WIDENING GAPS IN THE OFFICIAL STORYIraq's oil and gas potential has been vaunted from the run-up stage to the 2003 war, a war justified or rationalized by Colin Powell's false claims at the UN Security Council that the country had 'huge stocks' of chemical and biological weapons of mass destruction. The IEA continues to vaunt Iraq's oil potential as 'OPEC's coming star', making it a transmitter of upbeat news concocted at Iraq's all-powerful and secretive MOO or Ministry of Oil, headed by Abdul Krim Luaibi.
Today, Iraq suffers from a critical shortage of gas, and therefore electricity production. This is due to lack of investment in gas resource development and infrastructures. Power shortages are themselves also curbing the economy and foreign investment. Iraq desperately needs a huge increase in gas production to fuel power plants - but like investment in oil, that may not be forthcoming.
Newswires regularly post encouraging news on Iraqi oil, for example Iraq's rising rank inside OPEC for oil output. On Dec 28, 2012, Bloomberg reported it jumped two places to No. 2 in OPEC rankings for 2012 - because sanctions-hit neighboring Iran had dropped three spots to fifth pace. Iraq's rank was also helped by third-placed Venezuela's oil output continuing to decline - as it has, on and off since 1999 for a 25% decline in national output over 12 years.
In 2012 Iraq's oil output rose 24% on 2011 to an approximate year-average 3.2 Mbd (million barrels a day), but its chance of repeating the trick for 2013 is zero. The growth of Iraqi output was almost solely due to rising supply from the BP-led Rumaila consortium operating in southern Iraq, the region producing 67% or more of Iraq's total output. Unless Iraq can sweep in more foreign investor funds, and settle rising disputes and standoffs with the major companies operating in Iraq - and in Kurdistan with the KRG or Kurdistan Regional Government - 2013 exports will be down on 2012.
UNSURE AND UNCERTAINThe reliability of Iraqi exports is not only at risk due to Iraq's federal central government in Baghdad refusing to agree to KRG terms on oil revenue and contract issues. The majors, who now ignore Baghdad's strictures on either dealing with or recognizing the KRG, have firmly reacted to the MOO's attempts to force them to focus Iraq's southern fields and mount costly exploration programs in 'new and unexplored areas'. Iraq's fourth and largest energy auction since 2003, in May 2012, which was intended to add nearly 1 trillion cubic metres of natural gas and 10 billion barrels of oil to its huge reserves, flopped in major part due to the MOO writing-in conditions forbidding any deals between the majors and the KRG. The auction's financial terms for company netbacks were also rejected.
Eight 'mega blocks' received no bids at all because none of the 39 approved bidders, including Royal Dutch Shell, BP, Exxon Mobil, Total, Lukoil and Chevron accepted Baghdad's terms. Apart from the KRG issue, which will not go away, and Iraq's heavily deteriorated oil infrastructures which need very heavy investment spending, oil executives, off the record, called the MOO's terms on their netback from production 'insanely greedy'. The MOO had set a netback of $5.38-$6.24 per barrel produced.
Most recently in August 2013, the MOO has re-focused its ire on Shell, blaming the Anglo-Dutch energy giant for a claimed loss of about 45 million barrels or $4.6 billion due to under-production, because Shell 'wilfully under-maintained' its infrastructures at the Majnoon field it operates with Malaysia's Petronas. It also accused Shell of 'wilfully under-investing' in this struggling but giant field - with giant spending needs for rehabilitation and upgrade. Exxon Mobil, at the neighboring regional West Qurna-1 field, has made it plain it wants to abandon the field and sell out, in part due to the corporation signing a six-block deal with the KRG in October 2011 that incensed the MOO, and poisoned relations with Exxon Mobil.
In a statement e-mailed to AFP following the August 2013 dispute, Shell spokesman Diego Perez said he could confirm the very poor state of field infrastructures which 'indicated the need for major additional work", explaining the loss of production. He went on to state the usually-unmentioned major fear of employee security in Iraq's continuing civil war, saying: "The safety of our people and assets remain our top priority in Iraq'.
CIVIL WAR THREATMost foreign oil executives inside Iraq, and oil commentators say that the explosive cocktail of Iraq's unpredictable or 'freewheeling' politics, extreme and intensifying security concerns in nearly all urban areas, and often outside them, and Baghdad's peremptory rejection of oil company financial demands make it nigh-on impossible to rebuild and expand its all-important energy industry. Iraq's economic dependence on oil and gas is however almost total.
