Beware of extremes in Iraq's oil In the pipeline

Beware of Extremes in Iraq's Oil

In Iraq we say: "touch him or break his skull," or, if we want to be less violent, "use two lamps or stay in the darkness". This is to describe extreme behaviour and nothing better comes to my mind to describe the latest news from the Iraqi oil scene. Either we do nothing or from what we know today about the wholesale results of the auction, oil production in Iraq is envisaged close to 12 million barrels a day in six to seven years or by 2017.

In my long association in the industry no one imagined this in his wildest dreams.

For the last six and a half years, those at the helm of the Iraqi oil industry have hardly achieved anything to show the people in spite of the millions that were spent supposedly to revitalise the oil industry.

Oil production has been stagnant or slightly improving. It was 2.3 million bpd in 2004 and in November 2009 it is only 2.4 million bpd. Oil exports have improved only at the expense of the decline in domestic demand due to the state of the economy and the exodus of millions of Iraqis to neighbouring countries.

Natural gas, wastefully flared in the south, was around 800 million cubic feet a day (cfd) and it is still flared at 600 cfd for the lack of good rehabilitation of the gas facilities and pipelines at a time when power stations are burning liquid fuels and even crude oil.

The refineries are operating at 60 per cent of capacity and imports of finished light products are rampant where in 2008 they were close to 60,000 barrels a day, costing not less than $2 billion.

I think the major parameters above are enough to show that Iraq oil industry really needs a solution.

But the wholesale selling of Iraq oil reserves is not a solution and the question must be asked: why is the current minister in a hurry to sell Iraq's oil reserves when he was so slow to tackle any problem in the industry? Why have the Iraqis who developed and operated oil fields, built refineries and gas plants and pipelines by themselves in the past, not been able to achieve much since their "liberation" in 2003?

I think the occupation and its clients obliged the Iraqis to fail miserably to justify abandoning the industry and present it on a platter to hungry international oil companies.

The economics of the contracts the ministry intends to sign are not clear because not all the terms are yet known, but the companies will surely reap billions after all their costs are recovered and taxes paid.

Export problems

The task to export these volumes of crude is enormous and there is no clear idea how it will be achieved.

Even if the Gulf terminals are maintained and expanded they cannot handle half the export volume while their location is being contested by Iran and Kuwait. Other outlets have limited possibilities unless very expensive projects are undertaken.

But the most worrying of all this episode is the state of the oil market and it seems that the ministry is absent on the latest development here.

Opec production in 2009 is estimated at 28 million bpd and, according to the Opec Secretariat, is likely to rise to 34 million in 2020 and 41 million by 2030. Even in a higher growth scenario where economic recovery is assured then it may rise to 37 million bpd in 2020 and 48 million in 2030.

But if the recession is entrenched and leads to lower growth later then the demand for Opec oil could be 29 million bpd in 2020 and 31 million in 2030 or just slightly less than what it is now.

The IEA numbers are more or less the same and forecast Iraq's oil production at only 6.7 million bpd in 2030.

Even in the best situation, can anyone imagine that the whole increment of world oil demand will go to Iraq and that all oil producers in Opec and elsewhere will sit still and do nothing or reduce their production to accommodate the Iraqi oil minister?

Or is Iraq intent on driving the price of oil to less than $10 a barrel, destroying Opec and make its occupiers live happily ever after by this handsome repayment?

I hate to attribute any of this to my country, a founding member of Opec and which always had its interests at heart, but to me this is the only logical explanation and the expense will all be borne by Iraq.

There is no Iraqi who does not want to see the oil industry flourish and expand, but they also do not want to break anybody's skull or their own.

The writer is the former head of the Energy Studies Department at the Opec Secretariat in Vienna.