Iraq on collision course with OPEC or itself?

The Iraqi government has great expectations for its massive, low cost oil resources. By opening the door to international oil companies for the first time since Saddam Hussein’s Baathist party nationalised oil concessions in 1972, the government is hoping to increase crude oil production to six million barrels per day (bpd) from 2.5 million in five to six years. The successful implementation of its oil development plan would put Iraq on a collision course with OPEC.

The most likely factor to impede the rapid development of Iraq’s oil resources, besides another oil price war, is a civil war between Arabs and Kurds. Wars and their aftermath have been impeding Iraqi oil ministry plans to rapidly ramp up oil production for the past three decades.

Despite the first of two licensing rounds being a relative flop, Iraq could still easily meet its production goals; a testament to the country’s incredible resource base. On June 30, the Iraqi oil ministry awarded only one of eight 20-year service contracts — six major oil and two gas fields — up for bid after asking the leading consortium to accept drastically lower service fees.

BP and China National Petroleum Corp. (CNPC) agreed to accept US$2 per barrel, rather than US$3.99 per barrel, to re-develop the Rumaila field, the country’s largest explored oil field. Rumaila has 17.7 billion of proven oil reserves, more than a half of the United State’s total reserves. The BP/CNPC consortium has agreed to increase Rumaila’s production to 2.85 million bpd from one million within six years, which would place it second in productivity to Saudi Arabia’s Ghawar field.

Learning from its mistakes, the Iraqi oil ministry has softened the terms for the second bid round, to be awarded in December. The second round is for 10 oil and gas fields, and the goal is to produce an additional two million to 2.5 million bpd from these fields within four to five years.

If Iraq was to increase production to six million bpd during the next six years, the annual increment would be almost 600,000 bpd. The demand for OPEC crude oil (excluding inventory changes) increased by an average of 500,000 bpd per year over the past decade.

It is unlikely the other OPEC members (such as Saudi Arabia) would allow Iraq to grab all the incremental demand for OPEC crude oil and more over the next six years without a fight, especially since OPEC-11 spare capacity has increased to 6.6 million bpd because the Global Recession, and the Saudi’s 1.2 million bpd Khurais field is just coming on line.

Although violence in Iraq has dropped significantly since the Shiite-Sunni bloodbath in 2006 and 2007, northern Iraq remains the country’s most dangerous region. Al-Qaeda in Mesopotamia retains a foothold in Mosul, Iraq’s largest northern city, where bombings, shootings and assassinations remain almost everyday occurrences. The Sunni extremists are attempting to ignite ethnic tensions between Arabs and Kurds in the north, as they previously did between Shiites and Sunnis in central Iraq.

Al-Qaeda’s potential to start a conflagration in the north is great, given the Kurds desire for greater autonomy if not outright independence. The Kurdistan Regional Government (KRG) has enjoyed de-facto independence from Baghdad since the end of the Gulf war in 1991 and is resistant to the Iraqi government’s drive to re-centralize power.

In contrast, the KRG is advocating a highly flexible federal system that would allow it almost complete control over the region and to extend its borders to the “disputed areas” beyond the “green line” separating Kurdistan from the rest of Iraq. The KRG believes it should have full control over the natural resources in the region, not the central government, and has awarded a number of contracts to oil companies to develop its oil fields.

Despite allowing two new fields in Kurdistan — Tawke operated by Norway’s DNO International and Taq Taq operated by Addax Petroleum, now part of China’s Sinopec — to export a total of 100,000 bpd through the northern pipeline running to the Turkish port of Ceyhan since June 1, the Iraqi government continues to deem all contracts signed by foreign firms and the KRG as illegal. To date, Baghdad has failed to pay either DNO or Addax for its exported oil.

The disputed territories that the KRG claim as their own involve 11 to 15 areas outside the green line containing a mix of Arabs, Kurds, Turkmen and smaller ethnic groups, with the city and province of Kirkuk at the heart of the matter. Kirkuk produces about a fifth of Iraq’s oil and holds about 16% of its proven oil reserves. More important, Kurds view Kirkuk as their “Jerusalem.” Heavily armed Kurdish Peshmerga forces have kept Iraqi army units from entering the disputed territories under their control.

U.S. officials, including Secretary of Defense Robert Gates and General Raymond Odierno, the commander of U.S. forces in Iraq, have warned that ethnic tensions could break into armed conflict between the Iraqi military and Kurdish Peshmerga, or even a civil war between Arabs and Kurds, particularly after the withdrawal of U.S. forces from Iraq at the end of 2011.

*Vincent Lauerman is president of the Calgary-based consultancy Geopolitics Central, and the former editor of the journal Geopolitics of Energy. He has been analyzing and commenting on geopolitical issues and the world oil market for more than 20 years.

Tags:  Iraq, OPEC