According to the UN, in May and June Iraq suffered its highest rate of violent deaths since the so-called 'civil war' of 2007-2008. Many observers say the country is 'standing on the edge of an existential precipice'. In 2013, the monthly death toll has often attained 1000 and injuries 5 times that.
As previously, the threat is renewed Sunni Salafist car bombing and assassination of Shia Muslims, attacks on Shia mosques and politicians, and bombings of Shia shops and commerces. In 2007-08, the US Army's "surge'' and a relentless Special Forces campaign of targeted killings gutted the Iraqi al-Qaeda movement. The military action had an essentially political goal - attack and destroy the 'mid level ranks' of al-Qaeda, limit the insurgents' ability to move in southern Iraq - but did not include a post-struggle 'hearts and minds' campaign, except in highly rudimentary form. With US troops gone and facing an Iraqi government that outside the MOO displays a fatal combination of incompetence, corruption, under-manning and under-financing, the 'surge' has reversed. The former AQI has been succeeded and replaced by the Islamic State of Iraq and al Sham (ISIS), also operating in Syria and Egypt. After the Syrian war, ISIS forces returning to Iraq could number 45 000 or more.
ISIS and its affiliates want a full scale civil war. Their sustaining objective is unambiguous -- foster a cauldron of chaos breaking down the already-weak and divided federal government, detaching Iraqis into base-level sectarian alliances, then create a shariah-law caliphate.
Sunni extremists, similar to the Muslim Brotherhood in Egypt supporting ousted president Morsi can claim that they have been robbed of legitimate power. In the 2010 parliamentary elections, the Sunni-dominated Iraq National Movement of Iyad Allawi won most seats, but Shia prime minister Nouri al-Maliki refused to accept the outcome. Instead, he promised a national unity government with Allawi, and then reneged on that offer following irreconcilable disputes on oil revenue sharing, as well as regional sovereignty and the KRG crisis.
Since then, al-Maliki's armed forces have on several occassions directly massacred Sunni protestors, as well as promoting or utilising Shia militias and terrorists in tit-for-tat attacks on Sunni communities, mosques, shops and commerces. For foreign oil companies, personnel security concerns and costs can only remain high. The often irrational decisions, and aggressive actions of the al-Maliki power group, who cannot be called a 'government', are inevitably most extreme in the oil and gas sector.
In 2013, its grandiose plan to become one of the world's most powerful natural gas producers, at a time when there's an increasing global gas glut and prices can only erode, signals how far out of line with reality the power clique in Baghdad has drifted. Currently, the country is unable even to produce enough gas to run its domestic power plants. Electricity rationing on an episodic and unpredictable basis is the rule in all major urban centers.
THE LIBYA MODELLibya's oil production increased even faster than Iraq's in 2012, more than doubling from its low point during the NATO war of 2011, as operators including Total and Eni returned to the North African Arab nation after the removal of dictator Muammar Gaddafi. This was however not sustainable.
The same war unleashed widespread and continuing Sunni-Salafist extremist insurgency. Libyan oil output fell about 70% in the first 7 months of 2013 to about 0.66 Mbd, close to its wartime low, according to oil minister Abdelbari al-Arusi in a Reuters interview of 27 August.
Highly ironically, due to the Libyan and Iraqi situation, Iran is now seen by rising numbers of analysts and strategists as the 'new hope' for boosting world oil supply - despite global output, using IEA data, increasing 2.7% in 2012-2013 compared with a global demand increase of less than 1.25%. The major fear causing the hunt for new output or replacement capacity to cover Iraqi and Libyan risk, is that Iraq's export surplus will suddenly fall, and its total output will also shrink, like Libya's, due to a fatal combination of negative factors intensified by anarchy and civil war.
Iran's output has been in decline since the end of 2008, Bloomberg data shows, and has accelerated this year as US and EU sanctions were tightened, aimed at curbing the Islamic republic's nuclear program. Due to far greater social cohesion and political stability in Iran, however, an end to sanctions will rapidly trigger the return of foreign oil majors, unveiling the prospect of Iran's total oil output growing at a sustained rate. The extent to which this can cover Iraqi and Libyan risk is presently difficult to gauge, but the need for alternate and secure global oil capacity is clearly growing.
The message that Iraq is now more than ever 'risk-on' seems unknown to the al-Maliki power group or clique presently and shakily wielding federal power in Baghdad. The federal government is however under fast-rising pressure from insurgents, and a highly successful political standoff by the KRG, meaning that the potential for Iraq rapidly ceasing to be 'OPEC's coming star', and falling in OPEC output rankings can only be high.
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