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copy frm anthr room* The Future Importance of Iraqi Oil in The International Oil Market

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Interesting read! Has some very nice underlying benefits to us!

http://www.iraqupdates.com/p_articles.php/article/26514

The following article was written for MEES by Dr Hussain, Oil Consultant and former OPEC Officer [[e-mail]].
In the future, Iraqi oil can play a very important role in the oil market to the extent that its production, and hence exports, may prove to have a positive impact on the global economy. This will happen provided that the Iraqi oil industry is developed efficiently and the authorities adopt the right and effective policies. In order for the Iraqi oil industry to develop rapidly and oil production to increase substantially this industry must go through two important phases simultaneously, namely rehabilitation and expansion.
A. Rehabilitation
During the last few decades the Iraqi oil industry faced substantial difficulties and severe problems. Before March 2003 these issues included: negligence, lack of maintenance and repair, UN sanctions, lack of investments, war damages, etc. After March 2003 these issues included: corruption, smuggling, sabotage, lack of sufficient investments, etc.
The rehabilitation of the Iraqi oil industry is required in both upstream and downstream operations. This includes drilling and development of oil fields, storage tanks, pipelines, refineries, pumping stations, oil terminals as well as training of staff and labor. Such rehabilitation can be implemented by the present South Oil Company in Basra and the North Oil Company in Kirkuk, and by the Iraqi National Oil Company (INOC) in the future as proposed by the draft Iraqi Oil Law.
Rehabilitation will help Iraqi oil production to increase from its present 2.5mn b/d to the pre-1979 level of 3.5mn b/d. According to some reports Iraq will have to invest at least $35bn to achieve this goal.
B. Expansion
With its huge proven oil reserves of at least 225bn barrels, according to some reports, Iraq can increase its oil production in the next 10 years to 10-15mn b/d. This increase can be achieved in two ways: through national and international investments.
1. National Investment
Through its present oil companies or in the future through the proposed INOC, Iraq can expand its oil production from the currently operating and producing oil fields, using its own financial resources. These fields such as Rumaila South and Rumaila North in the south, Kirkuk in the north etc, still contain large oil reserves. It must be mentioned here that whilst at present Iraq is earning annually between $30-40bn from oil exports, it will still have a limited ability to provide enough domestic investments for its oil industry. This follows as the Iraqi economy and its infrastructure are still in ruins, and to develop the infrastructure alone is estimated to require investment of at least $200bn in the next 10 years. Therefore in the next few years national investment may help Iraq to reach a maximum of 3.5mn b/d.
Domestic efforts to expand the oil sector are facing and will continue to face in the coming years the following problems:
a. Shortage of qualified and experienced staff, engineers and skilled labor, as many personnel have already fled the country.
b. Corruption.
c. Lack of efficient domestic private sector to provide the necessary goods and services.
d. Shortage of capital to invest in the oil sector.
e. It will take a long time to make the proposed INOC carry out its key duties and be in a position to function properly like ADNOC in the UAE and Aramco in Saudi Arabia. For example, these two companies with their vast experience can make use of foreign service contracts to develop their oil industries, while it will take INOC some time to reach their high levels of project implementation.
Therefore to say, as some argue, that service contracts are at present sufficient to develop the Iraqi oil industry is completely false. For example, during the last four years the Iraqi Ministry of Oil drastically failed to fully implement its budgets. Consequently Iraqi oil production remained below its pre-2003 level. It is therefore obvious from the above-mentioned problems that allocating all operating as well as discovered oil fields only to INOC, as some suggest, would be a very big mistake.
2. International Investment
For Iraq to expand its oil industry rapidly and be able to generate enough income to develop its economy it will have to rely to some extent on foreign investments.
It should be noted that the oil industry is a capital intensive industry, requiring large amounts of investments. For example, according to Citigroup, global upstream spending in 2008 will reach $354.6bn, compared with $324.4bn in 2007. For Iraq to increase its oil production rapidly to 10-15mn b/d will require several billion dollars worth of investments. This is due to the recent big global increase in the international costs of developing the oil industry for both upstream and downstream operations. Therefore Iraq is not in a position to provide the necessary capital to expand its oil production to very high levels. Its security and infrastructure expenditure alone will absorb most of its oil revenues. Thus domestic finance, as mentioned earlier, cannot help to increase Iraqi oil production beyond 3.5mn b/d.
Under the present circumstances, Iraq has no choice but to rely on foreign investment to raise its oil production to high levels. However, such investment must not exploit the Iraqi oil industry to the sole benefit of international oil companies (IOCs). Iraqi interests must come first to maximize Iraqi benefits from its oil operations. Iraq can do that by formulating international contracts including production-sharing agreements (PSAs) that will safeguard Iraqi interests.
