The United States has not developed adequate responses for dealing with hybrid groups like the Houthis.
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On June 27, Iraqi Deputy Prime Minister for Energy Affairs and Oil Minister Thamir Ghadhban opened the Iraq Oil 2019 conference in London by expressing hope that Iraq would soon become “energy independent” and stop importing natural gas and oil products to meet its domestic needs. Addressing a hall packed with international oil company executives, bankers, and diplomats, Ghadhban did not refer specifically to Iran, which supplies Iraq with gas. But he likely had both Iran and the United States in mind, given that Washington has granted Iraq an exemption to continue buying Iranian gas on the understanding that Iraq would speed up the effort to raise its own production and end reliance on Iranian imports. However, this will take time.
The administration of President Donald J. Trump is also aware that denying Iraq the ability to import gas during the sweltering summer months might lead to social unrest. The situation is particularly precarious in the southern oil province of Basra, where the majority Shia population has already expressed disaffection with the poor level of public services and polluted water supplies by staging violent demonstrations in recent months. The Iraqi government does not want to deprive the region that accounts for the majority of the country’s revenue of electricity during the hottest days of the year.
Iraq is now the second largest producer and exporter in OPEC, a position it holds largely because of sanctions against Iran, which previously held the number two slot but has been unable to build any meaningful production capacity in the past decade. The Trump administration’s maximum pressure policy, which is intended to force Iranian oil exports down to zero, has frightened away Western investors and crimped Iran’s oil production and exports. Iraq is expected to grow its oil production capacity over the next decade and account for a significant share of additional supply.
According to a report on Iraq’s energy sector published in April by the International Energy Agency, Iraq has the potential to become the world’s second largest oil exporter, overtaking Russia, by 2030. The report estimates Iraq’s production will increase by an average 1.2 million barrels per day over the next 10 years to reach 6 mb/d, overtaking Canada to become the world’s fourth largest producer. However, any increase in production capacity will depend on securing enough water for reinjection into oil reservoirs. The IEA estimates that Iraq will need more than 8 mb/d of water to sustain production in 2030, and it currently has a supply of only 5 mb/d. Iraq’s Oil Ministry has been in negotiations with a consortium led by ExxonMobil for eight years and is reportedly close to agreement on a project that is of crucial importance if Iraq is to achieve its production capacity targets.
The growth in Iraq’s oil production has been phenomenal since 2003, when the U.S.-led invasion of Iraq ousted Saddam Hussein and resulted in international sanctions that crippled its mainstay oil industry. By opening its upstream sector to international investors, Baghdad drew the largest international oil companies that now operate mainly in southern Iraq to develop some of the world’s largest oil fields, including the massive Rumaila field, the second largest producing field in the world after Saudi Arabia’s Ghawar. Rumaila alone with production of 1.5 mb/d contributes $100 million per day to the Iraqi treasury, according to operator BP. However, decline rates at Rumaila and other producing fields in Iraq are steep while recovery rates are low by international standards. These factors and a shortage of water for reinjection into reservoirs explain the IEA’s conservative estimate of production growth over the next decade. Still, even at this rate, Iraq would provide world markets with the third-largest increment of additional supply by 2030, after the United States and Brazil.
Iraq’s major fields produce gas along with crude oil. However, Iraq lacks infrastructure to gather the gas, treat it, and process it into a fuel that can be used in electricity generation and industry. Iraq is trying to reverse that vulnerability by investing heavily in gas processing and supporting infrastructure.
The technical service contracts awarded to international oil companies since 2009, when Iraq held its first oil auction, did not make it mandatory for foreign contractors to handle the associated gas produced from the oil fields. Much of the gas was therefore flared, which deprived Iraq of potential revenue that was going up in smoke while forcing the government to rely on imports at relatively high cost. According to the IEA’s report on Iraq’s energy sector, gas flaring releases an estimated 30 million tons of carbon dioxide into the atmosphere each year, adding to the environmental problems that Iraq faces already, not least of which is water scarcity. Although some of that gas is now being captured by the Basrah Gas Company, a joint venture between Shell, Mitsubishi, and the Iraqi South Gas Company, more than half of the gas produced in the south is flared.
Beyond the lack of sufficient gas, Iraq’s electricity sector is also in need of an overhaul. The decades of wars and sanctions, starting with the Iraqi invasion of Iran in 1980, have taken their toll on Iraq’s energy infrastructure. Electricity supply is sporadic and there is not enough capacity to meet demand. Iraq currently has some 32 gigawatts of capacity but can only generate around 16 megawatts because of its inefficient grid. Of the 16 megawatts it produces, about 40 percent is lost during distribution. This, according to the IEA, compares with a 14 percent loss of transmission in some of the poorest countries in Africa.
