Source of Conflict and Life: Energy Future of Iraq - Volkan Güner

Planning and managing an energy future is a hard quest for a country like Iraq. Iraq is in a conflict zone which maintains various religious and ethnic groups. Conflict in the country is based on political, ethnic and economic problems. Especially after the US invasion in 2002, Iraq energy resources became a bigger question for the sides of this conflict. Iraq is expected to have stability after the elections held in March 7th, 2010. There are also some analysts who state that after the elections and US army withdrawn from Iraq there will be a state of conflict. The attacks and deaths on the Election Day can be understood as signals of an upcoming civil war in Iraq. All these issues will strongly affect the energy future of country. For understanding and interpreting the situation of energy, Iraq’s energy evolution should be examined, especially situation on oil and natural gas.



Iraq was the world’s 13th largest oil producer in 2008, and has the world’s third largest proven petroleum reserves after Saudi Arabia and Canada. Just a fraction of Iraq’s known fields are in development, and Iraq may be one of the few places left where vast reserves, proven and unknown, have barely been exploited. Iraq’s energy sector is heavily based upon oil, with approximately 94 percent of its energy needs met with petroleum. According to the International Monetary Fund, crude oil export revenues represented over 75 percent of GDP and 86 percent of government revenues in 20081.

Sanctions undermined Iraq’s oil sector and Iraq’s oil infrastructure needs to be reformed. US allocation of $ 2.05 billion to Iraqi oil and gas sector started a kind of reformation but it was ended in 2008. In 2009, Iraqi budget accepted $ 3.2 billion allocation to Ministry of Oil it was a %50 percent increase from the 2008 base budget. US government agencies reported that Iraqi reconstruction of oil, gas and electricity sectors cost $ 100 billion or higher. International oil companies are expected to be aided according to the Hydrocarbons Law in accordance with their investments.



Oil

Oil and Gas Journal announced that Iraq has oil reserves which contain 115 billion barrels but statistics have not been revised since 2001. In the unexplored territories of Iraq (western and Southern Deserts) there may be additional coverable oil of 45 to 100 billion barrels.

One of the main problems on oil is the division of resources across sectarian demographic lines. Hydrocarbon resources are mostly found in the Shiite areas of the South and resources of Northern Iraq which is ethnically Kurdish is controlled by Sunni minority.

Eastern edge of Iraq is known as the oil and gas depot of the country. There are 9 fields which are called as “Super Giants” (over 5 billion barrels) and there are 22 fields which are known as “Giant” fields (over 1 billion barrels). Southeastern Iraq contains the largest known concentration of such fields. This region also has the 70 to 80 percent of the Iraq’s proven oil sources. 20 percent of oil resources are located in the north of Iraq, near Kirkuk, Mosul, and Khanaqin. This area is controlled by the Kurds and other groups living in that region.

Oil Production

State owned oil companies were producing oil at an average of 2.4 million barrels per day. In 2008, production was 2.1 million barrels per day in 2007. Pre-war production capacity level still not reached which was 2.8 million barrels per day in 2003. Nearly 66% of the production comes from the southern fields. Actually, three giant fields are the major production areas: North and South Rumelia and Kirkuk.

Currently, the Ministry of Oil has central control over oil and gas production and development in all but the Kurdish territory through its three operating entities, the North Oil Company (NOC), the South Oil Company (SOC), and the Missan Oil Company (MOC), which was split off from the South Oil Company in 2008. According to the NOC’s website, their concession and jurisdiction extends from the Turkish borders in the north to 32.5 degrees latitude (about 100 miles south of Baghdad), and from Iranian borders in the east to Syrian and Jordanian borders in the west. The company’s geographical operation area spans the following governorates: Tamim (Kirkuk), Nineveh, Irbil, Baghdad, Diyala and part of Babil to Hilla and Wasit to Kut. The remainder falls under the jurisdiction of the SOC and MOC, and though smaller in geographical size, includes the majority of proven reserves. MOC's oil fields hold an estimated 30 billion barrels of reserves. They include Amara, Halfaya, Huwaiza, Noor, Rifaee, Dijaila, Kumait and East Rafidain.




