Potential Risks to Iraqi Production Capacity

The decision by Iraq , to allow international companies to support the development of productive oil fields, is the most important economic decision taken by the government since 2003. The importance of this step is in increasing the production capacity from 2.5 million bpd currently, to 11 million by the year 2017, an increase of nine million bpd. If the price per barrel ranged between 70 and 100 $, additional income for Iraq would increase to 200 $ billion annually by mid decade, compared to about 45 billion currently.

These contracts established through a system of tenders were won by Asian state-owned companies, especially Chinese and Malaysian with a majority shareholding, followed by the two European companies «Shell» and «BP» and the American companies «Exxon Mobil» and «occidental», and Russian, «Lukoil».

If Iraqi achieves the predicted new production level of about 20 million barrels in 2020 it will be producing about 10 % of global oil production per year, putting it in the top three producing countries in the world.

This ambitious project raises an important question: Can Iraq implement this massive program, even in cooperation with international companies? What about the geopolitical risks that surround the country, and the failure of the administrative government to provide security, and more importantly, the absence of a social contract between the ruling classes and the people, and between the people themselves? Is it possible to implement this program card in the estimated dates

In summary the answer is that Iraq will face serious difficulties in implementing the program as planned, according to the assumed timetable. Can Iraq be expected to increase production to about six or seven million bpd by mid-decade? The most important thing, however is that Iraq has launched finally, after much hesitation and difficulties, into the development of its huge reserves.

What are the risks and challenges anticipated? First, there is the inability and corruption of government institutions. Secondly, there is the risk arising from operations by militias and terrorist organizations against oil installations. Government has undertaken to protect the fields, but the security of foreign employees in their offices in Baghdad and Basrah and public roads is the responsibility of the companies themselves who rely on notorious private security companies. In the current circumstances an increase in operations against enterprises and individuals is expected with the presence of thousands of foreigners in Iraq.

And thirdly there is the legitimacy of the agreements itself. The oil ministry has insisted that cabinet approval is enough to pass the agreements, thus avoiding the approval of Parliament. The reason for this is clear, because it’s difficult to obtain legislative approval, which would delay the ratification of the contracts. However, the procedure opens the way for future governments to change the contracts or even cancel them. The Chairman of the oil committee in parliament, a coalition of Kurdistan and an ally of the government, threatened actions of this kind in the future.

The fourth economic challenge to the country in the future is in the absence of a clear vision on how to exploit new oil revenues. This lies in the absence of a decision to transfer funds to infrastructure projects or investment projects. There is fear that future governments will continue to expand unproductive bureaucracy, it is noteworthy that the number of employees and retirees of the state apparatus in Iraq exceed some of the major industrialized countries.

Finally, there is the problem of mass production. Companies will try to produce the highest amount possible in the shortest period available to them so as to increase their profits, nor could Iraqi authorities prevent it. This means a flooding of market and declining prices, and an imbalance with the neighboring oil producing countries. Concentrating on a rapidly increased level of production within a short period has its dangers, not only on oil prices, but also Iraq’s relations with neighboring countries in cirumstances  that involve multiple and complex problems. Some of these countries can block the construction of new export terminals necessary for this expansion, not to mention aggression and harassment at the border.

Therefore the foreign policy of the country must be linked with oil policy. This is unlikely in the light of anarchy prevailing in the country and government institutions.

In spite of the oil fields allocated to international companies, some 50 additional fields still await development. These are not expected to be delivered to international companies, at least in the foreseeable future. Any new agreements will focus on exploration and drilling in new areas.

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