The Greatest Prize Of All ?  

Posted by Big Gav

Mobjectivist recently had a post that included a quote from Daniel Yergin in the New York times saying that Iraqi oil represents "The greatest single prize in all history". While WHT and SW don't share this view, the subject of Iraqi oil reserves is one that I have something of a fixation on (on a side note, Matthew Simmons will be responding to the Yergin via a piece in the Washington Post shortly).

The estimates of Iraqi oil reserves vary wildly, with the figures below showing the extent of the variation.

SourceEstimated Reserves
(billion barrels)
ASPO105
DOE / IEA112
USGS145
Petroleum Economist Magazine 200
Federation of American Scientists215
Council on Foreign Relations / James A. Baker III Institute300
Center for Global Energy Studies300
Taha Hmud Moussa (Saddam's deputy oil minister)300
Benito Livigni (former manager of ENI and Gulf Oil Company)400


While the range of estimates is pretty wide, and most of the higher estimates are accused of being "political" in nature by experts like Laherrere and Campbell, as I've noted before, I tend to believe there is a historical basis for believing these could be correct, given the activities of the oil companies discussed in "The Control Of Oil". It does seem that there is fairly widespread belief that this could be possible, with an article in this weekend's Australian Financial Review on Saudi Arabia mentioning that some observers believe that Iraq has greater reserves.

If the high end estimates are correct, then it means Iraq has the largest remaining reserves of oil - and these reserves (due to Iraq's isolation in the 1990's and due to insurgent activities in recent years) are being depleted at a much slower rate (albeit one that is hard to get a firm grip on) than those of Saudi Arabia.

Digressing for a moment, there have been more accusations of horizontal well drilling from Kuwait into Iraq, though these are being downplayed by the Iraqi government, which is talking about increasing output again, although insurgent attacks on infrastructure are a major obstacle to this objective.
Security is another aspect of the ministry's plan to boost output and exports. Sabotage against pipelines, power cables and installations has hampered the country's export schedules and production. Iraq's oil production has this year dropped to slightly more than 2 million b/d, compared with prewar output of 2.7 million b/d.

"We are also laying down a plan in cooperation with the ministries of defense and interior to implement tight security measures to protect our oil pipelines and installations," said Bahr al-Uloum. The minister said he is confident "these measures would increase Iraq's crude oil production." The minister said Iraq was seeking to guarantee a regular flow of crude oil from northern oil fields to the Turkish port of Ceyhan. "We are working to guarantee tight security at the pipeline and we have taken good steps in that regard," he said.

The flow of Iraq's crude oil via a northern oil pipeline has been sporadic due to persistent acts of sabotage and shortage of output. The pipeline was reopened mid-May and since then it has been pumping on and off. In July, Iraq exported a total of 5.2 million bbl, or 167,000 b/d, via the pipeline, compared with 800,000 b/d before the U.S.-led invasion.

Bahr al-Uloum said Kuwait has denied accusations from some Iraqi legislators that the emirate was stealing Iraqi oil by drilling horizontal oil wells near the borders between the two countries. "I have contacted the Kuwaiti oil minister who affirmed to me that they were not digging any oil well near the Iraqi-Kuwaiti borders," he said. "He has even invited me to come and see for myself if they were drilling any oil wells." Ousted Iraqi president Saddam Hussein invaded Kuwait in 1990 on allegations that Kuwait was stealing Iraqi oil.

Now - if we make the assumption that the higher end estimates of Iraqi oil reserves are correct, how does Daniel Yergin's statement that iraq is the "Greatest Prize of All" look ?

With over 25% of the world's remaining oil, and a much lower depletion rate than that of Saudi Arabia (thanks to 15 years of sanctions and war following the historical efforts to keep iraqi production low), I guess its not such a far-fetched statement.

If we assign an average value of US$100 a barrel to this oil, you could say that this treasure is worth around $30 trillion dollars - which makes the hundreds of billions of dollars being spent by the US occupying the country a little more understandable. And of course, as we follow the path down Hubbert's Peak the strategic value of this oil is immense.

One of the problems with Iraq's (and Kuwait's, and Saudi Arabia's for that matter) oil is that it mostly gets shipped out through the Persian Gulf, from where it is easier and cheaper for it to head onwards to India or China than the West. This presents something of a problem as depletion proceeds and the world becomes ever more dependent on this oil (assuming we don't make the much wiser choice of moving on to renewables and other alternatives as rapidly as possible, of course).

