An Ambitious Project

With the new government, led by Adel Abdul Mehdi, the country's economic revival is underway, with the energy sector leading the way.

by Adib Fateh Ali
16 April 2019
9 min read
by Adib Fateh Ali
16 April 2019
9 min read

The International Energy Agency’s (IEA) recently published annual oil report included the following highlight: “Iraq is strengthening its position as one of the world’s major crude oil producers. As the third global source of new supplies, the country is also driving the growth in supply within OPEC until 2024. Iraq's increased production of crude oil will need to make up for the significant drop in the positions held by Iran and Venezuela, as well as the ongoing fragile situation in Libya. The implications of these developments on energy security are significant and could have lasting consequences.”

With production in January of this year standing at 4.7 million barrels per day (bpd), and exports of almost 3.7 million bpd, Iraq is rapidly moving up the ranking of OPEC’s crude oil producing countries. Currently in second place behind Saudi Arabia (see chart 1), it’s quickly becoming a global power in the field of oil production. The country sees black gold as a means to revive the national economy, defuse fierce internal social conflicts and start the process of reconstructing the regions devastated by jihadist militias in the black years of the Caliphate (2014-2017). The political initiative aims to achieve multiple goals: to gradually increase production and export capacity, diversify export terminals and modernize infrastructure.

It’s an ambitious project, as the conflicts that have plagued Iraq for 40 years have put a severe strain on its national oil industry. They include the eight-year war with Iran in the 1980s and the long embargo imposed on the country after the unfortunate invasion of Kuwait by Saddam Hussein, a fuse that triggered the first Gulf War. The UN Oil-for-Food program, implemented to punish the regime in 1995 (and which stayed in place until 2003), effectively blocked the country’s production activities. These activities restarted slowly under the control of western multinationals after the overthrow of Saddam Hussein’s regime and the arrival of the so-called “coalition of the willing,” led by the U.S. (see chart 2).

The ups and downs of production

The first significant turning point in the recovery of the Iraqi oil sector came in 2012, when the government announced a plan to increase production to nine million bpd by 2017, as many as the Wahhabi kingdom of Riyadh was producing at the time. The goal was pursued tenaciously, albeit slowed down by the spread of Abu al-Baghdadi’s men in the North and West of the country and followed, in June 2014, by the establishment of the Islamic Caliphate. The huge expenses incurred by the Baghdad government to fund the army in its war against the jihadists were compounded by the loss of strategic deposits and infrastructures, starting with the Biji refinery, north of the capital.

But the conflict did not lead to a total collapse of production in the national energy sector: driven by the southern fields, crude oil production began to increase strongly again from 2015, when the fateful threshold of 4 million bpd was exceeded (see chart 2). The positive trend also continued in the years after that. At the end of January 2018, Jabar al-Luaibi, who was Oil Minister at the time, issued an official statement predicting that crude oil production would reach 5 million bpd by the end of the year and that the record figure of 7 million bpd would be reached by 2022. Will the promise be kept? The IEA’s forecasts seem to confirm it.

The scenario has attracted the attention of OPEC and caused significant concern in Riyadh, which has been struggling with multiple problems in recent years: the fall in crude oil prices on international markets, the economic and political cost of the military campaign in Yemen, which has been running since 2015, and internal conflicts which have dented the wealthy kingdom’s budget with a public debt jumping to a record level of 17.2 of GDP in 2018 (see chart 3).

The agreement between Russia and members of the OPEC cartel on reducing oil production quotas, which came into force in January 2017, pushed prices up, but for Iraq it led to a fall in exports of over 900,000 bpd in the first month of this year. Data published last January by the Iraqi Ministry of Oil show total production of 4.58 million bpd against crude oil exports of less than 3.65 million bpd, a significant drop which is expected to be offset to a certain extent by forecasts of an increase in the demand for crude oil of 1.24 percent on international markets in 2019.