It is absolutely unacceptable to exclude any kind of contracts including PSAs. The Iraqi authorities must choose those contracts most suitable to develop the oil industry and benefit the country to the maximum. The terms and conditions of such contracts can be stipulated by the Iraqi authorities and issued as tenders to make IOCs compete for them. To secure maximum benefits from such contracts Iraq can formulate them with the help of international consulting companies. Furthermore, there are now many oil producing countries using PSAs, which started in Indonesia and have since been adopted by Libya, Angola, Egypt, etc.
With the present international oil market conditions of high oil prices and limited surplus production capacity within OPEC countries, Iraq is in a very strong position to impose its terms and conditions on the IOCs wishing to invest in Iraq. Conditions can include the period of the contracts and the percentage of profitability which these companies can get. In addition, Iraq can include in these conditions a preference for oil companies prepared to invest in Iraq's downstream operations, ie to construct refineries and petrochemical industries to produce refined products and petrochemicals not only for domestic consumption but also for exports. In this way Iraq will not only increase its crude oil production but also expand its industrial base and add value to its oil operations.
Iraqis must realize that oil underground is worth nothing. At the same time, to keep the majority of the Iraqi people in poverty without exploiting the oil sector properly and sufficiently with the help of foreign investments can not be tolerated any more. We have to ignore all empty slogans against foreign investment as long as such investment is in the interests of the Iraqi oil industry. We must not be emotional when it comes to foreign investments in the oil sector. We must be realistic and try our best to use such investment to raise oil production and exports, and hence oil revenues, which can be invested to raise living standards of Iraqis which are at present among the lowest in the world.
It must also be mentioned that foreign investment in Iraq can be allowed for a certain period of time until it is able to develop its oil industry by itself through generating enough income to invest in its oil sector. Furthermore, in signing international contracts Iraq must be selective in allocating its oil fields and allow oil production to increase gradually without negatively affecting international oil prices. Thus oil production policies in Iraq must be studied and adopted carefully and wisely.
The Future Role Of Iraqi Oil Production In The World Oil Market
The Iraqi oil industry has many positive features, among them:
1. Large oil and gas reserves.
2. Low cost of oil production ($1-2/B).
3. Oil fields are located across Iraq.
4. Iraqi oil export routes are many and can go through several directions such as the Gulf, Turkey, Syria, Saudi Arabia, Iran, Jordan and Kuwait.
Given these advantages, Iraq can expand its oil production rapidly and supply the international oil market with substantial amounts of oil exports that may reach more than 10mn b/d. Considering the above possibilities Iraq can make use and benefit from the future development of the international oil market and especially the future rapid increase in the global demand for oil. The IEA estimates that world demand will increase from the present level of 85mn b/d to 116mn b/d in 2030. In other words, in the next 23 years the global demand for oil will increase by about 30mn b/d. How will this increase be met and by whom?
Most of the world oil reserves (1,200bn barrels) are located in OPEC countries with its share reaching 76%. The Gulf countries’ share (Iraq, Iran and GCC states) is 62%.Therefore, there is a concentration of global oil reserves in a few countries, namely in the Gulf region including Iraq.
With its present oil production policies, it is doubtful that output in the Gulf countries will increase sharply to meet the rapid expected increase in global demand. For example, Saudi Arabia, with the largest oil reserves in the world, intends to increase production during the next few years by only 1.5mn b/d. Similar increases are expected in Kuwait, the UAE and Iran. In total, these four major oil producing countries may only increase output in the coming few years by 6mn b/d. So who can help to fill the gap and be able to meet some of the future increase in the world demand for oil? The answer is very simple: Iraq.
Hence, if the IEA prediction materializes, then Iraq will certainly play a very important role in supplying the international oil market with a large quantity of oil to meet the expected increase in global demand, particularly if it increases production to 10-15mnm b/d.
To support the above possibility is the fact that global oil will, sooner or later, reach its peak simply because oil underground is limited in quantity. Peak oil means that global oil production will reach a peak and then start to fall. This has already happened in the US since the late 1960s. It is happening now in the UK, North Sea and Indonesia. It is expected to happen in five years in Mexico and perhaps in other major oil producing countries. Thus it is evident that the increase in Iraqi oil production in the future will play a vital role in the international oil market to meet increasing world oil demand and act as an engine of growth for the world economy.
It is time Iraqi policy makers, oil officials and experts realized this fact. In pursuing its own interests Iraq must also understand and recognize its global obligation. Iraq can combine maximizing benefits from its oil industry while playing a positive role in the growth of the world economy. With the right policies regarding national and international investment, Iraq can achieve these goals.
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