If Iraq hopes to increase oil production from the present high of 2.5 to 2.9 million barrels a day by next year, it will need some partnerships with foreign oil companies. Yet the Oil Ministry in Baghdad should proceed with caution. Its invitation for foreign participation must not turn into the bonanza that US oil companies have been waiting for since the 2003 invasion that has plunged the country into chaos.
Thanks to the long US-sponsored UN boycott of Saddam’s regime after his troops were thrown out of Kuwait, Iraq’s hydrocarbon infrastructure is out of date and decrepit and reservoir exploitation and maximization has been allowed to decay. Much of the infrastructure is in need of modernization. On paper, the Iraqi authorities ought themselves to be able to hire the specialist international oil field services companies to undertake this work on their own behalf. The problem is that the demand worldwide for these firms is such that they have limited spare capacity. And thanks to corruption, the ongoing insurgency and the need to address the social health and welfare structure, Iraq does not have enough spare cash to fund such contracts.
Therefore partnering with foreign oil firms seems to be the logical answer. It is however important that US companies do not win the lion’s share of the proposed deals. Not only will large American investment in Iraqi give Washington the excuse to stay on in the country, it will also fulfill one of the prime aims of the Bush White House in invading in the first place — to grab strong influence if not actual control over Iraq’s oil reserves.
It is easy to advise that Baghdad must think politically and involve Russian and Chinese oil companies to balance Washington’s influence. Other national oil companies (NOCs), not just from the Middle East but also from further afield could offer both the funding and expertise to restore oil infrastructure and boost production from existing fields. The era of dominant international oil majors is drawing to a close. NOCs are proving perfectly capable of operating beyond their own borders. The activities of Brazilian NOC Petrobras in Angola and of Chinese NOCs in Sudan are two examples of this growth.
But does the Al-Maliki government have the freedom of action, given the fact that Iraq is under US military occupation? There is another problem, also associated with occupation and resistance. Any outside investor is going to need reassurance on the two key areas of security and legality. The security issue is clear enough. Oil installations, particularly pipelines, have proved vulnerable to insurgent attacks and at the height of the insurgency, key oil workers were targets of attacks.
The legal issue includes Iraq’s northern oil fields in Kurdish areas. From 2005, the Kurdish regional government has been making deals with foreign oil companies without reference to Baghdad. However in March last year, the Kurds agreed to be bound by the proposed National Oil Law, which however has yet to be finalized by Parliament. Thus until there is a clear legal framework with established disputes procedures, Iraq is not going to attract the quality oil investors it needs and it will struggle economically. Here we have a vicious cycle. Occupation encourages violence that in turn slows down reconstruction and economic development. Without recovery, the men of violence will keep their recruiting grounds.