The Basrah Gas Company estimates the value of all the natural gas flared in Iraq at $7 million per day. This does not include the opportunity cost of the oil that is used to generate electricity instead of natural gas, which could otherwise be exported. The Basrah Gas Company puts the volume of carbon dioxide emissions caused by flaring at 20 million tons per year, lower than the IEA’s estimate, but notes that is the equivalent of 90,000 flights from Basra to Hong Kong.
Ghadhban, an experienced oil executive and technocrat, took over as oil minister eight months ago, a position he held in a previous government. At the June conference, he said that production capacity was expected to grow by 2 mb/d “soon” while export capacity will rise to 6.5 mb/d. All but a small volume of Iraq’s crude oil is exported from its southern Basra terminal and on through the Strait of Hormuz, where recent attacks on tankers just outside the strategic oil waterway highlight the risks associated with overreliance on one export route. Ghadhban said that Iraq is working to rehabilitate its northern export pipeline to Turkey’s Mediterranean port of Ceyhan and will revive a project to build a pipeline to Jordan’s Aqaba port, a plan that was suspended after the Islamic State in Iraq and the Levant’s incursion into Iraq in 2014. The main northern pipeline linking the Kirkuk oil field to Ceyhan was the target of insurgent attacks after 2003 and was badly damaged by ISIL militants when they swept across Iraq and occupied roughly one-third of the country. Attacks on energy infrastructure also knocked out Iraq’s largest oil refinery at Baiji. That and the configuration of Iraq’s remaining refineries that produce more of the heavy products such as fuel oil forced Iraq to rely more on imports of lighter refined products like gasoline and gasoil. Iraq imports an average 100,000 b/d of oil products.
Iraq remains heavily reliant on oil for its fiscal revenue and is therefore exposed to oil price volatility. According to the World Bank, oil and gas account for almost 60 percent of gross domestic product, 99 percent of export earnings, and 90 percent of the state’s revenue, a much higher percentage than other Middle Eastern oil producers. This makes the Iraqi economy the most oil-dependent in the world. Little has been done so far to diversify the economy and make use of the country’s abundant renewable energy sources like wind and solar, which would offer a solution to Iraq’s electricity shortages, replace natural gas in power generation, and free up more oil for export in the future by displacing oil products used as feedstock in power plants.
Despite these challenges, Iraq’s oil sector has held up relatively well, though a high level of bureaucracy and corruption continue to plague this key ministry. Ghadhban is taking bold steps to rectify the situation and has already begun to streamline the policymaking process and review badly drafted contracts awarded by his predecessors. He also plans to open up new acreage for exploration, some of which will be for gas development, which would explain why a delegate from Qatar Petroleum, the world’s biggest exporter of liquefied natural gas, attended the London conference. Ghadhban told Iraq Oil Report in an interview coinciding with the conference that Saudi Aramco had expressed an interest in possible exploration in the Western Desert, one of the areas that has not been fully explored.
In fact, much of Iraqi territory is underexplored. Further exploration might lead to a revision of the country’s oil and gas reserves. The BP Statistical Review of World Energy 2019 estimates Iraq’s total proved crude oil reserves at 147.2 billion barrels, the fifth largest in the world, and natural gas at 3.6 trillion cubic meters.
Iraq produced an average 4.6 mb/d of crude oil in 2018 and 13 trillion cubic meters per day of natural gas, low considering the reserve base. However, as crude oil production increases, so will associated gas output, which will add pressure on Iraq to reduce flaring and process the gas. Ghadhban said Iraq aims to stop flaring gas by 2022, a highly optimistic target. But in order to achieve that goal, Iraq will have to invest in new gas infrastructure and rehabilitate some existing facilities. It will also have to consider energy price reforms and eliminate subsidies in order to manage consumption. Ghadhban said the government would make sure that subsidies would be targeted so as not to burden the lower income consumer.
For now, Iraq will need the help of its neighbor Iran to sustain its power sector as it builds domestic capacity. However, it isn’t yet known whether Washington will be willing to extend the sanctions waivers indefinitely. Iraq may soon be forced to halt its gas imports from Iran, but that is not the independence it aspires to, not yet anyway.
is a non-resident fellow at the Arab Gulf States Institute in Washington, a contributing editor at MEES, and a fellow at the Energy Institute.
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