Major bottlenecks in Iraq's oil refinery sector

Six years have passed since the occupation of Iraq and its oil industry still has not recovered to the level of the pre-invasion years. Billions have been sunk into the industry without an apparent result to be compared with the difficult years of the embargo that preceded the occupation.

Oil production in 2008 averaged 2.4 million barrels a day as compared to 2.6 million in 2001. Although this is an improvement over previous years, there are signs of deterioration in the production of South Oil Company where a decline of almost 200,000 barrels a day was seen in the last few months compared to previous months. Changes in management and the fast track remedies to salvage the situation are unlikely to bring a quick fix as long as the divisive and unstable general conditions in the country, brought about by the occupation are still there.

North Oil Company production has recovered close to 600,000 bpd but this is still two-thirds of its production before the occupation. The northern fields close to Kirkuk suffer from a number of problems in addition to the lack of progress in adding new capacity in one of the Kirkuk oil field domes as the ministry engineers are prevented from working there by the infringement of the Kurdish authorities outside their designated areas.

In the downstream sector the situation is not much different. The refineries and gas processing plants are working to not more than 65 per cent of capacity at a time when the country has imported enormous quantities of light petroleum products over the past six years. Although there is a noticeable improvement in 2008 over previous years, the production of light products (LPG, gasoline and middle distillates) at the overall level of 225,000 bpd still 25 per cent below the average level in 2001 and 2002. The situation has been helped by a drastic reduction in demand for light products as it fell by almost 18 per cent since 2005. The loss of demand is due to unemployment and the number of Iraqis forced to seek refuge in neighbouring countries in addition to those displaced inside.

The production and the reduction in demand amounted to a reduction of imports by almost 60 per cent in 2008 compared to 2005. A positive result indeed if it was only for the improvement in production and curtailment of smuggling and not overshadowed by the numbers of unemployed Iraqis and those who have left the country or displaced inside.

Talk of new refining projects has been abundant but actual achievement so far is very little. The only increase in refining capacity has come about from the construction of small topping plants here and there while the much needed large refining projects are proceeding at very slow pace if at all. Maintenance of higher refinery utilisation rates has been elusive either because of mounting technical problems or because of the loss of experienced engineers and operators. Natural gas is another sad story. In 2002, Iraq produced and used 865 million cubic feet a day (mcfd) of dry natural gas while in 2008, volume is close to 400 mcfd.

The flared gas in 2008 is therefore more than the utilised by almost 100 mcfd. This has forced the electricity industry to use more liquid fuels as a substitute including crude oil where in 2007 the average use amounted to 70,000 bpd in power stations that would have benefited so much from the cleaner natural gas.

To get out of this gloomy situation is not easy in the circumstances where the administration is lacking in direction and the ability to make the hard decisions required moving forward. The solution may lie outside the realm of the oil industry and the country has to rid itself of the occupation and the culture that came with it. If oil resources were one of the main reasons for the occupation of Iraq, then the occupiers have failed miserably.

- Saadallah Al Fathi is the former Head of Energy Studies Department at Opec Secretariat.