Development

Iraq government aims to increase oil production by 300.000 barrels per day 70 2.7 million barrels by the end of 2010. Crude oil production capacity is expected to become 1.5 million barrels per day within 3-4 years and by an additional 2 million barrels per day to a total of 6 million barrels per day within 10 years according to the Iraq’s 10 year strategic plan (2008-2017). As part of this plan, Iraq planned three licensing rounds. The first was announced June 30, 2008, and included plans to rehabilitate six giant producing fields with reserves of over 43 billion barrels. These contracts were planned to be awarded by mid-2009. The second bidding round was announced in December 2008 for fields that were explored but not fully developed. Iraq also plans to sign delineation agreements on shared oil fields with Kuwait and Iran. It would like to set up joint committees with its neighbors on how to share the oil. In April 2009, Iraq started work on the Safwan field with Kuwait.

Kurdistan Regional Government Issues
The Kurdistan Regional Government (KRG), the official ruling body of a federated region in northern Iraq that is predominantly Kurdish, passed its own hydrocarbons law in 2007. Despite the lack of a national Iraqi law governing investment in hydrocarbons, KRG has signed oil production sharing, development and exploration contracts with several foreign firms. In addition, more than a dozen contracts signed by the central government with international companies during Saddam Hussein’s regime are being renegotiated or may come under review when Iraq’s oil law and investment framework is in place. In the interim, the Iraqi Ministry of Oil has approved a request from the KRG to send 60,000 barrels per day of crude oil from the Tawke and Taq fields in the Kurdish region to the northern Iraq export pipeline, effective June 2009. KRG Natural Resources Minister Ashti Hawrami expects Kurdish production to reach 250,000 barrels per day by early 2010.

Refining
Iraqi refineries, with a total capacity of almost 600,000 barrels per day, have antiquated infrastructure, and their output does not reflect the current demand mix. Despite improvements in recent years, the sector has not been able to meet domestic demand for most refined products, and the refineries produce too much heavy fuel oil. As a result, Iraq relies on imports for about one fourth of the petroleum products it uses, with total petroleum product consumption averaging about 600,000 barrels per day in 2008. To alleviate product shortages, Iraq’s 10-year strategic plan for 2008-2017 set a goal of increasing refining capacity from 600,000 barrels per day to 1.5 million barrels per day. Iraq has plans for 5 new refineries, as well as plans for expanding the existing Daura and Basrah refineries.









Natural Gas

Reserves

According to the Oil and Gas Journal,Iraq’s proven natural gas reserves are 112 trillion cubic feet (Tcf). An estimated 70 percent of these lie in Basra governorate in the south of Iraq. Probable Iraqi reserves have been estimated at 275-300 Tcf, and work is currently underway by several IOCs and independents to accurately update hydrocarbon reserve numbers. Iraq’s proven gas reserves are the tenth largest in the world, and two-thirds of resources are associated with oil fields including, Kirkuk, as well as the southern Nahr (Bin) Umar, Majnoon, Halfaya, Nassiriya, the Rumaila fields, West Qurna, and Zubair. Just under 20 percent of known gas reserves are non-associated; around 10 percent is salt “dome” gas. The majority of non-associated reserves are concentrated in several fields in the North including: Ajil, Bai Hassan, Jambur, Chemchemal, Kor Mor, Khashem al-Ahmar, and al-Mansuriyah.

Production

Iraqi natural gas production has risen since 2003, and has returned to levels reached during the mid-1990’s. However, its 2006 dry natural gas production of approximately 104 billion cubic feet (Bcf) per year is still far below its peak level of 215 Bcf reached in 1989. The Ministry of Oil reported that approximately 60 percent of associated natural gas production is flared due to a lack of sufficient infrastructure to utilize it for consumption and export. Significant volumes of gas are also re-injectedto enhance oil recovery efforts. In addition, the flaring of the natural gas has meant lost Liquefied Petroleum Gas (LPG) output of an estimated 4,000 tons per day, while at the same time there are LPG shortages requiring imports of 1,200 tons per day. To reduce flaring, the state-owned South Gas Company signed an agreement with Shell in September 2008to implement a 25-year project to capture flared gas and provide it for domestic use, with any surplus sent to an LNG project for export.

