OPEC appears to be stuck in a vicious cycle of cutting production only to see its share of the market filled by the United States and other, higher-cost producers that are not bound by the production restraints of the OPEC+ agreement.
The appointment of Thamir Ghadhban as Iraq’s minister of oil is a welcome development for the country’s oil sector, the mainstay of its economy. A technocrat who served previously as interim minister during the transitional period following the U.S.-led invasion of Iraq in 2003, Ghadhban has managed to maneuver his way around the maze of Iraq’s sectarian politics without upsetting any of the parties now vying for the remaining ministerial portfolios in the new Cabinet. Yet for all his excellent credentials, Ghadhban faces multiple challenges, not least of which is a resurgence of violence in the majority Shia province of Basra and the apparently intractable dispute with the semi-autonomous province of Kurdistan over revenue sharing and oil exports. He will also have to oversee a restructuring of the energy sector to make it more efficient and accountable without upsetting the vested interests that have benefited from the absence of good governance across the Iraqi political spectrum.
Ghadhban was among 13 ministerial nominees approved by the Iraqi Parliament in October when Prime Minister Adel Abdul Mahdi submitted his Cabinet list to lawmakers. But the full Cabinet has yet to be constituted months after the May elections after some members of parliament objected to eight of the proposed candidates, leaving these posts unfilled, including the ministers of interior and defense, two of the most contested jobs in the Cabinet. This prompted Abdul Mahdi to invite online applications for ministerial posts from the public, an unusual step apparently designed to sidestep the sectarian horse-trading that has been the norm in Iraqi politics since 2003.
As both oil minister and deputy prime minister for energy, Ghadhban has more authority than his predecessors to reshape policy and introduce accountability and transparency to the energy sector, which generates nearly all of Iraq’s revenue. But it is a high stakes gamble. Iraq has persistently topped the list of most corrupt states in the annual rankings published by Transparency International. The question is not whether Ghadhban is willing to take action to root out corruption and streamline the bureaucracy that has become endemic but whether he will be allowed to do so by those who have benefited from the lack of accountability in his and other ministries.
That may be Ghadhban’s biggest challenge as he assumes his dual duties but one that needs to be addressed urgently given the importance of the energy sector to Iraq’s economic well-being and internal stability, as well as for the security of oil supply globally. Public discontent in the south has grown over the lack of adequate public services and in recent months this has taken a violent turn in Basra, where the provisional authorities have long complained of being marginalized by Baghdad while their demands for a higher share of oil revenue have been ignored. Nearly a dozen Iraqis were reported to have died during violent protests in Basra in September. Demonstrators attacked government buildings as well as the U.S. and Iranian Consulates in a show of anger against what they perceive to be foreign interference in Iraqi politics. At one point, the protesters forced the closure of the port of Umm Qasr, highlighting the risks of continued unrest on Iraq’s main Gulf oil export terminals should they evolve.
Iraq’s current oil production of just over 4.6 million barrels per day (mb/d) is close to the December 2016 average, though it could easily increase output by at least 200,000 barrels per day if Baghdad can reach an export and pipeline agreement with the Kurdistan Regional Government, thereby allowing stranded oil to flow from the Kirkuk fields. Iraq is the second largest producer and exporter of crude oil after Saudi Arabia within OPEC. More importantly, Iraq is expected to provide the largest percentage of additional oil production capacity within OPEC in the decades to come. With U.S. sanctions targeting Iran’s energy sector expected to delay capacity growth in the Islamic Republic, Iraq’s oil fields will have an important role to play in filling any supply gaps that may emerge in the medium term.
As a veteran oil man and senior advisor to the government in his many incarnations during a long and distinguished career, Ghadhban is certainly qualified to lead the energy sector during this period of domestic and international transition. However, he will need to act fast to transform the energy sector and deliver the higher volumes needed to beef up state revenue and secure the funds needed for energy infrastructure, including export facilities, and for the reconstruction of areas devastated by the brutal occupation of the Islamic State in Iraq and the Levant.
More pressing is the need to secure electricity delivery to the millions of Iraqis who have suffered for close to 15 years from power shortages and a general lack of public services. In that, Ghadhban has a very able partner in the Ministry of Electricity with the appointment of another highly qualified technocrat, Luay al-Khateeb, as minister of electricity. Khateeb, who previously headed the independent Iraq Energy Institute, has served as an advisor to the government on energy matters and is an expert on gas, a much-needed commodity that has lagged growth in the oil sector.
Both Ghadhban and Khateeb have hit the ground running. Ghadhban has already held talks with parliamentarians representing Basra to discuss the recent unrest and has promised to address their grievances. He is also reportedly negotiating with Erbil to try to break the deadlock over the Kirkuk fields, but an agreement does not appear to be imminent. Khateeb, meanwhile, has already met with a delegation from GE Power to fast track an agreement to develop the power sector.
Generating sufficient oil revenue will be crucial to the rehabilitation of the power sector and the ongoing reconstruction effort elsewhere in Iraq. Oil export revenue accounts for more than 80 percent of fiscal revenue and around half of gross domestic product. Revenue from oil also supports the state-dominated economy in providing jobs, directly or indirectly, to some eight million Iraqis in the public sector. In the 2019 draft budget, oil will account for nearly 90 percent of state earnings as non-oil revenue is expected to shrink and there has been little effort to date to diversify the economy. This leaves Iraq highly vulnerable to oil price volatility and highlights the structural weaknesses inherent in a centralized, rentier economic model. A large portion of the budget goes to pay salaries and pensions while state subsidies on food and fuel constitute another heavy fiscal burden. The battle against ISIL, whose fighters overran a third of the country in 2014, has also strained public finances – additional government spending is believed to be in excess of $100 million since 2014.
