring
points opening in the south, along with Kurdish oil production. At the same
time, the country is behind the government’s targets, and may not reach its
ambitious goals, because there are some large hurdles with its infrastructure
it has to overcome. Still, with the unstable situation in the region, oil
prices will remain high at least for the short term providing Iraq with an
increasing amount of money to spend on its needs.
SOURCES
Associated Press, “Iraq’s Kurds pledge to raise oil exports
in 2013,” 10/22/12
- “Iraq’s oil exports increase 1.1 percent in October,”
11/22/12
Kami, Aseel, “UPDATE 1-Oil exports from Iraq’s Kurdish
region rise to 170,000 bpd,” Reuters, 10/4/12
Al-Khayat, Faleh, “Iraq’s oil output slumps by 200,000 b/d
in October,” Platts, 11/28/12
Lawler, Alex, “Iraq’s south oil exports head for record in
October,” Reuters, 10/19/12
Republic Of Iraq Ministry Of Oil, “Iraq Crude Oil Exports –
October 2012,” 11/25/12
Reuters, “Bad weather halts Iraq southern oil exports,”
10/21/12
Special Inspector General for Iraq Reconstruction,
“Quarterly report to the United States Congress,” 10/30/12
Wednesday, November 28, 2012
Premier Maliki’s Politicization Of Corruption Charges In Iraq
One after another, the heads of independent institutions and
some of the largest banks in Iraq have been charged with corruption. The first
was the director of the Trade Bank of Iraq in May 2011, followed by the
commissioner of the Election Commission in April 2012, and then the head of the
Central Bank of Iraq in October. The chief of the Integrity Commission claimed
he was going to be accused of corruption as well before he resigned in
September 2011. Corruption is a huge problem in Iraq, and it is continuously
ranked as one of the worst in the world. Therefore it’s believable that there
would be graft and theft at these organizations. However, the fact that Prime
Minister Nouri al-Maliki and his State of Law list were directly involved in
each case makes many believe that the premier is attempting to gain control of
each one of these institutions. They also follow a Supreme Court ruling that
the Integrity Commission, Election Commission, and Central Bank were all under
the executive rather than legislative branch. Maliki has now gained leverage
over most of them by appointing their temporary leaders. This all points to the
prime minister manipulating corruption charges to centralize power in his
hands.
The Trade Bank of Iraq was the first target on Maliki’s
list. According to the Bank’s Director Hussein al-Azri, on June 2, 2011, Prime Minister Maliki paid him a visit. He asked that the bank to finance a $6
billion deal with a South Korean company to build power plants. Azri asked for
a sovereign guarantee on the loan where the government would be responsible for
the balance should the company default. Maliki said that one wasn’t needed. He
then demanded that the department heads at the bank come to the meeting. A
Maliki adviser then arranged a press conference where he said that the bank was
under investigation for corruption, followed by security forces surrounding the
building. Azri ended up fleeing, and eventually turned up in Lebanon where his family resides. In the aftermath, the integrity committee in parliament
that looks into illegal government activities and the Finance Ministry issued a
report saying that there were irregularities at the bank. One article said that Azri had given out $400 million in defaulted loans. Maliki stated that $500 million was missing from the bank. It later turned out that the
investigation was never completed, and all the accusations against Azri came
either from the prime minister or members of his State of Law list. Not only
that, but the charges against Azri were made back in 2007, raising questions
why it took four years for anyone to act upon them. The bank director ended up being sentenced to 15 years in prison in absentia in October 2012. In
his place, Maliki named Hamida al-Jaff as the new head of the bank. The
raid on the bank was immediately seen as political. A British adviser to the bank Sir Claude Hankes said that Maliki was behind the move. He told
reporters that the government had attempted to manipulate the bank before, but
had been rebuffed. Critics believed that the prime minister wanted control of the bank’s $14.9 billion in assets to fund development projects. In 2003,
the Americans created the bank, which handles most major trade and
financial deals. J.P. Morgan helped set it up, giving it ties with
international financial markets. That was why it was the only bank in Iraq that could get credit from foreign institutions. Iraq does not provide sovereign guarantees, which makes it very difficult for Baghdad to finance
large infrastructure projects outside of the energy field, which benefits from
interest from foreign oil companies. Instead, the government has to rely
upon foreign aid, private contractors, and cash payments to fund projects. With
control of the Trade Bank, Maliki could use its billions to cover projects.
