Analysis: Iraq Faces Challenges in Growing Oil Production

Iraq's large oil-production potential could allow it to compete for leadership with Saudi Arabia in the coming decades, but a new energy study by Rice University's Baker Institute for Public Policy finds that in the near term, both Baghdad and Riyadh may have difficulty meeting rising demand for oil.

The study, "Iraqi Oil Potential and Implications for Global Oil Markets and OPEC Politics," argues that ambitious targets set by the government of Iraq may not be reachable in the short-to-intermediate term while international oil companies operating in southern Iraq continue to experience infrastructure development problems.

Iraq has the potential to increase production from 2.5 million b/d in 2010 to over 5 million b/d in the next five to 10 years. The country has expressed the ambition to reach 10 to 12 million b/d of production by 2017, but this lofty target will be difficult, given mounting political, bureaucratic and infrastructure related barriers.

"Political decentralization inside Iraq, social tensions and electricity shortages remain barriers to large-scale repair and construction of infrastructure that is needed before export levels can rise," said author Amy Myers Jaffe, the Wallace S. Wilson Fellow for Energy Studies at the Baker Institute. "Failure to progress quickly on water injection, pipeline, electricity and natural gas facilities will limit the ability of independent oil companies to translate upstream oil-field expansion successes into continued export increases."

The return of international oil companies to Iraq has raised the prospect that Baghdad's oil production will indeed be increasing in the coming years. Iraq is expected to see a 200,000 b/d increase in output in 2011, with output expansions already achieved at the Rumaila, Zubair, West Qurna-1 and Majnoon fields. As of spring 2011, Iraq's southern oil fields were producing a total of 1.986 million b/d and total production was pegged at around 2.7 million b/d. Iraq's June 2011 output was 2.56 million b/d, of which 2.27 million b/d were exported.

However, foreign oil company officials say that, while output gains are easily achievable based on field performance and geology, infrastructure bottlenecks might make future increases harder to accomplish. "The end result may be that ambitious targets set by the government of Iraq may not be reached in the short to intermediate term, delaying the time when OPEC will have to address rising Iraqi output," the study found.

While these operational and logistical factors will play a large role in whether Iraq reaches its energy potential, political factors will be equally important, the study concludes. The resolution or management of several political issues – including ongoing challenges to political stability, difficult power-sharing arrangements at the national level between political parties and growing pressures for provincial empowerment – is essential to the smooth development of Iraq's energy potential.

Iraq's logistical and political challenges come at the same time that the costs for Saudi Arabia to continue to expand and maintain sufficient spare capacity to influence global markets have increased dramatically, according to the study. Saudi Arabia has less spare capacity immediately available now than in the 1980s and 1990s, and it will be quite expensive for Saudi Arabia to bring on additional production capacity.

Saudi Arabia has spent $14 billion since 2005 to increase its oil production since 2005 to grow its oil production capacity from 10 million b/d to 12 million b/d. Future investment in a new tranche of Saudi production capacity is likely to be even more expensive because the kingdom will have to shift to areas that have more complex geology and require greater technological intervention.

But Saudi Arabia is also facing competing priorities with higher spending requirements on social services and defense in light of new regional and internal challenges, which calls into question whether sufficient spending on spare oil production capability will be maintained. King Abdullah ordered sweeping spending increases of $67 million in March 2011 for housing, job creation and the military, on top of a $36 billion hand-out to citizens in February, in an effort to respond to increased instability across the Middle East. "The pressures for higher defense and social spending will make it that much harder for the government to justify a massive campaign to expand its oil sector."

Possible increases in Iraqi oil production will likely be very important to the future stability of the global oil markets, and Iraq’s aspirations to become a major oil exporter create shared interested with the U.S. and other major oil consuming countries. The U.S. and other major powers should meet to discuss way to support Iraq's realization of the potential of its oil and gas deposits.

"As the U.S. government did successfully in the Caspian region and the Japanese government did successfully in Qatar and other LNG [liquefied natural gas] producing nations, the United States, EU, Japan and China should work together to ensure that IOC’s [international operating companies] operating in Iraq and the Iraqi government are able to attain attractive financing and loan packages to underwrite major export infrastructure development projects," the study noted. "Multinational assistance would also be appropriate as a means to support major investments as well as bilateral or trilaterial trade finance and development assistance."

Iraq's ability to reach its energy potential should be of broad regional and international concern. The nation could be poised for a dramatic transformation, one in which it finally escapes the political and technical constraints that have kept it producing less than four percent of the world's oil, despite having the third largest conventional oil reserves in the world.

"Should Iraq meet its ambitions to bring nearly 10 million more barrels of oil on line by 2017, it would constitute the largest ever capacity increase in the history of the oil industry," said Meghan O'Sullivan, the Jeane Kirkpatrick Professor of the Practice of International Affairs at Harvard University's Kennedy School. The health of Iraq's energy sector – currently the source of more than 90 percent of revenues accrued by the state – is a major determinant in setting Iraq's overall trajectory.


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