07 December 2005

Iraq oil production on the decline

By Carola Hoyos
Financial Times, 06 December 2005

When it became clear the US was bent on toppling Saddam Hussein in early 2003, oil executives, analysts and government officials began to calculate the huge potential of Iraq’s oil industry.

Iraqi oil officials in exile estimated the country’s 112.5bn barrels of reserves would reach 300bn through exploration. Fadhil Chalabi, a former Iraqi oil minister, predicted Iraq could boost its production from 2.5m to 4.5m barrels a day by 2008.

Washington insiders, meanwhile, quietly spread the word that, free of Mr Hussein and United Nations sanctions, Iraq would eventually reduce America’s heavy reliance on neighbouring Saudi Arabia.

Nearly three years after the US-led invasion, it has become painfully clear that those who predicted that political instability would delay any decision on a national oil policy and that violence, often directed against the industry, would leave big international oil companies unwilling to send their personnel to Iraq, were those who got it right.

Iraq’s oil industry has gone backwards since the fall of Mr Hussein in the spring of 2003. Oil production is barely more than 2m barrels a day, a far cry from the 3.5m b/d Iraq pumped before the first war with the US in 1990 and the level industry analysts thought the country could again achieve within a couple of years of the war ending.

The latest figures show Iraq produced 1.24m b/d in November, the lowest level in a year. Iraq’s capacity to produce oil appears to be declining, possibly because its southern fields are being driven too hard and damaged by officials keen to compensate for losses to production from the north, which has been hampered by frequent sabotage.

The lack of progress has been disastrous for Iraq, which relies on oil revenue for its budget. But it has had an impact further afield as well. Oil companies desperate to grow their reserves have not had Iraq to save them from their dismal performance elsewhere around the world, while consumers have had to face record petrol and heating prices as global demand has outstripped supply.

With few – or perhaps even no – large oilfields left to find, the world needs Iraq’s oil more now than it did two years ago. So far, Iraq is still the domain of oil service companies such as Halliburton, and of small companies willing to cut deals early. To attract the money and expertise of the world’s biggest energy groups, such as ExxonMobil of the US and UK-based BP, Iraq needs a legal framework that guarantees any big contracts it may hope to sign. Most take it for granted that international oil companies will be invited back to Iraq at favourable, if competitive, terms.

But a report published last month by Platform and other human rights groups warned Iraq risked losing as much as $194bn (€166bn, £112bn) if it established the production sharing agreements the international oil companies sought. It suggested Iraq opt to go it alone by using its budget revenue or borrowing money, or offer more restrictive contracts to international companies. Whatever Iraq does, the cards appear stacked in its favour. This year Libya, whose prospects are less exciting than Iraq’s, managed to secure some of the most favourable terms ever agreed when the removal of US sanctions opened its fields to US and other foreign companies.

Companies were so desperate to secure new fields that they banked on high oil prices continuing for years to come and agreed to give the Libyan government an 80-90 per cent share of the revenues of their production sharing agreements, compared with the industry average of well below that.

High oil prices, few alternatives and neighbours, such as Kuwait and Saudi Arabia, which have yet to open their industries to foreign investment, could be seen as incentives for Iraq to open up its industry as soon as it can, regardless of which approach it chooses to take.

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Citation: Carola Hoyos. "Iraq oil production on the decline," Financial Times, 06 December 2005.
Original URL: http://news.ft.com/cms/s/fd9ce7c4-6694-11da-884a-0000779e2340,ft_acl=,s01=1.html
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