After the head of the Integrity Commission Judge Rahim
al-Ogaili resigned it was revealed that he, and members of his staff were
facing corruption charges as well. Judge Ogaili resigned from the main
anti-corruption agency in September 2011 claiming that the government was
preventing him from doing his work. Later, he told the Special Inspector
General for Iraq Reconstruction that he was going to be charged with illegal
activities before he left. His violations included providing statistics on the
Commission’s work to the United States, a requirement for it to receive aid
from Washington, and exaggerating the levels of corruption in the country in
talks with the press. Judge Ogaili quit before he could be brought to court.
Other members of the Commission faced similar accusations, forcing some to
resign as a result. Prime Minister Maliki then named Izzat Tawfiq the acting commissioner. Since he is temporary, Tawfiq can be replaced anytime the
premier wants. Maliki has opposed the Integrity Commission, and has continuously tried to block its investigations as a result. He has also
demanded that all its major inquiries go through him. Now he might have that
ability with Ogaili out of the way, and his man Tawfiq in office.
Maliki was less successful taking on the Election
Commission. On April 12, 2012, the head commissioner Faraj al-Haydari was arrested, along with some of his staff. He was charged and found guilty of paying $130 to members of the State Property Commission to get public land. In October, an appeals court overturned his conviction. Haydari said that
the charges stemmed back from 2008, and that State of Law parliamentarian Hannan al-Fatlawi was behind his detention. The commission head claimed that a court dismissed the case, and then Fatlawi went to another judge who
eventually issued a warrant. Fatlawi was also the one that announced Haydari’s arrest, not the judiciary. Again, this case was seen as an
attempt by Maliki to gain sway over an independent body. A member of the Board
of Supreme Audit, which goes through the government’s books, said that acts of
corruption at the Election Commission had been known for years, but no one
acted upon them. The Board official told the International Crisis Group that he
believed Maliki went after the commission for not going along with him during
the 2010 elections. In that vote, Maliki’s State of Law came in second place,
when the premier believed he would win. He then demanded a recount, but it did
not change the results. The prime minister then allegedly accused the commission of helping the Iraqi National Movement win the balloting. Not
only that, but lawmaker Fatlawi had gone after the commission before. Starting in May 2011, Fatlawi led an unsuccessful no confidence vote against
Haydari for corruption, which was defeated in parliament in July. Then in
September 2012, State of Law was blocked from expanding the number of commissioners from 9 to 15, which could have been used to put more of its
followers on the staff. Iraq is due for two more rounds of elections,
provincials in 2013 and parliamentary in 2014. If Maliki had been able to
replace Haydari with his own election head or pack the commission with State of
Law members that would give him great sway over the upcoming balloting. Those
were leading causes for other parties to vote against Fatlawi’s no confidence
vote in the summer of 2011, condemn Haydari’s arrest in the spring of 2012, and
why Maliki was unsuccessful in expanding the number of commissioners this fall.
These were all seen as crass moves by Maliki to take over the commission.
Today, the Central Bank of Iraq is caught up in the latest
controversy involving the prime minister. At the end of October, arrest
warrants were issued for the director of the Central Bank of Iraq Sinan
al-Shabibi and members of his staff. A committee found evidence against them that had to deal with the sale of foreign currency. The premier then named
the head of the Board of Supreme Audit Abdul Basit Turki the acting bank chief.
The investigation into Shabibi started in August 2012 when a State of Law
parliamentarian accused bank officials of laundering money. That led the
Speaker of Parliament Osama Nujafi to call for a special committee to be
formed. What that group found is under dispute. A State of Law member claimed
that there was corruption involving dollar auctions the bank holds every week.
Another lawmaker said he quit the committee, because others were going to form
their own special group and release an anti-Shabibi report. Shabibi claimed that the government had been trying to get rid of him since 2009. He told
the press that Baghdad wanted to use the Central Bank’s $63 billion reserves to
fund development projects. The bank chief went on to say that was against
the bank’s rules, and that he received threats and was intimidated as a result. Maliki and Shabibi have also argued over a wide range of issues such as revaluing
the dinar and interest rates. In March, the prime minister ordered that all the
bank’s policy decisions be sent to the cabinet for approval. The next month
there were rumors that Maliki wanted Shabibi out to be replaced by one of the
premier’s economic advisers. This was just like the Trade Bank of Iraq case.
