Iraq: five years on from allied invasion

Five years have passed since US and UK forces invaded Iraq and overthrew Saddam Hussein. There would be few people who expected the problems there to have lasted so long, with little sign of solutions in the foreseeable future.

Iraq was one of the most important oil producers in the Middle East. The loss of output from the country has been one of the reasons for high oil prices, both directly and indirectly.

Indirectly, the ongoing political crises in the region have affected the policies of other countries, notably Saudi Arabia, whose King Abdullah has frequently linked his country’s willingness to increase oil production to a permanent solution to the Israeli-Palestine conflict. Iranian oil and gas production has also been constrained by UN sanctions, notably on the import of equipment for the industry.

I believe that the problems in Iraq have probably added at least $10 per barrel to world oil prices. Every time there is a new crisis in the country there is usually another jump in prices.

Saddam Hussein was overthrown in 2003. In the years immediately prior to that, Iraqi oil production averaged about 2.5million barrels per day, or 125million tonnes per year. That was about 11% of Middle Eastern and 4% of world output. By comparison, UK output in 2002 was also just under 2.5million bpd, but falling.

Iraqi output dropped to 1.3million bpd in 2003. It has recovered since then and the provisional 2007 estimate is 2.3million bpd.

The BP Statistical Review of World Energy estimates Iraq’s proved oil reserves at 115billion barrels, or 15.5billon tonnes. The reserves:production (R:P) ratio at 158.0, implying that the country could produce oil at the current level of output for another 158 years.

That is an incredibly high figure – possibly the highest in the world – and much greater than the 66.7 for Saudi and 86.7 for Iran. The world R:P average is 40.5 and the UK figure just 6.5.

If these reserve estimates are accurate then it appears that Iraq has the potential for a substantial increase in production, possibly more than doubling to 6million bpd. The problem is: how can that be achieved?

The government has frequently published forecasts of increased oil production, but none has been realised, for a wide variety of reasons, including lack of skilled labour, equipment shortages and – not least – sabotage.

Iraq’s reserves and production are distributed widely. There are many fields in the north in the Kurdistan region, close to the border with Turkey, with the output normally exported by pipeline to Ceyhan on the Turkish coast.

There are also fields in the south whose output is normally exported from terminals on the Gulf. Output from fields in the centre of the country, around Baghdad, was in the past exported via pipelines to Syria and Lebanon, but those routes have been blocked, although there are rumours of unofficial or illegal exports there.

The terminals on the Gulf have been heavily protected since the war but, at the time of writing, there has been renewed fighting in the Basra region. There has also been more trouble in the Kurdistan region, including fighting between Turkish troops and Kurdistan rebels.

It has been estimated that the reconstruction of Iraq’s oil, gas and electricity sectors will require expenditure of at least $30billion (£15billion). The development of new fields will involve a similar magnitude.

Where can this finance come from? High oil prices should benefit Iraq, but I find it difficult to envisage a significant proportion of current oil revenues being reinvested in the industry given the massive problems elsewhere in the economy. About 90% of Baghdad’s revenues now come from oil production. There are also massive problems in distributing the revenues fairly among the Shiite, Sunni and Kurdish communities.

The Iraq National Oil Company needs extensive international assistance. From a US and UK perspective, their companies are obviously the preferred partners, but there are few signs of any significant British, never mind Scottish, involvement. That is understandable given the ongoing security problems.

The multinationals are facing increasing difficulty in accessing new reserves, so Iraq must be of great interest to them. Nevertheless, they all appear to be taking a very cautious approach.

The Russians may be the exception, as is increasingly the case. Lukoil is trying to revive a $4billion Saddam Hussein-era deal to develop the massive West Qurna field, and another Russian company is in negotiations to reopen one of the oil export pipelines to Syria.

There is little doubt that there is massive potential in Iraq’s oil industry. Some progress has been made since 2003, but at great cost. Sadly, I do not expect much more progress in the near future.

Tony Mackay is MD of Mackay Consultants