It seems that every now and again someone in Iraq’s Oil Ministry realises how much oil the country has left undeveloped and what a good idea it would be to increase production and sell more of it. The latest chap from the Ministry to make such a discovery (last Wednesday apparently) — Undersecretary Ali Maarij – concluded that Iraq could boost its oil production to 7 million barrels per day (bpd) within the next five years. In fact, with one key adjustment to Iraq’s broad operating procedure in the sector, its oil production could reach 12-13 million in around the same time. So, how could it be done, and what is the problem in doing it?
In 2012, then-Iraq Prime Minister Nouri al-Maliki received a confidential report on his desk showing exactly how Iraq could increase its oil output from just over 3 million bpd at that point to a plateau of 13 million bpd in the ‘High Production’ scenario by 2017. The ‘Medium Production’ scenario plotted a course to 9 million bpd plateau by 2020, while the ‘Low Production’ scenario planned for 6 million bpd by 2025. The report was called the ‘Integrated National Energy Strategy’ (INES) and concluded an 18-month exhaustive study in large part funded by the World Bank, whose senior staff were also instrumental in the analysis. Further assistance came from renowned management consultancy firm then-Booz & Company. Around a year later, a limited-circulation report by the International Energy Agency (IEA) reached similar conclusions about Iraq’s oil production potential.
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The cornerstone assumption of both was that Iraq’s true oil reserve number was much higher than previously thought and this remains the case. Officially, Iraq holds a very conservatively-estimated 145 billion barrels of proved crude oil reserves (nearly 18 percent of the Middle East’s total, and the fifth biggest on the planet). Unofficially, it is extremely likely that it holds much more oil than this. In October 2010, around the same time as producing the official reserves figures, the Oil Ministry stated that Iraq’s undiscovered resources amounted to around 215 billion barrels. This was also a figure that had been arrived at in a 1997 detailed study by respected oil and gas firm, Petrolog. Even this figure, though, did not include the parts of northern Iraq in the semi-autonomous region of Kurdistan. This meant, as highlighted by the IEA, that most of these oil sites had been drilled during a period before the 1970s when technical limits and low oil prices gave a narrower definition of what constituted a commercially successful well than would be the case later. Overall, the IEA underlined that ultimately recoverable resources across all of Iraq (including the Kurdistan region) totalled about 246 billion barrels (crude and natural gas liquids).
So far so good, then, especially as Iraq has the world’s equal lowest oil production cost along with Saudi Arabia and Iran of just US$1-2 per barrel. The focus of the INES and IEA key reports – and others that were to follow – was basically three things. First, prioritise the development of Iraq’s ‘Big Four’ fields of West Qurna (1 and 2), Rumaila, Zubair, and Majnoon. At the time these constituted around three-quarters of all Iraq’s incremental oil production. Second, expedite the Common Seawater Supply Project (CSSP). This project involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities to maintain pressure in oil reservoirs to optimise the longevity and output of fields. To reach and then sustain the higher levels of Iraq’s increased oil production profiles, it will need water injection equating to around 2% of the combined average flows of the Tigris and Euphrates rivers or 6% of their combined flow during the low season. And third, ensure that the connecting infrastructure from wellheads to the trunk pipelines was built to a well-organised and regimented plan with clear financial expenditure linked to precise project objectives.
In the wake of these reports, two things happened which encapsulate the Iraq dilemma. First, Iraq Prime Minister started out by doing the right thing in trying to secure one of the very few companies in the world who could handle the size and complexity of the crucial CSSP – the U.S.’s ExxonMobil, as analysed in full in my latest book on the new global oil market order. Talks in 2012 failed but in 2015 the American energy supermajor agreed to take part in the project, in partnership with the China National Petroleum Corporation. Second, in 2018 ExxonMobil requested to withdraw from the project. According to sources who work closely with the Oil Ministry spoken to exclusively by OilPrice.com at the time, the central problem for ExxonMobil was that the risk/reward elements of the CSSP contract as laid out by Iraq’s Oil Ministry were profoundly unbalanced. In terms of the general risk/reward matrix that formed the basis of these negotiations, there were three key elements: ‘cohesion’, ‘security’ and ‘streamlining’. Cohesion related to ensuring that building the facilities connected to the CSSP were completed in full and in order. Security related not just to the on-the-ground security of personnel but also to the soundness of the basic business and legal practices involved in the agreement. Streamlining meant that any deal should continue as had been laid out in the agreement, regardless of any and all future changes to the government of Iraq. The source added that ExxonMobil was at one stage prepared to continue with the CSSP but only if the contracts were drawn up in a truly transparent manner by lawyers it approved, the accounts were managed and audited by accountants it approved, and the Iraqi authorities also managed their side in a similarly above-board way. Subsequent to this, a senior legal source in Washington exclusively told OilPrice.com that any major agreements signed by big U.S. oil and gas firms in Iraq will have to be agreed in full by U.S. lawyers, all accounts will have to be checked by U.S. accounting firms, working processes will have to be checked by U.S. project consultancy firms, and security issues of any nature will have to be worked through and then monitored on an ongoing basis with U.S. security organisations.
Further light on precisely why ExxonMobil believed it necessary to put these safeguards for its own reputation and that of the U.S. in place might be inferred from independent non-governmental organisation, Transparency International (TI), in its ‘Corruption Perceptions Index’. Iraq, which at the time regularly featured in the worst 10 out of 180 countries for its scale and scope of corruption, was described as: “Among the worst countries on corruption and governance indicators, with corruption risks exacerbated by lack of experience in the public administration, weak capacity to absorb the influx of aid money, sectarian issues and lack of political will for anti-corruption efforts.” TI added: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery that have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery.” It concluded: “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.”
As it now stands, French energy behemoth TotalEnergies has taken over the driving seat for the West in the CSSP, as part of a US$27 billion four-pronged deal in Iraq, which also includes oil and gas field production work and projects to reduce associated gas flaring. That this firm also faced the same initial problems as ExxonMobil was evident when it refused to go ahead with the deal when faced in 2022 with the prospect that Iraq would resuscitate its rightly-buried Iraqi National Oil Company (INOC). Widely regarded as one of the most corrupt organisations to operate in any field anywhere in the world ever, INOC was immediately a deal breaker for TotalEnergies. Having set a precedent in its flat refusal to countenance such shenanigans, the French firm appears to have established a solid position from which to move forward on its four-tier project. If Iraq manages to keep some of its questionable operating practices in check for the duration of TotalEnergies’ four projects, then it may yet see a lot more of its oil production potential realised.
By Simon Watkins for Oilprice.com