All the accusations against the Central Bank came from legislators belonging to
Maliki’s list. With the long time director out of the way, Maliki could name
his replacement that would then be beholden to him. Together, Baghdad would
have over $70 billion to help finance projects. Whether this works out as well
for Maliki as the Trade Bank is yet to be seen as Shabibi has said he will
fight his charges, and no one has actually been arrested yet.
The prime minister’s intention to gain control of Iraq’s
independent institutions was revealed in January 2011. That was when the
Federal Supreme Court made a very controversial ruling that the Election and
Integrity Commissions as well as the Central Bank of Iraq were all under the
authority of the executive. This was despite explicit language in the
constitution, which said that only parliament had that power. In February 2012,
the Higher Judicial Council affirmed the court’s decision. Both happen to be under Chief Justice Medhat Mahmoud who is considered to be an ally of Maliki. Neither the commissions nor the bank were willing to go along with the courts.
Now the premier has been able to name the heads of the Integrity Commission and
Central Bank, while failing to do the same with the Election Commission. That
was done by using corruption charges, which never go anywhere against important
officials, unless someone more powerful is able to manipulate them. This
appears to be the case here, as Maliki and his State of Law were behind all of
the charges.
Many believe that Prime Minister Maliki is becoming an
autocrat. Some of those accusations don’t appear to hold water. These four
cases however, are more clear-cut. Maliki personally led the raid against the
Trade Bank of Iraq, and legislators from State of Law made all the accusations
against the Integrity and Election Commissions, and now the Central Bank of
Iraq. Corruption is endemic in Iraq, but some of the charges have appeared
minuscule at best like those against Election Commissioner Haydari and Judge
Ogaili or have never become clear such as those against Central Bank head
Shabibi. Not only that, but nothing is ever done against high officials like
these over corruption, unless someone powerful wants action to be taken. That
person is the premier who now at the least has gotten rid of officials who
refused to follow his dictates. At the worst, he has gained de facto control
over several independent institutions. This has all been possible by manipulating
graft and theft charges to fulfill his political goals. This is a direct threat
to Iraq’s developing political system. Without checks and balances, Iraq’s
leaders like Maliki will be able to do what they like. The fact that he has
attacked the commissions in charge of voting and fighting corruption are
especially troubling, because he could now influence future elections and
ensure that nothing is done about the rampant theft and graft within the
government. This sets a dangerous precedent that the prime minister will use
the courts and corruption to get rid of those that stand in his way. The Iraqi
parliament has only been partially effective in blocking these moves, and could
do a lot more. The problem is that the party bosses are unwilling to shake the
boat, because they all benefit from the status quo. That means Maliki may be
able to continue with these actions, concentrating more and more authority in
his hands.
SOURCES
Agence France Presse, “Iraq ex-electoral chief says cleared
of graft,” 10/16/12
AIN, “Mutleg: Arresting Haidiri, Timimi raises doubts over
independence of judicial systems,” 4/14/12
- “Sadrist MP accuses SLC of working to postpone elections,”
4/17/12
AK News, “Head of elections’ commission arrested over
corruption,” 4/13/12
- “UN Assistance Mission calls for due process in detention
of electoral commission members,” 4/14/12
Alsumaria News, “Director of Trade Bank of Iraq, fled to
Beirut on charges of corruption,” 6/4/11
Arango, Tim, “An Arrest Casts a Shadow Over Elections in
Iraq,” New York Times, 4/16/12
Aswat al-Iraq, “Arrest of Haidari, attempt of vengeance,
MP,” 4/14/12
Aziz, Raber, “Independent elections body mired by corruption
allegations,” AK News, 4/9/11
Biedermann, Ferry, “Iraq’s biggest bank reaches telling milestone,”
Financial Times, 5/18/09
Brosk, Raman, “Kurdish Blocs Coalition investigates MP’s
relation to arrest of electoral commission members,” AK News, 4/15/12
Drummond, James, “Banks in Iraq move towards modernization,”
Financial Times, 5/25/11
Dunlop, W.G., “Maliki’s ‘calculations’ plunge Iraq deeper
