Vision Of The Future: What's Next For Iraq?

verfasst von Cosa, 07.07.2003, 21:28

-->Hi,

ein interessanter Artikel von MEES mit vielen Zahlen zum Irak:

VOL. XLVI
No 27
07-July-2003

IRAQ

Vision Of The Future: What's Next For Iraq?

By Saadalla al-Fathi

The following paper was presented by consultant Saadalla al-Fathi at the 8th Annual Asia Oil & Gas Conference in Kuala Lumpur, Malaysia on 15-17 June.

There is no doubt that Iraq has great oil potential with its vast reserves of 112bn barrels and 80-year-old oil industry which have a substantial impact on the economy. However, Iraq’s oil industry and particularly its production capacity is not commensurate with its oil resource base or its economic needs and should be expanded. In this presentation I shall discuss the environment that is likely to influence such expansion.

The evolution of oil prices, prospects for world economic growth and the energy and oil policies of the industrial countries continue to determine the evolution of the world oil market to a large extent. Oil prices are expected to remain moderate to the year 2020, while economic growth rates will average 3.3% per year with strong growth in developing countries. Energy and oil policies of industrial countries will remain cautious, driven by supply security concerns which will continue to drive fuel substitution, conservation, stockpiling and diversification of oil production.

World oil demand is expected to grow from 76mn b/d in 2000 to 105mn b/d in 2020. Non-OPEC supplies are still resilient and will continue to increase for some time. Therefore, OPEC production to balance the market is expected to increase particularly after 2005 to a level of not less than 50mn b/d in 2020 and OPEC output capacity will increase accordingly. In this perspective, there is plenty of room for Iraq and other OPEC states to increase capacity. Iraq is likely to stay in OPEC as any future government will find it difficult to justify leaving the organization. OPEC tends to stabilize the oil market for the benefit of all its members and Iraq will need such stability. In any case, OPEC decisions are unlikely to burden Iraq in the short to medium term.

At the beginning of 2003, it was generally agreed that Iraq’s sustainable oil production capacity was of the order of 2.7-2.8mn b/d. Late in 1999 Iraq even produced over 3.1mn b/d for a short time. When we remember Iraq’s average production of 3.5mn b/d in 1979 it becomes clear how production capacity has slipped over the years.

There are many factors to be considered in support of raising the production capacity of Iraq. The country’s oil potential is under-utilized, with more than one third of the country unexplored and few of the discovered fields developed. The massive reserves of Iraq are produced at the most economic rate among oil producers in the world. The life of Iraq’s reserves is the highest in the world at 128 years.

The importance of oil in Iraq’s economy cannot be underestimated. The greater majority of Iraq’s foreign currency income is generated from its oil exports. In 1990 Iraq’s GDP was about $75bn and the value of its petroleum exports was $9.6bn. In 1991, however, GDP was down to about $10bn and the value of petroleum exports was close to $0.4bn. Clearly, the precipitous decline of petroleum exports was a major factor in the general decline of the economy, in addition to other factors related to the UN embargo on Iraq and the damages sustained in the war of 1991.

At the same time, Iraq’s per capita income in 1990 was $4,145 and fell to $1,178 in 2001. The decline in the standard of living was due to the decline of Iraq’s oil production and the under-investment in the oil industry during that time. While the revival of all the sectors of the economy is necessary to raise the standard of living, the role of the oil sector as a driving force is extremely important. Therefore, rehabilitation of the oil industry and fresh investment aimed at raising oil exports and oil production capacity are needed. Even if the desired increase of oil production capacity is realized, it may not be sufficient by itself to increase the GDP per capita to the 1990 level in the near future.

Iraq’s debts have been estimated at $116bn, excluding the war reparations. Although debt relief is widely talked about, it is not guaranteed, because many conditions must be fulfilled before this process can be started, including an agreement with the IMF. Iraq would be treated as a country rich with resources and, therefore, according to the banks, debt relief would be strange. Similarly, war reparations to Kuwait and others are still an ongoing process with the UN Compensation Commission with estimates of the final settlement widely ranging between tens to hundreds of billions of dollars. The only way to alleviate some of these burdens is to expand the oil industry, which will invigorate the rest of the economy.

For a long time the Ministry of Oil’s objective was to raise production capacity to 6mn b/d seven years from the lifting of economic sanctions. This program may be running a little late, but it is still achievable by 2010-11. I believe capacity in the years 2015 and 2020 could well be at 7.0mn and 8.5mn b/d respectively.

