There is no doubt that the oil and gas potential of Iraq is great. Excluding the Northern Kurdish region, 66 fields have been discovered with proven oil reserves of 143.1 billion barrels and proven gas reserves of 127 trillion cubic feet (TCF). With only 20 fields developed and producing, and large swathes of the country not even explored, the numbers are expected to head upward in the future.

However, the industry is not in a state commensurate with Iraq's endowment. Many decades of war, sanctions and occupation have delayed its evolution in all sectors. The decline after the occupation of 2003 is more pronounced.

Sanctions

The maximum historical crude oil production stands at 3.9 million barrels per day (bpd) in 1979. Production declined during the 1980s because of the war with Iran and recovered in July 1990 to over 3 million bpd but suffered another setback because of the sanctions imposed after its invasion of Kuwait.

The agreement with the UN towards the end of 1996 allowed Iraq to come back into the market albeit with limitations. Iraq achieved average production of 2.6 million bpd in 2001 only to fall to an average of 2.2 million bpd in 2002 due to further restrictions on Iraq's sales.

During January and February 2003 — the two full months before the invasion of Iraq — production averaged 2.85 million bpd, a rate that has not been reached after eight years of occupation. The average production in 2009 was 2.4 million bpd and the average 2010 production was even lower at 2.36.

Service contracts

In 2009 the government signed 11 long-term service contracts with international oil companies to develop a number of fields, including the already prolific and producing fields of Rumaila, Zubair and West Qurna to the objection of many Iraqis who wanted to keep the producing fields in national hands.

The oil reserves of the awarded fields are around 94 billion barrels representing 66 per cent of Iraq's oil reserves, and the gas reserves of the awarded gas fields was 12 trillion cubic feet, representing around a third of the country's free gas reserves.

Yet the production in July 2011 was only 2.7 million bpd including 150,000 bpd from the autonomous region in the north, though the central government considers the contracts signed there as illegal.

On the eve of the occupation, Iraq's refining capacity was 700,000 bpd and operating close to 85 per cent and exports of LPG, gas oil and fuel oil may have been close to 150,000 bpd in 2002. Today's capacity is 840,000 bpd with the addition of two distillation units in Daura refinery without further processing facilities.

Only on paper

The refineries have consistently operated at 50-60 per cent of capacity and Iraq has been forced since 2003 to import often large volumes of LPG, gasoline, kerosene and gas oil. The combined volume of imported products in July 2011 is close to 80,000 barrels a day.

Iraq has a plan to expand refining capacity and add conversion and treating units in the existing refineries, but after tens of millions spent on studies and designs, these plans remain on paper and action on the ground is yet to be seen. Unfortunately, Iraq has opted to attract foreign investors to build its proposed five new refineries, but efforts to attract investors with fair terms have failed so far and have little chance to succeed in the future.

The government should have taken the task of building at least two of these refineries to ensure meeting local demand for products instead of relying on imports or the goodwill of yet-to-come foreign investors.

Enormous waste

While Iraq is using liquid fuels, including crude oil, in power generation, it is flaring huge quantities of associated natural gas, especially in the south. Around 750 million cubic feet per day on average is flared as the gas plants in the south are in need of refurbishment and thorough maintenance. The delays in the deal with Shell to exploit the gas are no excuse for such enormous waste.

Iraq's plan to increase crude oil production to 12.5 million bpd by 2017 is widely criticised by veterans of the industry not only because of the wholesale to the international oil companies but also because there is an enormous risk that world oil demand may not grow to the extent possible to absorb Iraq's and other countries' expanded production, as well as running the risk of ending up with a huge redundant capacity that is very expensive to build and maintain.

Iraq surely does not want to destroy oil prices and be in conflict with other producers, therefore Iraq may end up paying billions for capacity that it cannot use. It has become clear recently that contracting oil companies will be remunerated for any volume that they are able to produce but are not allowed by a government-imposed market limitation or export system limitations.

Lack of facilities

The plan also suffers from lack of transportation and export facilities and, although a lot of work is under way, it is thought to be slow and insufficient. Iraq has to do more to reopen its pipeline to Saudi Arabia, refurbish its pipeline to Turkey and complete the agreed line through Syria if it is to stand any chance of exporting the planned volumes.

The problems are not just technical, as the country has to liberate itself from the clutches of the occupation and regain its sovereignty and the unity of its people. Then and only then it can formulate the right policies and draw appropriate plans that will make the Iraqi oil industry take it's appropriate place in the world oil industry and be the principal base upon which the future prosperity of Iraq will be built.

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