into political tension,” Middle East Online, 4/14/12
Fletcher, Pascal, “Former top Iraq financier denounces bank
power grab,” Reuters, 6/14/11
Harissi, Mohamad Ali, “Iraq political blocs accuse PM of
dictatorship,” Agence France Presse, 4/14/12
Hatem, Oudai, “Iraq Lawmakers See a Power Grab In Maliki
Ouster of Central Banker,” Al-Hayat, 10/18/12
Ibrahim, Haidar, “Lack of Political Consensus Hinders
Assigning New Integrity Head,” AK News, 12/16/11
International Crisis Group, “Failing Oversight: Iraq’s
Unchecked Government,” 9/26/11
Kami, Aseel, “Iraq Trade Bank recovers $400m,” Reuters,
11/15/11
Kami, Aseel and al-Ansary, Khalid, “UPDATE 1-Iraqi PM orders
probe into state-run Trade Bank of Iraq,” Reuters, 6/2/11
Kami, Aseel and Ibrahim, Waleed, “Iraq seeks bank head’s
arrest, denies witchhunt,” Reuters, 6/5/11
Najm, Hayder, “electoral commission inquiry not ‘political
revenge’ mps say,” Niqash, 4/21/11
National Iraqi News Agency, “KA demands the release of
Haydari, Tamimi considering their arrests “unnecessary, abusive,” 4/13/12
- “Sa’edi affirms that no personal reason for accusing the
Governor of CBI,” 10/19/12
Peel, Michael, “Iraq issues arrest warrant for bank
governor,” Financial Times, 10/18/12
- “Iraq leaders’ fairness queried
in scandal,” Financial Times, 10/22/12
Rao, Prashant, “Iraqi PM in power
grab by ousting bank chief, experts say,” Agence France Presse, 10/22/12
Razzouk, Nayla, “Iraq’s Maliki Replaces Trade Bank Chief
Amid Corruption Case,” Bloomberg, 6/5/11
Reuters, “Iraq election commission chief released from
jail-official,” 4/15/12
Al Sayegh, Hadeel, “Iraq’s former central bank chief
criticizes government,” The National, 11/9/12
- “Iraqi bank chief says he fled after visit by al Maliki,”
The National, 6/18/11
Shafaq News, “Integrity Committee: sentenced 15 years on
chairman of the Trade Bank of Iraq and his adviser,” 10/2/12
- “Shabibi: attempts to dismiss me started since 2009,”
11/10/12
Sowell, Kirk, “Inside Iraqi Politics No. 16,” 6/12/11
- “Inside Iraqi Politics No, 18,” 7/14/11
- “Inside Iraqi Politics No. 19,” 7/28/11
- “Inside Iraqi Politics, No. 41,” 7/3/12
- “Inside Iraqi Politics No. 49,”
10/31/12
Special Inspector General for Iraq Reconstruction,
“Quarterly report to the United States Congress,” 10/30/12
Visser, Reidar, “Iraq’s New Independent Electoral
Commission: Some Initial Thoughts,” Iraq and Gulf Analysis, 9/17/12
Tuesday, November 27, 2012
Problems With Iraq’s Southern Oil Fields’ Common Seawater Supply Project
Iraq wants to become the largest oil producer in the world
surpassing the current leader Saudi Arabia. In 2009, it opened up its oil and
gas market to major oil corporations, and has seen steady growth in its
petroleum production and exports since then. Slowly it is also building up the
necessary infrastructure to support these plans. There are still some major
barriers however, that could derail all of these hopes. One is the Common
Seawater Supply Facility. It’s supposed to pump water into the southern fields
to produce the necessary pressure to extract oil. The project is years behind
schedule, and may be a major impediment to Baghdad’s ambitions.
The lack of water in Iraq could be a major cause of Iraq
failing to achieve its oil production goals. The International Energy Agency
(IEA) predicted that Iraq’s petroleum output would grow from its current 3 million barrels a day to 6 million by 2020, and 8 million by 2035. The Oil
Ministry is hoping for even more at 6 million barrels by 2015 and 10 million by
2020. Without water being injected into its fields in southern Iraq, which has
responsibility for most of this growth, there will not be enough pressure to
maintain or even increase production. The south needs an estimated 8 million
barrels of water per day today to reach its short-term goals. The IEA believes
that amount will increase to 12 million barrels by 2035. For every one barrel
of oil extracted in Iraq, it needs 1.5 barrels of water. Baghdad therefore
needs huge investments in its water pipelines and pumping stations. Adding to
this issue is the fact that Iraq lacks fresh water. The country relies upon its
two major rivers the Euphrates and Tigris, but Syria, Iran, and Turkey, all of
which are building dams up river, are cutting Iraq’s supply. The Common
Seawater Supply Facility is supposed to be the solution to this problem. It’s supposed to pump 12-15 million barrels a day of seawater from the Persian
Gulf into the southern oil fields when it is fully operating. The project has
run into many difficulties however.