The problems of sanctions and the politicization of the oil-for-food program, under which the US and the UK put holds on equipment and spare part deliveries, rendered that program largely ineffective in raising Iraq’s production capability. Not more than 30% of the approved contracts were actually delivered to Iraq. Given this, the Iraqis did an amazing job in keeping the industry going. Now that this episode is behind us, further delays will result from the March 2003 war and the occupation of Iraq. The irony of the war is that it was not the conflict itself that did most damage to the industry, but the subsequent looting that is still going on today. The repair of the additional damage sustained by the industry is yet to be seen.

In the downstream, there is an equally challenging task ahead. The refining industry, gas processing plants and the transportation and distribution networks of crude, gas and oil products have suffered great damage caused by wars and sanctions. The Iraqis have done a tremendous job of keeping these plants going in the face of adversity, but sometimes they had to sacrifice some of the product qualities for quantities. Therefore, these plants and systems need to be rehabilitated and upgraded to the level that will enhance their productivity, improve product specification and maintain safety, health and environmental standards. The refineries in Iraq are simple in configuration and need to be enhanced by conversion facilities to increase the production of light products and reduce the volume of surplus fuel oil. The Ministry of Oil already has plans to do so in both Baiji and Basra refineries. It may need to go one step further now that sanctions are lifted. The gas treatment plants, too, need a lot of rehabilitation and upgrading if gas and LPG needs are to be met. Iraq also needs to develop some of its non-associated gasfields to back up its system in case of fluctuating crude production. The natural gas trunk-line linking the north and the south must be completed without delay. Furthermore, the products transportation network and respective storage facilities must be upgraded and expanded to reach new destinations.

In light of the current situation in Iraq it is not easy to estimate the investment requirements in the oil and gas industry. There were estimates by the Ministry of Oil for the time up to 2010 and I believe these may have to be revised upwards. After three wars and 13 years of economic sanctions, it is not surprising that the country needs renewal and rehabilitation of many of its production facilities, infrastructure and services.

The oil and gas industry and the power sector in Iraq up to the year 2010 will need to invest at least $40bn, according to a paper by Iraq in the Arab Energy Conference in Cairo 2002. While $30bn of investment is estimated for the oil sector (and private estimates by oil companies put it even higher at $40-45bn), this figure is likely to change for many reasons. First, an allowance must be made for the additional damage that was sustained in the recent war and subsequent occupation. Second, it must be remembered that the above estimate was made during a difficult time and was most probably constrained. Third, due to the new damages sustained by all sectors of the economy and infrastructure and in order to expedite the recovery, the expansion of the oil industry itself must be expedited and this will add to costs.

Most of the investment must be made within the next five years if Iraq is to maintain, modernize and raise oil production, refining and gas processing capacity. This will add to the pressure on the labor market, the ports and the transportation system.

Will Iraq be able to finance these programs? During the MOU program between December 1996 and December 2002, Iraq exported 3.3bn barrels of oil with accumulated revenue of nearly $60bn. In the meantime, Iraq allocated $4.8bn for the oil and gas sector, which is about 8% of the revenue during that period. That was not easy to achieve as the needs of other economic sectors were rising and the oil sector did not have the same leverage with the UN or the Iraqi government.

Therefore, even if total Iraqi oil exports double over the next six years and the price of the average Iraqi crude remains at around $22/B, Iraq may have to allocate close to 15-20% of oil export revenue to finance its oil and energy investment alone. This is indeed
high considering the needs of other sectors of the economy and the competition that will arise as a result of the new political
situation and the urgent needs of all other sectors. There is no foreseeable improvement in oil prices that will change this perception.

Therefore, Iraq will have to resort to all other means available to it, such as borrowing and investment agreements with international
oil companies (IOCs) based on service, buyback or production-sharing contracts. Other sectors of the economy cannot obtain
foreign financing as easily as the oil sector and therefore raising capital in the international market for the oil industry will allow local
resources to be invested in other sectors of the economy. The attractiveness of Iraq’s oilfields, where the capital and operating costs
are among the lowest in the world, and the relative ease of their development in comparison with other countries will enhance the
already high expectations of oil companies in working with Iraq.

The relations between the producing countries and the IOCs have evolved over the last 20 years to create a more amicable and
accommodating atmosphere. The ownership of the reserves is settled in favor of the producing countries and the new contracts are
largely commercial and intended to realize a fair deal for both sides agreed upon in a transparent, and often competitive, negotiating
process. The technology, and the operating and management practices are objectives that come with the financial side of any
agreement and they are often modeled for the maximum participation of the producing country. The training of Iraqi engineers and
technicians is something that IOCs will be expected to carry out as part of their contracts.