Upstream Development

The non-associated gas fields reportedly slated for priority development are mostly in the northern governorates near Kirkuk, including: al-Mansuriyah and the nearby Khashem al-Ahmar and Jaria Pika, Kor Mor, Akkas, Chemchemal and Siba. It is also been reported that the government of Iraq plans to capture more associated gas at Rumaila and Az-Zubair within five to ten years.
Iraq’s 10-year strategic plan for 2008-2017 set a goal of increasing natural gas production to 2.5 trillion cubic feet per year, and to end the flaring of natural gas. As part of this plan, Iraq planned three licensing rounds. The first was announced June 30, 2008, and included an expected $5 billion investment for natural gas fields with 22 Tcf of reserves, including Akkas in the western desert and al-Mansuriyah in the east. The contracts to develop these fields are planned for mid-2009. The second bidding round with 26 Tcf of reserves was planned for 2009, and includes the Siba field in the Basra area.







Iraq signed an agreement on producing oil in Bedra Region with a consortium which is a partnership of Russian Gasprom Neft Turkish TPAO, South Korean Kogas and Malaysian Petronas. Iraqi State owned oil companies have a share of %25 in this consortium. This consortium won a bid which was held in December 2009. This agreement will last for 20 years of time which is made for oil production of oil. Production is 170.000 barrels per day in Bedra region. Iraq government made agreements with 45 companies from 23 countries in December 2009 which is on oil reserves worth $ 41.2 billion. Russian giant oil production company LUKoil which was withdrawn from Iraq after the Iraq War in 2002, has been returned to west Kurna-2 region with the cooperation of Norwegian Statoil (ASA) Company. Russia had cancelled the payment of Iraq’s dept of $ 10 billion.

It is clear that Iraq is getting more and more privatized on producing and selling energy. International status and US effect on energy obliges Iraq to that kind of a policy. Iraq’s energy policy cannot be designed by Iraq’s own. Not only international pressure but home affairs of Iraq are so much complicated. Election cannot solve those internal problems in a short – time period. Energy games on Iraq will expected to continue after the election but actors and roles are a bit changing.

Iran was the most benefited country from the US invasion of Iraq in 2002. Actually, Iran got stronger and stronger after the invasion. Iran started the uranium enrichment program which seen as a possible threat especially by US. Iraq is so much problematic because of the conflicts and stability problem in its territory. So Iraq becomes more vulnerable to outside pressures. Iraq does not have the enough power to solve its problems by its own. Iraq needs to arrange new laws for preventing conflicts and to construct a political stability. Iran’s pressure on Iraq is based on forming a Anti-American government in Iraq. Iran is investing on Iraq’s energy sources and making donations to religious associations to increase their effect on Iraq.

US is planning to withdraw from Iraq until 2011, after US withdrawn, Iraq is expected have more problems about internal security. So Iraq will expect aid from its neighbors, Iran is preparing for this kind of an invitation and Iran would definitely use Iraq’s unstable situation to use Iraq’s energy resources and Iran would intervene Iraq policies. Russia is an another matter of fact on energy in the region. Russia will try to dominate natural gas production and exportation with using the advantage of its stability.

Iraq should find a solution to prevent a possible state of conflict solution may include delaying US withdrawn too. Consolidative laws for ethnic and religious groups and powerful support for efficiency of these laws may be effective for assuring stability. If stability cannot be assured energy exploitation over Iraq will become more widespread on oil and natural gas resources. It should be stated that Iraq is privatizing its energy production infrastructure with the agreements which are signed with foreign companies. This is a result of globalized world economy but Iraq’s policy seems to be a result of the conflicts within the region. Iraq cannot administrate its energy resources but privatize them. It seems to be hard to form a new government in Iraq, according to the unofficial results al- Iraqqiya coalition which is leaded by former prime minister Iyad Allawi is going ahead with a minor difference, National Iraqi Alliance and State of Law Coalition will be the second and third parties. Election results are hard to be predicted but a coalition government will be inevitable in Iraq. If Iraq cannot form a strong government after the elections then Iraq would lose its sovereignty on its energy resources so Iraq’s sovereignty in its borders will become suspicious.