The Common Seawater Facility is behind schedule, and has
been caught up in Iraq’s domestic politics. Originally, it was supposed to start operation in 2013, but now 2017 might be the earliest it will begin
pumping water. First, Baghdad is behind in its contracting. The project was
ready for bidding two years ago, but nothing happened. It wasn’t until May 2012
that the Oil Ministry asked 10 companies to submit proposals for the facility. It then took until October for a $170 million consultancy contract to be signed with CH2M Hill for the deal. Second, the government has not filed its initial design contract for the project. Third, the work got caught up in
the dispute between Baghdad and the Kurds. Exxon was supposed to be in the lead
on the project, but when it signed an oil and gas deal with the Kurdistan Regional Government (KRG) in October 2011, it became the focus of the
central government’s ire. Baghdad kicked Exxon out of the water project in
February 2012 claiming that it was failing to coordinate with the Oil Ministry,
and its economics were poor, but the real reason was that it was one of the few
ways the government could retaliate against the corporation. The central authorities
want to control the country’s energy policy, and therefore objects to the Kurds
signing their own independent deals like that with Exxon. As soon as the
company signed with the KRG it began receiving threats from Baghdad, which
resulted in it losing its place in the seawater project. Even before that, the
Oil Ministry was arguing with Exxon and the other oil majors that were involved
in the deal, British Petroleum, Eni, and Lukoil. It was claiming that their cost estimates were too high, and that they were holding up work. Iraq’s
bureaucracy is notorious for acting slowly, because it lacks the capacity and
experience to deal with such major contracts. That explains all the delays in
the work, and partially why it is so far behind schedule. On the other hand,
Maliki’s anger at Exxon deciding to work in northern Iraq added a political
element to the project as well. It seemed like the Oil Ministry was having
trouble with the oil corporations even before that, pushing for the lowest
possible prices for the work, which might not always be the best strategy to
take on something so important. The result is that the seawater facility is
years behind where it needs to be, which will have a direct affect upon Iraq’s
ability to increase its oil production in the south.
Iraq’s energy goals are widely questioned by analysts as
being overly ambitious. The government itself has recently had to revise what
it hoped to achieve. Its numbers are still audacious, and would be one of the
largest sustained spurts of growth in world history. The lack of infrastructure
will be a major impediment upon these plans. The Common Seawater Supply
Facility is a key piece in the puzzle in boosting output in the southern
fields. It is moving along, but at a slow and often times delayed pace. Red
tape holding things up could have been predicted. The fact that Iraq would take
out its anger on Exxon by taking away its lead role in the project was not.
Either way, the project is years behind schedule. Iraq lacks the freshwater to
pump into the fields, and could use the natural gas that it flares in the
south, but it has not liked that process, and would require an entirely new project
being planned and contracted to go that direction. It therefore needs to trudge
ahead with its seawater concept, and hope that it can be finished by 2017
otherwise petroleum production could hit a massive roadblock, which would be
very difficult to overcome.
