Hopes rise for Iraqi oil

Iraq has a new government, its oil minister is looking for business and Al Qaeda takes a hit

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By  Nicholas Wilson Published  July 4, 2006

comment|~|comment200.jpg|~||~|Within minutes of announcing the death of Al Qaeda leader Al Zarqawi, Iraqi prime minister, Nouri Al Maliki, announced the resolution of the political crisis that had paralysed Iraq’s new government. He named Shia figures as the ministers of national security and the interior, and a Sunni was given the defense job.

Both news items were what international energy companies have been waiting to hear before they start massive, long-term investment in Iraq: They want an internationally recognised government and an end to the insurgency. The former has now happened, and the latter may be a step closer with Al Zarqawi’s slaying weakening Al Qaeda, which has deliberately targeted Shias in order to create chaos and near-civil war conditions.

It was all good news for Iraqi’s new oil minister, Hussain Al Shahristani, who says his country needs investment of US $12 - 20 billion to raise oil production to six million barrels per day (bpd) by 2012. “This means $2 - 3 billion of investment a year,” he said at a Turkish-Arab economic conference, when visiting Turkey last month to stump up the cash. Iraq is producing 2.1 million bpd—below the pre-invasion levels. The sector has been crippled by war, sanctions, lack of investment, corruption and mismanagement.

And still more good news for Al Shahristani came when the chief executive officer of Italian energy giant ENI, Paolo Scaroni, said in June the company was considering possible business opportunities in Iraq, at least in the least violent areas of the country.

Al Shahristani has said that he will launch wide-ranging contacts with international oil companies.

Hydrocarbon resources cannot be developed through local efforts alone, because Iraq has neither the means nor the technology to do it.

Al Shahristani also announced last month that a new investment code would be approved this year. The government has given itself two months to draft the law before it goes to parliament he said. And this announcement, while not grabbing headlines in the way that Al Zarqawi’s killing did, is a dramatic leap for the prospects of foreign firms getting access to oil. Currently, it is not even clear if Saddam-era contracts, such as those that Chinese firms had, will be honoured.

Nor are the details and the new government’s interpretation of the constitution clear. The constitution addresses the control and distribution of oil resources in general terms, but exactly how oil revenues will be distributed has not been spelled out. The government has not said if Iraq will form a new state-owned Iraqi National Oil Company (INOC). Without a legal framework as well as security few majors will want to tread on what could become a minefield. The Iraqi government is also likely to be cautious in where it treads too—giving concessions to US and UK firms could be seen as handing over the spoils of war to the victors.

But with creeping energy nationalism spreading in South America and Russia, the number of fields where the majors are likely to get lucrative production sharing agreements has diminished, making Iraq an even more tempting proposition.

According to the Energy Information Authority, Iraq contains 115 billion barrels of proven oil reserves, the third largest in the world (behind Saudi Arabia and Canada), and only about 10% per cent of the country has been explored. Some analysts, including the Baker Institute, Center for Global Energy Studies, and the Federation of American Scientists, believe that deep oil-bearing formations located mainly in the vast Western Desert region could yield another 100 billion barrels of oil. Modern exploration techniques from the past two decades, such as 2-D and 3-D seismic imaging, have never been used in Iraq. “They say Iraq has the third largest reserves in the world, but I think Iraq is really the first because there has been no exploration or investment for all these years,” Al Shahristani said.

Firms will, however, demand a risk premium to work in the country.

Insurgents have repeatedly targeted Iraq’s oil infrastructure over the past three years, hitting pipelines and pumping stations, which are often in an advanced state of disrepair because of under investment. Furthermore, Iraq will need oil revenue to pay off its debts—around $100 billion incurred by the Saddam regime, and a further $250 billion in war reparations to Kuwait. And Kuwait has started drilling for gas in a field that is disputed by Iran, increasing tension near Iraq’s export outlet.||**||

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