With proven oil reserves of around 150 billion barrels (see chart 4) and the prospect of increasing them to 250 billion, just below the 264 billion of Saudi Arabia, Iraq seems determined to maintain growth in production and exports. The conditions are all there: the Siniya, Haditha, Qayyara and Kisk refineries, destroyed by ISIS jihadists, have been reactivated and are producing 70,000 bpd. Capacity will also be boosted by the construction of a new refinery in Kirkuk that will produce 70,000 bpd and the full recovery of production at the main refinery in Biji.

The historic law on oil and the new Government

To add to the strong growth in refining production, an agreement was signed in February 2018 for gas and oil pipelines to be built between Basra, on the Gulf, and the Jordanian port of Aqaba, on the Red Sea. The agreement with Jordan was followed a month later by an important legislative achievement: parliamentary approval of the long-awaited oil law. On March 5, 2018, the Council of Representatives in Baghdad voted in favor of a bill establishing the Iraq National Oil Company. In addition to regulating crude oil production and exports, the state body is tasked with distributing the revenue equally to the different regions of Iraq.

A historic decision, which, according to the government, should allow the country to develop fields, refineries and production plants through local state-owned companies, thereby guaranteeing employment, full sovereignty over its vast resources and independence from foreign companies. All with benefits, even in terms of social peace, for individual regions, which will receive 10 percent of oil revenues.

The creation of a new government last October and, above all, the appointment as prime minister of a “uniting” politician like the Shiite Adel Abdul Mehdi have given Iraq's energy ambitions a new boost. Unlike his predecessors, Abdul Mehdi immediately sought to resolve the strong tensions between Baghdad and Erbil which erupted after the independence referendum promoted by the Kurdish minority in the North. Recently, Baghdad decided to resume the payment of salaries to public employees in the autonomous region of Kurdistan, salaries which had been blocked a few years earlier. The decision was immediately followed by an announcement by the Prime Minister of the Kurdish government, Nichervan Barzani, that the Autonomous Region’s Oil and Gas Council had been assigned the task of “starting a serious discussion with the Iraqi federal government to resolve all the outstanding issues concerning oil in the framework of the constitution.” This announcement promised to make the implementation of Baghdad’s energy plans a real possibility. In the event of an agreement, the Kurds would commit to restoring to the central government the management of the more than 250 thousand bpd exported.

The appointment of an internationally respected and recognized technician to head the oil ministry also reflected the new government’s determination to pursue a winning strategy in the energy field. The new minister, Thamir Abbas Al Ghadhban, held the same post after the fall of Saddam Hussein and, in 2004, he led the Iraqi post-war delegation to the OPEC ministerial meeting. He has over three decades of experience in the Iraqi oil industry. After initially working in the field as a petroleum engineer, he moved to the headquarters of the Oil Ministry, where he worked as Director General of the Reservoir and Field Development Department and later as Director General for Planning. He played a leading role in rehabilitating the severely damaged oil industry after the fall of the regime in 2003.

“Iraq will play a constructive, positive and influential role in OPEC. We will work to increase Iraq's production and export capacity and to diversify export terminals and improve infrastructure,” said Ghadhban in an interview after announcing his new post last October.

The remaining challenges

The recent defeat of ISIS, both in Iraq and in Syria, has undoubtedly reduced the number of attacks in the country, although it would be naive to think that the fall of the Caliphate, at least as a “State,” signifies the total elimination of terrorism in Iraq. Thus the age-old problem remains one of reconciling the Shiite majority with the Sunni minority, the latter belonging to the same faith as al Qaeda's jihadists first and ISIS later. The new government led by a Shiite seems intent on not repeating the mistakes of the past, in particular the marginalization of the Sunni element.  Even moderate Sunnis, however, seem to acknowledge their responsibility for creating the conditions for jihadists to thrive, as they were long held to be the only way to realize their demands.

The hope now is that regional powers, including Shiite Iran on one side and Sunni Turkey and Saudi Arabia on the other, will limit their interference in Iraqi internal affairs by drawing lessons from the Syrian experience, whose conflict has jeopardized the stability of the whole Middle Eastern region. A peaceful and united Iraq can only benefit peace and the fight against terrorism. Not just in the Middle East.