SOURCES
Adal, Mirza, “ExxonMobil exits seawater supply project:
further delays expected at common supply facility, which could affect Iraq’s
oil production,” Middle East Economic Digest, 4/13/12
Ajrash, Kadhim and Razzouk, Nayla, “Iraq Awards CH2M
Water-Injection Oil Project, Replacing Exxon,” Bloomberg, 10/10/12
Berdikeeva, Saltanat, “No Water, No Gain for Iraq’s Oil
Development,” The Great Energy Challenge, 11/13/12
Al Fathi, Saadallah, “Iraq oil: Less ambition and more
realism,” Gulf News, 10/7/12
Hafidh, Hassan, “Iraq, Oil Majors Agree To Build Oil Field
Water Injection Plant,” Dow Jones, 10/19/11
Jacobs, Caroline and Boselli, Muriel, “UPDATE 3-Total latest
oil group to shift Iraq focus to Kurdistan,” Reuters, 2/10/12
Lando, Ben, “Despite nationwide investment, Exxon has Iraq
output doubts,” Iraq Oil Report, 1/3/12
Lee, John, “Will CH2M Hill Replace Exxon in Water-Injection
Project?” Iraq Business News, 10/13/12
Reuters, “Iraq Invites Firms to Manage Water Injection,”
Iraq Business News, 5/15/12
- “Iraq sets new condition for Exxon on Kurdistan,” 2/10/12
Special Inspector General for Iraq Reconstruction,
“Quarterly Report to the United States Congress,” 4/30/12
- “Quarterly report to the United States Congress,” 10/30/12
Van Heuvelen, Ben, “Crude Awakening,” Foreign Policy,
1/31/12
Monday, November 26, 2012
Investing In Iraq, Opportunities And Difficulties Ahead For Doing Business In A Country In Transition, An Interview With Northern Gulf Partners' Zaab Sethna
Zaab
Sethna is a partner at Northern Gulf Partners. It is one of the leading
investment companies in Iraq. Below is an interview with Sethna about the
reasons why foreign investment is increasing in Iraq, what sectors are
attracting attention, and the difficult process the country is going through to
open itself up to private enterprise, trade, and diversification. Overall, he
is quite optimistic about the future of the country.
1. Recently there has
been a huge jump in foreign investment in Iraq. According to Dunia Frontier
Consultants there was only $2.7 billion in 2007. That then jumped to $17.9
billion in 2008, $28.7 billion in 2009, $39.6 billion in 2010, before reaching
$55.6 billion in 2011. One major reason for the increase seems to be the end of
the civil war, and major fighting in 2008. Today, how much does concern over
security play in investing and doing business in Iraq?
The security situation in Iraq has certainly improved
significantly. There have been virtually no incidents involving foreign
companies in the last couple of years and the oil-producing areas of southern
Iraq have seen few incidents of any kind. Nevertheless security remains a
primary concern for foreign investors, and definitely adds to the cost of doing
business in Iraq. Of course another major reason for the spike in foreign
direct investment are the oil and gas contracts, which the Government of Iraq
signed with major international energy companies in the last three years. The
massive investment required to develop Iraq’s hydrocarbon reserves is only just
beginning, and I would expect to see foreign direct investment numbers
continuing to go up dramatically.
2. What do you see as
the other major reasons why people are interested in investing in Iraq now?
Iraq is
currently poor, but it has the capacity to lift itself quite quickly into the
ranks of the middle-income countries, and eventually to the level of the Gulf
States. Obviously, oil and gas is the primary driver of the Iraqi economy, but
Iraq is a country with vast needs in almost every sector. With a population of
30 million who have been cut off from the outside world for generations the
possibilities for growth are enormous. As per capita gross domestic product
(GDP) increases, we expect it to double by 2020, there will be great demand for
everything from consumer products to financial services to healthcare. Iraq is
attractive to foreign investors because the population is relatively young,
there is a history of an educated middle class, and there are possibilities to
develop the non-oil economy in areas such as agriculture, technology, and
industry.
3. When people think
about Iraq’s economy, oil is the first thing that comes to mind. Companies are
actually putting their money into a wide variety of industries today. Can you
tell us some of those fields that are garnering interest?
Telecommunications
is one sector that has seen huge foreign investment. There are three extremely
profitable mobile phone carriers all of which have significant stakes held by
international operators. There are also two national CDMA carriers, which is a
different mobile technology, and they are both foreign-owned as well as a
number of internet service providers and other telecoms companies. Financial
services is a sector that is interesting to foreign investors. The market for
financial services is still nascent in Iraq with unsophisticated banks, no asset
management industry, a primitive insurance sector, and virtually non-existent
capital markets. International financial institutions see the opportunity, so
they are investing in Iraqi banks or in building their own networks. Housing is
another area where we are hearing of large foreign investments although how
real these are remains to be seen.
4. What countries
seem the most interested in putting their money into Iraq these days?
Definitely
regional countries are at the forefront. The Gulf Cooperation Council (GCC) and
Turkey are leaders in investing in Iraq, although not all GCC countries are
there. The United Arab Emirates and Kuwait are probably the most advanced
followed by Qatar. Saudi companies are still hesitant to invest, and that is
probably a reflection of the chilly diplomatic relations between the two
governments. However in the last year we are also seeing increasing interest
from European, U.S. and Asian firms, and 2013 should see a flurry of deals.