I found some of the comments in a post at Brad Setser's weblog a while back quite interesting - they talked about a pipeline from Iraq to the Mediterranean, which would a much more convenient means of making sure that this oil headed westward instead of eastward. This pipeline is called the "Tapline" and has been out of service since 1977. It crosses from Iraq into Jordan, Syria and Lebanon to the sea. There was a lot of talk in the aftermath of the Iraq invasion that it could be resurrected and terminate in Israel, though exactly what is happening now (if anything) isn't clear.

This description is from the US Department of Energy:
Although Israel itself produces almost no oil, a comprehensive settlement of the Arab-Israeli conflict could affect Middle East oil flows significantly. Israel's geographic location between the Arabian peninsula and the Mediterranean Sea offers the potential for an alternative oil export route for Persian Gulf oil to the West. At present, these oil exports must travel either by ship (through the Suez Canal or around the cape of Africa), by pipeline from Iraq to Turkey (design capacity 1.5-1.6 MMBD), or via the Sumed (Suez-Mediterranean) Pipeline (capacity 2.5 MMBD).

Utilization of the Trans-Arabian Pipeline (Tapline) could offer another potentially economic alternative. The Tapline was originally constructed in the 1940s with a capacity of 500,000 bbl/d, and intended as the main means of exporting Saudi oil to the West (via Jordan to the port of Haifa, then part of Palestine, now a major Israeli port city). The establishment of the state of Israel resulted in diversion of the Tapline's terminus from Haifa to Sidon, Lebanon (through Syria and Lebanon). Partly as a result of turmoil in Lebanon, and partly for economic reasons, oil exports via the Tapline were halted in 1975. In 1983, the Tapline's Lebanese section was closed altogether. Since then, the Tapline has been used exclusively to supply oil to Jordan, although Saudi Arabia terminated this arrangement to display displeasure with perceived Jordanian support for Iraq in the 1990/1 Gulf War. Despite these problems, the Tapline remains a potential export route for Persian Gulf oil exports to Europe and the United States. At least one analysis indicates that the transportation cost of exporting oil via the Tapline through Haifa to Europe would cost as much as 40% less than shipping by tanker through the Suez Canal.

In April 2003, there was some discussion of "reopening" the old oil pipeline from Mosul in northern Iraq to Haifa. The line, which was built in the 1930s, carried 100,000 bbl/d at its peak, but has been closed since Israel's establishment in 1948. Today, however the Mosul-Haifa pipeline is in extremely poor condition (the Iraqi section is completely rusted and the Jordanian section was sold as scrap metal several years ago), and reportedly would require hundreds of millions of dollars to repair/rebuild, even if this were politically feasible. Along those lines, Jordan has strongly denied any interest in rebuilding this pipeline at the present time, stating that "the pipeline no longer exists in Jordanian territory."

More analysis from "Jane's Defense Weekly":
"US efforts to get Iraqi oil to Israel are not surprising. Under a 1975 Memorandum of Understanding (MoU), the US guaranteed all Israel's oil needs in the event of a crisis. The MoU, which has been quietly renewed every five years, also committed the USA to construct and stock a supplementary strategic reserve for Israel, equivalent to some US$3bn in 2002. Special legislation was enacted to exempt Israel from restrictions on oil exports from the USA.

Moreover, the USA agreed to divert oil from its home market, even if that entailed domestic shortages, and guaranteed delivery of the promised oil in its own tankers if commercial shippers were unwilling or not available to carry the crude to Israel. All of this adds up to a potentially massive financial commitment.

The USA has another reason for supporting Paritzky's project: a land route for Iraqi oil direct to the Mediterranean would lessen US dependence on Gulf oil supplies. Direct access to the world's second-largest oil reserves (with the possibility of expansion through so-far untapped deposits) is an important strategic objective."



More commentary and speculation can be found at "Global Politician ", "Ha'aretz", "Ha'aretz (again)", "The Guardian" and "The Asia Times".

From the second Ha'aretz article, it would appear that the dream of piping this oil westward has been around for a long time - pretty much since the original Tapline was mothballed:
The flow of oil from Mosul was redirected from Haifa to Syria after the British Mandate for Palestine expired in 1948. There were several attempts to renew the flow of oil to Haifa in subsequent years. One such effort occurred during the Iraq-Iran war in the 1980s, after Syria acceded to a request from Iran to block the flow of Iraqi oil to the Mediterranean. (Iran was then preventing oil tankers from moving Iraqi oil via the Persian Gulf.) The prime minister at the time, Yitzhak Shamir, proposed to Iraq to renew the flow of oil through the pipeline to Haifa.

