Tapping Iraq

Through five-plus years of fighting in Iraq, oil has been the elephant in the war room. The country’s vast and underexplored oil resources typically take a backseat to more pressing security questions, but in any broad analysis of Iraq’s long-term prospects, talk of crude output is never far away. Oil is Iraq’s economic motor and the key to meaningful reconstruction in the country, many experts say. Even discounting conspiracy theories that the United States invaded Iraq for its oil, increased Iraqi oil output would also be an unequivocally good thing for Washington. Among many other side effects, higher output levels could help mitigate concerns about the total economic cost of the Iraq war by tapping one of the largest—and most underutilized—national reserves in the world.

The potential risks and rewards of gaining access to Iraqi oil will come into sharp focus over the coming months as Iraq prepares to sell oil contracts (WSJ) to foreign firms for the first time in more than three decades. Iraq’s oil minister says he wants to grant development rights to six major oil fields—the “backbone” of Iraq’s oil industry—in the hopes that foreign investment will raise Iraqi output from 2.5 million barrels per day today to 4.5 million in 2013 (FT). Using estimates from the Central Intelligence Agency, such an increase would raise Iraq from the world’s fourteenth leading producer of oil (in 2007) to its fourth leading producer, behind only Saudi Arabia, Russia, and the United States. The ramifications of opening up these reserves would likely be felt globally. In a recent podcast, Robert D. Hormats, the vice chairman of Goldman Sachs International, said increased Iraqi oil exports could potentially “have a very positive effect on the oil market and therefore on the global economy.”

For all the potential gains, however, the effort to open up Iraqi oil may well prove a hornet’s nest, both politically and logistically. Iraq’s goal of opening up its oil fields to international firms stands in stark contrast to global energy market trends, in which national oil companies, not private firms, have seized larger market share. The New York Times reports that many Iraqis remain skeptical about doling out contracts to Western firms, despite insistences from Iraq’s government that multinational companies will only serve as service providers, not project owners, and that Iraq’s two national oil companies will have at least a 25 percent stake in all projects.

Foreign oil firms, too, seem unlikely to dive headlong into Iraqi oil projects without certain assurances, even as they salivate over the idea of winning production contracts through Iraqi auctions. The Journal article cited above reports that oil firms will likely wait for Iraq to forge an oil revenue-sharing agreement before broadening their involvement in the country’s oil projects. Yet the prospects for such a deal seem highly uncertain. Prior draft agreements have met a sharp response from Sunnis and Kurds, each for different reasons, and experts say disputes over how to divvy Iraqi oil revenues don’t seem much closer to resolution than they did years ago.

Even if a revenue-sharing bill were passed, other concerns would likely persist. Firms likely will seek guarantees that Iraq’s government won’t renege on contracts, as it has before. French and Russian firms experienced a similar fate in Iraq, following Saddam Hussein’s decision to nationalize Iraqi oil production during the 1970s. Other firms have been burnt recently in Venezuela and Russia, even after investing substantially in infrastructure development. Until Iraq’s government can assuage these concerns, a gusher of new oil output seems little more than a pipe dream.