5. The World Bank has
ranked Iraq one of the most difficult places to do business in for the last
couple years. What kinds of problems do companies face when entering the Iraqi
market?
Iraq is
undergoing three transitions simultaneously: from war and occupation to
post-conflict, from sanctions to free trade, and from socialist central
planning to a market economy. Such
transitions are wrenching at the best of times, and few countries in history
have had to undergo all three at the same time. Foreign investors have to bear
this in mind, and realize that while change is taking place it is happening
slowly and incrementally. The problems that companies face arise mostly from
Iraq’s recent history: lack of infrastructure, security, corruption, red tape,
and uncertainty in the legal and regulatory environment.
6. What role does the
lack of a modern and private banking sector play?
The financial sector is changing quickly as Iraqi banks
offer new products and services, and their customers get more sophisticated and
demand even more. Banking is an area where we will see change relatively
quickly, so I am not too worried.
7. In the last two
years, the government has moved against the Trade Bank of Iraq (TBI) and
currently the Central Bank of Iraq (CBI) charging their directors with
corruption. Are you concerned about these cases?
As a foreign investor one is always concerned to see what
might be political interference in independent institutions. However, in my
experience the Iraqi judicial system is relatively robust and I would have
faith in it to deal with the issues of TBI and CBI.
8. Iraq also does not
offer sovereign guarantees where the government would be responsible if a
business defaults in a deal. How big is that in financing major development
projects?
This is a major issue that is certainly holding back
development in areas such as housing or independent power projects. Let’s be
clear that a sovereign guarantee does not make the government responsible if a
private business defaults on an obligation. A sovereign guarantee is an
irrevocable commitment by the state to pay for something. For that reason a
sovereign guarantee is considered indebtedness of the state and under the Iraqi
constitution any indebtedness must be approved by the legislature. As I
understand it, this is one of the main reasons that Iraq has not been able to
offer such guarantees, because the government is unwilling or unable to get
parliamentary approval.
9. Iraq still has a
state-run economy, but there is talk every year about diversifying. Have you
seen any moves in that direction or is Baghdad just using all its oil revenue
to increase the government’s role?
The transition from state control to a free market is taking
place albeit slowly. It will probably take a generation or more to complete.
Actually the recent decision by the government to stop giving every family a
basket of food every month, and replace it with a cash payment was an important
step in the right direction. The Government of Iraq is one of the largest
purchasers in the world of bulk commodities such as wheat, rice, tea, and
sugar. This is pointless, and an open invitation for corruption. Much better to
put cash directly in the hands of the people, and let the private sector take
over importing and selling commodities. This could even serve to jumpstart the
banking sector, since there are only about 700 bank branches, but nearly 17,000
ration distribution centers in the country. It is a great opportunity to
introduce leapfrogging technologies such as smart cards or mobile payments.
Unfortunately, the government botched the announcement, and scared people that
their rations were being taken away, so the decision has been rescinded for the
time being.
10. Iraq has 260
state-run enterprises that have struggled for years from out of date technology
and business practices, over staffing, etc. Recently there has been talk that
foreign firms are interested in investing in joint ventures with them. Are
those public companies really attracting a lot of attention, and is there a
chance to really turn them around, and make them successful?
Yes, there are some companies that have a chance to survive
in a free market. What Iraq has lacked for over 20 years is capital, technology
and skills. The government understands that foreign investors can bring all
three of these vital inputs. However, the government must recognize that
investors need to make a return that is commensurate with the risks and
difficulties of doing business in Iraq. Some of the companies will survive if
the government is realistic about the terms it offers foreign investors. Others
probably wouldn’t survive under any terms. After all how could Iraq possibly
make bicycles cheaper or more efficiently than countries in Asia with long
experience and huge internal markets? And why bother? There are plenty of other industries that
Iraq can develop using its abundant energy, water, and human resources.
11. What do you see
as the future for Iraq’s economy?
I see the
fastest growing economy in the world for the next few years. An economy that
will become increasingly sophisticated, and Iraq regaining its rightful place
as an important player in the international commercial and financial system.
