Politics and oil output don't mix

by Erik Eckholm

With vast reservoirs of oil and the potential to rival Saudi Arabia, Iraq has long tantalized the world's energy industry. But the new Iraqi government's glaring failure to agree on an oil minister, the sectarian bargaining over this crucial appointment and the reinvigorated insurgency have been new reminders of the political faults that keep the country's petroleum promise unrealised.
"Unfortunately, oil in Iraq is being politicised more and more," Issam al-Chalabi, who was Iraq's oil minister in the late 1980s, told a conference of scholars and oil company executives in Washington in late April. "This is dangerous."

Chalabi, now a consultant based in Jordan and Baghdad, is not related to Ahmad Chalabi, the former exile who, in the latest of his political ups and downs, has been appointed interim oil minister.
As recently as April, a senior Iraqi leader evoked the eternal dream that Iraq could produce 10 mm bpd close to the Saudi levels in 10 years to 15 years. Far less progress than that could alter the global oil market and aid consumers everywhere.

But two years after Saddam Hussein was toppled, production is limping along at about 2 mm bpd, less than before the war. Even at that rate, the production may be causing long-term damage to poorly maintained fields.
US officials had hoped that output at this stage would be at 3 mm bpd, generating money for reconstruction. That level of production could also reduce oil prices, which are now around $ 50 a barrel.

But nearly $ 2 bn worth of American aid to the oil sector has brought only limited gains. Sabotage of a pipeline to Turkey has choked off exports from Iraq's northern fields, around Kirkuk, and violence has slowed efforts to renovate the larger southern fields.
But even if the insurgency is tamed, oil experts say, Iraq will never receive the foreign investment and advanced technologies it needs until the country has a strategy and laws, ideally enshrined in a constitution, for developing hydrocarbons.

Can foreign firms be partners in exploring and drilling new fields and in reaping the product, or will they simply be hired to do the work?
Whatever pattern Iraq chooses, it must be clearly delineated, industry executives say, with protections for foreign investors. The volatile question of regional autonomy, especially for the Kurds who want more control over Kirkuk and its oil, must also be resolved before outsiders will be likely to put large amounts of capital at risk.
"If the northern pipeline could be secured and those fields were brought to their existing capacity, enough oil could flow to change the world oil market," said Lawrence Kumins, an oil expert at the Congressional Research Service. The Kirkuk fields could be producing 800,000 bpd within six months to a year, Kumins said, and "the world oil market swings on a million bpd."

Herman Franssen, an oil specialist at the Centre for Strategic and International Studies in Washington, cautioned against too much optimism. Even if Iraq's political situation stabilizes, he said, it takes years to sign contracts and get oil wells working. Any major decisions on oil development must also await the results of a study, being conducted by British Petroleum and Shell, that will chart the state of the country's oil fields and assess the most promising next steps.
"Doubling output to 4 mm bpd by the end of the decade would be a major achievement," Franssen said. "And that would make a big difference in the global market, absolutely."

No one doubts Iraq's potential for enormous production. Only 17 of its 80 known oil fields have been developed, and the costs of new production are among the world's lowest, according to the US Department of Energy. Only about 2,300 wells have ever been drilled in Iraq: By comparison, Texas has 1 mm wells. Huge geologically promising areas of Iraq have never been explored with advanced seismic techniques.
But the focus now is simply on resuming maintenance at existing fields to safeguard their output. Since the international sanctions that followed Iraq's invasion of Kuwait in 1990, the country has done virtually none of the customary nurturing of oil wells normally carried out every one to three years.
Also halted was the drilling of new wells, which are necessary to replace old ones, to reach shifting reservoir pockets or to apply strategic injections of pressure.