For the last 13 years, and to a lesser extent even before that, Iraq has been cut off from a lot of technological developments that
elsewhere resulted in better oilfield practices, lower investment and operating costs and better recovery factors of oil reserves.
Therefore, an infusion of technology into Iraq’s new oilfields is likely to generate similar results. The spillover of this technology to the
existing fields will also be beneficial particularly due to the maturity of these fields and the need to apply new methods and practices
to manage them optimally.

Although my views are very clear about the need to cooperate with IOCs to invest in Iraq’s oil industry, I do not believe that this
should be a wholesale process without limits. It is very dangerous to think that Iraqis will simply take a back seat and hand over or
“parcel out” the whole industry to others. There are a lot of activities and developments that the Iraqis themselves can carry out, and
they will not be persuaded otherwise. IOCs would be well advised to respect these aspirations and to cooperate with the Iraqis in this
respect. Stiff resistance from Iraq’s oil technocrats and the public at large will meet irresponsible calls from some circles for
“denationalization, privatization or decentralization”. More importantly, such slogans, which are marketed as part of a liberal agenda,
will plant mistrust in and impact negatively on new proposals for cooperation and cause additional delays in the realization of an
otherwise clear objective.

However, I am not opposed to the privatization of what was already started years ago in the distribution of oil products. In fact, I see
a large scope for it to expand into the LPG marketing, lube oil blending and distribution, drilling and other service activities. Also, there are many ways to enhance the participation of private Iraqi capital by itself or jointly with foreign capital. I take this opportunity to call for the establishment of a private Iraqi oil company which should be allowed by law to participate on its own or jointly with others in developing Iraq’s resources in the upstream as well as the downstream sectors. While, in my humble opinion, such views will avoid the divisive and totally misconstrued calls for “denationalization, privatization or decentralization”, they will nevertheless enhance gradually the role of the private sector in Iraq in pursuing its goals without collision with those of an already well established public sector.

I have tried to be as positive as possible under the circumstances, projecting a future view of the Iraqi oil industry that my countrymen at the Ministry of Oil have aspired to for a long time. But I have to admit that the conditions on the ground do not encourage optimism. Over the past two months, the occupying forces have failed to bring the necessities of law and order, and this failure has contributed to additional damage and loss of property. We hear so much about the protection of the Ministry of Oil - it is as if the whole oil industry was hidden in that building and we are supposed to thank the occupying powers for their act of chivalry. Let me assure you that even this small task was not achieved without loss. In reality the ministry suffered from looting, and a lot of exploration data at the central laboratories in Baghdad, which houses Iraq’s geological records, and the drilling company headquarters was stolen. More importantly, the occupying powers have done little to secure Iraq’s oil infrastructure, which is the real heart of the industry. Crucially, all the installations in the south were attacked, including the headquarters of the Southern Oil Company, with its records looted; and these attacks continue to this day, capping Iraq’s production and delaying the restoration of much needed revenue flows. I am scared to think about the consequences of the loss of records and I certainly hope that my fears are exaggerated. These records were the result of 80 years of hard work and the expenditure of billions of dollars.

Similarly, the policies of the US occupiers have focused on sweeping management and personnel changes that are likely to cause administrative havoc in the industry, which potentially stands to lose some of its best specialists as a result. Some of these people are the reason the industry survived the 13 years of crippling sanctions. This policy has also encouraged a witch-hunt that is still going on, and a situation where some feel empowered to decide the fate of others. It is difficult to see how this policy will contribute to any positive outcome, particularly in the industry where experience and education have often been greatly in demand. In the longer term with the prospect, affecting some badly needed people, the ministry’s objectives may become hard to realize. The international oil industry must demand justice, compassion, fairness and the preservation of human dignity for its counterparts in Iraq.

Stability in the longer term will require making the right political decisions, returning Iraq to Iraqi control and allowing Iraqi officials to plan and negotiate contracts with IOCs. Iraq is not a country that can be governed by trial and error, the way the occupation forces are trying to do it. What is being done now will have a significant impact on the future political and legal environment in Iraq and these issues will be watched very closely by IOCs that will determine Iraq’s attractiveness for much-needed foreign investment. Simply put, companies will be reluctant to invest unless there is a relatively stable and legally elected government in place.


Gruss
Cosa

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• Vision Of The Future: What's Next For Iraq? - Cosa, 07.07.2003, 21:28