Iraq’s Step Forward with Three Steps Back

By: Saltanat Berdikeeva

Note: Throughout December and January, PITAPOLICY has tried to view Iraq through various “non-oil” lenses when reviewing its political and economic state. PITA-consumers have commented on its previous sanctions regime and impact on human rights; the civil society initiatives, like TEDx; female entrepreneurs; conflict training programs, and observations on customer satisfaction. The goal was, and continues to be, describe the contemporary Iraq: the multi-faceted elements that make up a nation, a people, a civilization. PITAPOLICY concludes the series on Iraq by inviting an Energy Analyst to review…oil. Without characterizing oil as a resource curse or blessing, the author provides the current outlook.

“East – is a delicate matter,” according to one of many catchphrases of the 1970 Russian cult film “White Sun of the Desert” about the Russian Civil War in Central Asia in the early 1920s. But the reference could not be more germane to contemporary Iraq with its multitude of problems and opportunities. The departure of the U.S. troops from Iraq in December 2011 unleashed violence and explosions as the fragile unity government is more and more divided. Iraq may be at the crossroads to become either a fragmented state paralyzed with violence or a prosperous country benefitting from its fourth-largest oil reserves in the world.

On December 22, 2011, a few days after the departure of U.S. troops, Hussain al-Shahristani, Iraq’s deputy prime minister for energy, announced that Iraqi crude oil output reached the highest level in 20 years, or over 3 million barrels a day (mbd). He stressed that the oil production would be at 3.4 mbd by the end of 2013, of which 2.6 mbd would be exported. Estimates of Iraq’s crude oil production levels over the next five years by the International Energy Agency (IEA) were even more optimistic. According to IEA, Iraq’s total output, which includes crude from Kurdistan, were to reach 4.36 mbd between 2010 and 2015 and account for 80 percent of increase in production capacity of the Organization of Petroleum Export Countries (OPEC). While oil production in Iraq has been increasing with the arrival of major energy companies since 2009 and the country plans to carry out its 4th energy auction to international energy firms in April 2012, the anticipation of Iraq becoming a game-changer in OPEC in the next five years might be overly optimistic, if not naïve.

The 2007 Oil Law still in limbo, corruption, divided government, lingering security problems, lethal insurgency, a lack of the rule of law and cumbersome bureaucracy that makes even a simple process like obtaining a visa to Iraq a grueling mission will force investors to be more patient than their money might be. There are fears of Lebanonization of the country, that is, formalization of distribution of power along ethnic and sectarian lines, unless the fragile leadership manages to maintain the unity government. A dire need for investment to rebuild the country’s infrastructure has not made it easy for Western companies to go in and get to work. In fact, apart from security challenges and less than profitable initial business climate, the hardest lesson for investors appears to be understanding of the Iraqi culture. As one investor noted, “in a Western culture, we’re used to going in and saying ‘it’s your job, sort it (out), what’s the problem?’ and demanding services. In this culture, that’s not what they’re looking for.” Patience and fostering relationships with locals seem to be the best advice to take for investors.

Adding another layer of complexity to the Iraqi context, the interests of neighboring Iran and Saudi Arabia are not necessarily a prosperous or democratic Iraq. Even under the best of circumstances, Iraq’s ability to meet 80 percent of OPEC oil production capacity would be curtailed and controlled by the organization’s swing producer, Saudi Arabia. Emerging with strong influence on many aspects of Iraqi affairs following the U.S. invasion of this country, Iran will do everything to limit Iraq’s rise as an oil power house in the region, particularly as Iran’s energy sector sets back as a result of mounting sanctions from the West. It is not ruled out that as Iran comes under increasing pressure from the West, it may carry out attacks on Iraq’s oil infrastructure as a proxy attack against the West. In view of regional political and security issues, let alone domestic challenges within Iraq, rebuilding of this country and predicting its copious production of oil will be, in fact, a delicate matter for years to come.

Saltanat is an Energy Analyst based in Washington, DC. She may be reached via email sberdikeeva@gmail.com. Feel free to follow her on Twitter: @saltaberdikeeva