Investing in Iraq: Post-Conflict Constraints and Rewards

By Tariq Abdell, Founder & Chairman, Mesopotamia Insight.

The opinions expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq’s Lebanized democracy coupled with its lingering and convoluted political impasse are perfect recipes for a week and sectarian-based government, that is shackled by the region’s geopolitics (e.g., Iran’s nuclear and regional ambitions, Saudi Arabia, Syria, Turkey, etc…) consequently turning Iraq into proxy wars battleground for years to come and long after the U.S. forces are gone.

Thus, investors contemplating on doing business in Iraq, given the country’s untapped natural resources (billions of oil and gas reserves), are most likely to encounter a series of costly and challenging constraints common to post-conflict environments both internal and regional. These constraints are most likely to derail investors’ market entrée strategies, left unchecked, and damaged their long-term business interests in Iraq:

Internal constraints:

  • According to transparency international 2009 corruption index, Iraq is the fourth most corrupt country along with Sudan.
  • Well-entrenched tribal laws and archaic costumes undermine central government and foreign investors’ interests alike (tribal discontent of the oil companies, for instance).
  • 20 to 25 percent of Iraqis still live below the country’s poverty line (Ministry of Planning), a potential source of societal and political upheavals.
  • Higher illiteracy levels make it difficult for domestic and foreign investors to find a skilled and professionally literate workforce.
  • Higher unemployment rates, notably among military-age male population, are direct causes of the sudden surge of organized crime and militia’s activities.
  • Lack of basic services, e.g., drinking water, electricity, and running sewer nurtures resentment vis-a-vis public officials and foreign investors alike as recently demonstrated by electricity protests across Iraq.
  • Deep-seeded distrust and apprehension of oil companies are crippling residues of decades of planned economy, e.g., oil union fervent opposition to the oil law and contracts.

Regional constraints:

  • Iran, third’s largest oil producer (3.2 million bpd), is a major player in Iraq’s politics through its infamous Islamic Revolutionary Guard Corps’ elite Qods Force and its proxies. As top U.S. commander in the country Gen. Ray Odierno said “There is a very consistent threat from Iranian surrogates operating in Iraq,” (Washington Post July 13th).
  • The fallouts of Iran nuclear standoff with the West, United States recent approved new unilateral sanctions against Tehran, could easily spillover to Iraq’s internal politics and further undermine its stability. In fact, early signs of undercutting U.S. sanctions already been detected in the northern region where millions of dollars of oil and goods are smuggled to Iran (New York times report July 8).
  • The proximity of Iraq’s major oil fields to Iraq-Iran porous borders makes international oil companies’ workforce and equipments a vulnerable target for kidnapping and sabotage -Granting Iran invaluable leverage against the west.
  • Saudi Arabia, world’s largest oil producer (8.2 million bpd), could be a potential destabilizing force if the Shiite establishment continues to marginalize and ignore Sunnis’ demands.
  • Turkey’s recurrent incursion into Northern Iraq in the pursuit of the Kurdish workers party (PKK) elements and PKK assiduous attacks on the northern oil pipelines are a major threat to the country’s sovereignty and unity. According to Gen. IIker Basbug, head of the Turkish army, “The presence of PKK bases in northern Iraq will certainly affect Turkey and Iraq’s relationship, and will negatively influence relations between the U.S. and Turkey” (VOA News).
  • Kirkuk’s unsettled dispute (Northern oil hub) is a timed bomb that could expeditiously ignite a second civil war given Kirkuk’s ethnic diversity, e.g., Arabs, Kurds, Turkmens, etc…
  • U.S. planned hastily withdrawal in the absence of a legitimate and strong government it’s a strategic misjudgment with a dangerous and costly repercussions – Foreign investors may need to beef up their security personnel to countervail U.S. troops withdrawal.

Hence, foreign investors’ only cogent avenue, to overcome the aforementioned challenges, is to foster a sustainable political capital via a genuine and acculturated corporate social responsibility, and as Abraham Lincoln once said “Public sentiment is everything. With public sentiment, nothing can fail. Without it, nothing can succeed”

Case in point:

According to the terms of certain service contracts, in the absence of the hydrocarbon law, the international oil companies (IOCs) will receive $1.90 for each additional barrel produced, which is then charged with 35 percent tax and 25 percent cut for the state oil partner. Moreover, IOCs must factor in the financial impacts of the oil sector current constraints, for instance:

  • Major Oil fields require billions of dollars for rehabilitation and development as result of years of sanctions and wars.
  • Current oil workforce is in desperate need of training and know-how.
  • The Iraqi federation of Oil Union could be extremely problematic if both the IOCs and the government continue to ignore the Union’s demands.
  • Oil facilities protection services (FPS) lacks adequate training, equipments, and, most importantly, loyalty.
  • Contractually, ministry of oil can ask IOCs to reduce production to either meet Global markets demands (OPEC quotas, for instance) or to avoid systematic bottleneck as result of inadequate infrastructure.

Consequently, in order for IOCs to minimize their capital exposure while safeguarding their bottom line, IOCs should ask the following before committing billions of dollars for years to come:

a) Does the IOC’s leadership embody Transcultural competence and strategic insight?

b) What’s the IOC’s risk tolerance and price tag it’s willing to pay to mitigate the impact of unforeseen externalities associated with the post-conflict environment.

In sum, given international investors and oil companies experiences in high-risk environments, understanding and anticipating policy risks in a politically volatile environment such as Iraq could be a valuable source of a competitive advantage. furthermore, IOCs and investors who adopt business model which entails balanced operational efficiency with sustainable political capital (efficient leverage of trusted relationships) are most likely to survive Iraq’s political quagmire for years to come. Conversely, operating impetuously with no apparent understanding of the country’s political landmines and nuances could be a costly and dangerous venture with detrimental effects on both humans and capital, and as the renowned American businessman Malcolm Forbes once said “The best vision is insight”.

The opinions expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News.

Tariq Abdell, founder & chairman, Mesopotamia Insight and Iraq analyst

Can be contacted at: [email protected]

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Follow him on twitter: www.twitter.com/atariqx

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