Middle East & Africa Iraq, Iran and the politics of oil  

The Economist has an article on plans to expand oil production in Iraq - Iraq, Iran and the politics of oil.

Iraq is now trying to recover its glory, with plans to quadruple production or more. This could transform the global oil industry; it also threatens two other founding members of OPEC. Saudi Arabia might have to share its leadership of the organisation and Iran faces an even greater setback. Close relations with China, based on Beijing’s thirst for oil, have helped Iran to avoid isolation over its nuclear programme. But Chinese oil companies are now turning their attention to Iraq, with American backing.

Yet Iraq will have to pull off an unprecedented feat. In the history of the modern oil industry, no country has increased output with the speed the Iraqis envisage. Over the next seven years Iraq intends to go from producing 2.5m barrels per day to 12m b/d, a target that exceeds Saudi Arabia’s current output by more than 30%. To this end, Iraq has signed ten deals with most of the world’s top oil companies. Some got down to work this month.

The expansion plan was drawn up by Hussein al-Shahristani, the oil minister. He snared an initial deal with BP last summer, ensuring that its chief competitors, Royal Dutch Shell and Exxon Mobil, would follow suit. At the same time he made deals with Lukoil of Russia and China National Petroleum Corporation, giving him additional leverage. The clever dishing out of contracts was matched by ruthless pricing. The minister insisted that companies take less than $2 per barrel, leaving most of the gain, perhaps as much as 95%, to the Iraqi state. The minister’s hard bargaining headed off antipathy from nationalistic Iraqis. Desperate for money to build schools and hospitals, many welcomed the deals made with the hated foreign oil majors, whose predecessors once dominated Iraq.

Mr Shahristani is hoping for easy re-election in national polls on March 7th. But progress will be slower than he has led voters to believe. Even an advanced nation would struggle to add enough wells and pipelines to handle the equivalent of the total Saudi output. In decrepit Iraq, achieving Mr Shahristani’s plans is especially ambitious. Oil companies will need to build paved roads from scratch and they will have to bring in all their own equipment.

Such logistical delays will be compounded by manpower shortages. The industry does not have enough qualified specialists. Furthermore, the government needs to connect new oilfields with export facilities. That means laying hundreds of miles of pipelines and building countless pumping stations. For the time being, most Iraqi oil leaves the country via a single terminal near Umm Qasr in the northern Arabian Gulf. It is old and American experts have warned that it could run into problems. Foster Wheeler, an oil-services company, is building three extra pipelines and four new offshore moorings for tankers close to Basra, but that is still inadequate. There is talk of upgrading an existing pipeline to Turkey, but negotiations have yet to start. A pipeline to Syria has been closed for years and renovating it has been hampered by political squabbles.

At least the political obstacles to increasing production are less daunting than the technical ones. Admittedly Iraq is still plagued by an insurgency, there is no oil law, making the current government the sole guarantor of deals with foreign companies, and there is a dispute about the ownership of the oil in the Kurdish region in the north of the country, especially around the city of Kirkuk. But worries that an oil boom could spark a fight for control are overdone. Years of sectarian warfare have given Iraqis enough of a hangover to make them at least try to share revenues, as the 2010 national budget shows. After much debate and many delays, parliament agreed on January 26th that oil-producing provinces will receive an additional $1 per extracted barrel from the central government, which controls the industry. To compensate resource-poor provinces, a special subsidy was created for border regions. In addition, religious centres will get $20 per visa or visiting pilgrim.