SOURCES
Aswat al-Iraq, “Turkish company to rehabilitate iron and
steel factories in Basra,” 11/19/12
Dunia
Frontier Consultants, “2011 Year in Review, Foreign Commercial Activity in Iraq,”
March 2012
Iraq Business News, “Details of New Basra Logistics City,”
6/27/11
Kami, Aseel, “Iraq industrial sector attracts growing
investment,” Reuters, 11/19/12
World
Bank, “Doing Business in the Arab World 2012,” 2012
Wednesday, November 21, 2012
Iraq Does Badly In Another Global Ranking, This Time On Economics
In November 2012, England’s Legatum Institute released its annual Prosperity Index. The survey covered 142 countries, and ranked them
according to eight categories. Those were economics, entrepreneurship,
governance, education, health, safety and security, personal freedom, and
social capital. The Institute supports the growth of democracy and capitalism,
and the index was meant to measure the state of those two systems across the
globe. Iraq fell towards the bottom of the list at 131. That placed it second
to last in the Middle East and North Africa. Iraq routinely finishes low in
these types of lists, because it is coming out of decades of dictatorship, an
invasion, and civil war.
The purpose of the Prosperity Index was to look at economic
opportunity, access, confidence, and well being across the globe. This was
based upon eight factors. The first was economics that included macroeconomic
policies, economic satisfaction and expectations, foundations for growth, and
the financial sector. Economic policies obviously affect income and well being,
and also shape expectations of the future. Entrepreneurship looked at the
entrepreneurial environment, innovation, and access to opportunity. A good
business environment can improve the economy, and living standards. Governance
included effective and accountable government, fair elections, political
participation, and rule of law. Good governance can help with economic growth,
as well as protect freedom. Education was made up of three factors including
access to schools, quality of education, and human capital. Education can
stimulate economic growth. Outcomes, infrastructure, and satisfaction made up
the Health factor. Safety and security was made up of national security and
personal safety. Stability is obviously necessary for investment and economic
growth. Personal freedom looked at individual rights and social tolerance.
Finally, social networks covered social cohesion and community networks.
2012 was the first year that Iraq was included in the
Legatum Institute’s index, and it did not do well. It ranked 131 out of 142,
just placing it outside of the bottom ten. It was also second to last in the
Middle East and North Africa. The United Arab Emirates ranked best in the
region at 29, followed by Kuwait at 38, Israel at 40, Saudi Arabia at 52. At
the very bottom was Yemen at 134. Libya, Oman, and Qatar were not included.
Iraq did badly on all eight of the Institute’s eight categories, which could be
expected. On economy it was 92, on entrepreneurship 125, governance 137,
education 112, health 107, safety 135, personal freedom 141, and social capital
105. The information for these scores mostly came from 2008-2011, although a
few were from before that period. The earlier information is problematic,
because that would place it during the civil war when Iraq was a failed state.
2008 to the present is much better, because security is much improved allowing
for a sense of normality to return. Since Legatum was mostly concerned about
economics, the newer the data the better, because Iraq is seeing large economic
growth with massive investment in the oil industry, which is fueling state
revenue that is at the heart of everything since Iraq still has a largely
command economy. At the same time, the bureaucracy is notoriously bad, the
state is the largest employer, the economy is dominated by oil and gas, and the
government goes from crisis to crisis. Finally, the insurgency is still around
carrying out daily terrorist acts. Given all that it’s no surprise that Iraq
would do badly on the index.
Legatum Institute’s
Prosperity Index – Middle East/North Africa
United Arab Emirates 29
Kuwait 38
Israel 40
Saudi Arabia 52
Morocco 73
Jordan 77
Tunisia 78
Algeria 100
Iran 102
Egypt 106
Syria 113
Iraq 131
Yemen 134
Libya N/A
Oman N/A
Qatar N/A
Iraq’s Scores On
Index
Economy 92
Entrepreneurship and Opportunity 125
Governance 137
Education 112
Health 107
Safety and Security 135
Personal Freedom 141
Social Capital 105
Iraq is a struggling country coming out of two decades of
wars, sanctions, and dictatorship. It’s for those reasons it consistently
struggles in global rankings such as the Legatum Institute’s. At the same time,
things are beginning to turn around, at least economically now that major
fighting is over. That doesn’t mean the government isn’t dysfunctional, and
there aren’t large structural problems with a society based upon the
exploitation of natural resources. It does mean that some things are improving
however. It will probably take several years for outside groups to catch up
with these changes going on. Even then, Iraq will still probably rate the same
as many other developing countries, and have a hard time moving up the list of
other Middle Eastern and North African nations, because of its government and
oil dependence.
SOURCES
Legatum Institute, “2012 Legatum Prosperity Index,” November
2012
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