Hanan Bar-On, then the deputy director-general of the Foreign Ministry, confirmed yesterday that Israel was involved in talks during the mid-1980s on a plan for an Iraq-Jordanian pipeline to the Red Sea port of Aqaba. Among the participants in these talks was Donald Rumsfeld, then an adviser to U.S. president Reagan and currently secretary of defense. The American corporation Bechtel was slated to build the pipeline. According to the deal, which eventually fell through, Israel was to receive about $100 million a year via former Israeli businessman Bruce Rappaport in return for a commitment not to oppose the construction or operation of the new pipeline.

In 1987, energy minister Moshe Shahal reportedly looked into the idea of helping Iraq export its oil via the Golan Heights to Haifa. But this plan also failed to materialize.

And from The Guardian's article:
To resurrect the pipeline would need the backing of whatever government the US is to put in place in Iraq, and has been discussed - according to Western diplomatic sources - with the US-sponsored Iraqi National Congress and its leader Ahmed Chalabi, the former banker favoured by the Pentagon for a powerful role in the war's aftermath.

Sources at the State Department said that concluding a peace treaty with Israel is to be 'top of the agenda' for a new Iraqi government, and Chalabi is known to have discussed Iraq's recognition of the state of Israel. The pipeline would also require permission from Jordan. Paritzky's Ministry is believed to have approached officials in Amman on 9 April this year. Sources told Ha'aretz that the talks left Israel 'optimistic'.

James Akins, a former US ambassador to the region and one of America's leading Arabists, said: 'There would be a fee for transit rights through Jordan, just as there would be fees for Israel from those using what would be the Haifa terminal. 'After all, this is a new world order now. This is what things look like particularly if we wipe out Syria. It just goes to show that it is all about oil, for the United States and its ally.'

Akins was ambassador to Saudi Arabia before he was fired after a series of conflicts with then Secretary of State Henry Kissinger, father of the vision to pipe oil west from Iraq. In 1975, Kissinger signed what forms the basis for the Haifa project: a Memorandum of Understanding whereby the US would guarantee Israel's oil reserves and energy supply in times of crisis.

Kissinger was also master of the American plan in the mid-Eighties - when Saddam Hussein was a key US ally - to run an oil pipeline from Iraq to Aqaba in Jordan, opposite the Israeli port of Eilat. The plan was promoted by the now Defence Secretary Donald Rumsfeld, and the pipeline was to be built by the Bechtel company, which the Bush administration last week awarded a multi-billion dollar contract for the reconstruction of Iraq.

Back to Iraq, Steve at Deconsumption has posted a few snippets from Iraq lately. Democracy Now has a segment up on the prospect of civil war in Iraq and the activities of death squads like the Wolf Brigades (wonder where you got the idea for that Mr Negroponte ?). Past Peak looks at "T. E. Lawrence On Insurgencies" and concludes "To summarize: the US is completely screwed in Iraq.". Even though Iraq may have the world's largest oil reserves, the locals are still suffering from chronic fuel shortages. And finally, recently retired head of the Australian Defence Force, General Peter Cosgrove, says Australia should pull all of it's troops out of Iraq by the end of 2006 so as not to encourage terrorism - wonder what the Rodent thinks of that ?

(The Oil Drum also has the first of a series of posts up on Iraqi oil).

4 comments

Saddam Hussein invaded Kuwait in 1990 on allegations that Kuwait was stealing Iraqi oil.

It happens sometimes the neighboring countries pump oil that comes from the same pocket. The problem between Taiwain and China for example is a critical issue regarding oil extractions between Japan and China since they argue about the demarcation line for oil extraction regarding the oil pocket.

I'm more into foreign politics but the iraqi case regarding oil extraction is far to be solved. The Kurds in Kirkuk are supposed to save an oil pipeline with Turkey but the drafting of the iraqi constitution based on islamist laws may enable the Kurds to pronouce their independence which would rise the risk of a turkish intervention in Northern Iraq.
There is also a tremendous risk to balance the eastern part of Iraq inside Iran's camp that is convoited by Russia, China and India.

The future of the iraqi constitution will probably change the geopolitical zone in the middle-east.

One of the problems with Iraq's (and Kuwait's, and Saudi Arabia's for that matter) oil is that it mostly gets shipped out through the Persian Gulf, from where it is easier and cheaper for it to head onwards to India or China than the West.

Fascinating how that could accelerate industrialization of these countries. Jobs are already going there, and jobs need energy. Sounds almost like a positive feedback situation.

PU - yes - none of these issues is cut and dried - even the border between Iraq and Kuwait (and Iraq and Saudi, and all sorts of other post-colonial borders) was in dispute.

I guess one thing to remember is that issues are rarely black and white, especially when it comes to big countries playing power games...

WHT - Its a positive feedback loop all right - but not a very promising one for us - all the more reason to follow the European and Japanese lead and go for efficiency and renewables as much as possible.

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