For now, Iraq has no choice but to remain focused on oil and gas to sustain the economy. Ghadhban has provided a rough blueprint of the direction he intends to steer the sector. In a November 6 interview with Reuters, shortly after his confirmation, he said he is targeting production capacity of 5 mb/d in 2019 and 8.5 mb/d in coming years. Raising output capacity to 5 mb/d by 2019 is a realistic target. Further increases from southern fields, which are being developed by a consortia of multinational oil companies in partnership with Iraqi state-owned operators under long-term service contracts, is contingent on upgrading infrastructure in the south, which would account for 6.5 mb/d of the additional volume projected for the coming years. The International Energy Agency, in its medium-term Oil 2018 report, projects Iraq will raise capacity to 5.36 mb/d by 2023 from 4.86 million b/d in 2018 with southern fields providing the majority of the increase.
Northern fields centered around Kirkuk will provide an extra 1 mb/d once a new pipeline from Kirkuk to Ceyhan is operational. This would imply that Baghdad is proceeding with plans to build a new pipeline to carry crude oil from its northern fields rather than using the expanded pipeline through Kurdish territory. The existing Kirkuk-Ceyhan pipeline was badly damaged during the incursion by ISIL. Baghdad and Erbil appear to have reached a tentative agreement on the export by the federal government of crude oil via the pipeline controlled by the Kurdistan Regional Government to the port of Ceyhan in Turkey. This test run will allow Baghdad to export an additional 50,000 to 100,000 b/d from the Kirkuk fields but the Iraqi Oil Ministry has specified that the agreement, which appears to have been a response to U.S. calls for more OPEC crude to make up for the expected shortfall from Iran, is a temporary measure. Previous such accords have faltered in the absence of a permanent and lasting agreement on revenue sharing and crude oil marketing.
In the south, further capacity expansion has been hampered by the delay in building a water treatment facility to provide water for reinjection into producing fields to manage reservoir pressure. Ghadhban said in the interview with Reuters that he has held talks with international oil companies on upgrading capacity from northern fields, which he said was a priority. He also said that the ministry is evaluating bids from three foreign contractors for the multibillion-dollar water treatment project and that he expected work to begin in 2019.
While there have been several false starts in the past with the water injection project pushed back repeatedly, Ghadhban has a better chance of delivering results. He is held in high esteem by the international oil companies operating in southern Iraq and is familiar with the geology of the Basra fields. As a young engineer, he worked at the Basra Petroleum Company shortly after the nationalization of the Iraqi energy sector in the early 1970s and then for the Iraqi National Oil Company, which he will now be in charge of reviving as minister.
Ghadhban has not said when he expects the Iraqi National Oil Company to become operational. The previous government had rushed through a draft law to re-establish it and transfer operational powers to a national oil company. Former Oil Minister Jabbar al-Luaibi was to have headed the Iraqi National Oil Company, but the draft law is now under judicial review, which could prove a very lengthy process. Although Ghadhban has previously been a strong advocate for the restoration of a state oil company, and had been slated to head a new Iraqi National Oil Company at one point, it is not clear how the new company would be structured and what role it could have in the vital sector.
For now, Ghadhban will have to prioritize the more immediate tasks as he prepares to attend his first OPEC meeting in Vienna as head of Iraq’s delegation on December 6. OPEC members are expected to discuss a proposal to cut production, possibly by 1 mb/d or more, to reduce some of the oversupply that has weighed on oil prices and led to an unwelcome rise in global inventories. Ghadhban has said that OPEC will have to wait to see the extent of the shortfall from Iran before making a decision on output. Although Iraq’s priority would be to secure maximum revenue from exports, it is unlikely that Ghadhban will risk souring relations with Saudi Arabia. Saudi Minister of Energy, Industry, and Mineral Resources Khalid al-Falih visited Baghdad on November 10 to discuss another extension to the November 2016 production cut agreement between OPEC and non-OPEC members.
Ghadhban will need to tread carefully so as to help preserve Iraq’s relations with the influential Gulf Arab states without upsetting Tehran, an important political ally to the Baghdad government. Iraq is among eight countries that were granted waivers by the U.S. administration to continue importing Iranian petroleum products, but the waiver is temporary. Iraq will be allowed to import Iranian gas and electricity for 45 days so long as payment is not made in U.S. dollars. The problem for Iraq is that it has very few options because it cannot currently process enough of the gas it produces to meet demand.
That reliance on Iran for costly gas is a symptom of the energy sector’s dysfunction. For years, Iraq flared nearly all the gas produced from its oil field operations in the south at volumes that at one point made up 25 percent of total gas flared in the Middle East. This associated gas is being collected from the oil fields and treated at a large gathering station in Basra, but the project was late to start and is still ramping up to capacity, forcing Iraq to resort to imports from Iran. All this points to the need for Iraq to consider how to extract maximum value from its hydrocarbon resources while considering a pathway toward less reliance on oil for its revenue.
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