Despite vast oil reserves, production could be hindered by pipeline attacks and new oil law.
Despite Iraq's vast reserves, insufficient refining capacity, pipeline attacks and the introduction of a new oil law may hinder the troubled country's production potential.
As it stands, Iraq possesses the world's third largest proven oil reserves, (behind Saudi Arabia and Iran), with some of the lowest extraction costs. Although, just a fraction of its known fields are in development, Iraq's total oil production is currently estimated at 115 billion barrels per day (bpd), about 11% of the world's total.
The Iraq oil law, also known as the Iraq hydrocarbon law, introduced earlier this year, however is seen to pose restrictions on the country's large reserves, proposing that the Iraq National Oil Company (INOC) would have control of just 17 of Iraq's 80 known oil fields, leaving two-thirds of known - and all of its as yet undiscovered reserves open to foreign control.
With attacks on Iraqi pipelines exceeding 80 this year alone, theft of oil is also consistent and a regular occurrence in Iraq.
In February this year, Iraq's labour unions sent a letter to Iraqi President Jalal Talbani urging him to reconsider this kind of agreement, "they will re-imprison the Iraqi economy and impinge on Iraq's sovereignty since they only preserve the interests of foreign companies. We warn against falling into this trap."
However, according to Iraqi Prime Minister Nouri Al-Maliki, the oil law is needed for Iraq to attract foreign investment to boost its oil output and rebuild its economy. "This law has been based on our national interest. It will encourage the bringing together of all component parts of the Iraqi people," he said in a news conference earlier this year.
The Kurds, whose regional government control a small fraction of the reserves in Iraq are also in opposition to the Iraq hydrocarbon law and want Iraq's regions to have a significant role in contracting exploration and production activity; and have limits set on the fields INOC has proprietary access to.
Having signed its own oil deals (with companies such as European OMV and Canadian Addax), and approved its own regional oil law, the Kurdish Regional Government (KRG) insist that it is "looking at creating proven reserves, new production, and sharing that with the rest of the Iraqi people," said Ashti Hawrami, KRG natural resources minister.
According to the hydrocarbon law, the plan is to make use of Iraq's natural gas reserves as well, which has gas fields containing 110 trillion m3 of gas. Its reserves are the tenth largest in the world, and two-thirds of these resources are associated with oil fields including Kirkuk, as well as the southern Nahr (Bin) Umar, Majnoon, Hakfaya, Nassiriyia the Rumaila fields, West Qurna, and Az-Zubair.
Sabotage, supply, security
The introduction of the Iraqi oil law is not the country's only worry where its oil and gas industry is concerned. Acts of sabotage are causing an immense strain, with more than 80 attacks on Iraqi pipelines this year alone, theft of oil is a consistent and regular occurrence in Iraq.
Its 4 350-mile network of pipelines has remained a target of sabotage for a number of years. According to the Institute for the Analysis of Global Security (IAGS), between April 2003 and May 2007, there were over 400 attacks on Iraqi energy infrastructure. Due to security issues, much of the pipeline infrastructure remains offline.
In the north, the major international crude oil pipeline is the 1.1 million bpd capacity Kirkurk-Ceyhan (Iraq-Turkey) pipeline. This pipeline and its 480 000 bpd sister-installation have been subjected to repeated attacks and, as a consequence, irregular functioning.
Despite the presence of special oil ministry units, pipelines around Kirkuk are destroyed and hundreds of tons of oil is stolen every day by tribe members from surrounding villages, such as al-Milih, Wadi Zghetun, al-Muradiyya, al-Saduniyya, al-Kanaina and al-Safra and then sold on the ‘black market'.
Although security issues are causing problems for Iraq's oil industry, experts agree that Iraq may be one of the few places left where vast reserves, known and unknown, have barely been exploited.
After more than a decade of sanctions and two Gulf Wars, Iraq's oil infrastructure is in need of modernisation and investment. Despite a large reconstruction effort (the Iraq Relief and Reconstruction Fund (IRRF) support of US $1.72 billion, for example), the industry has not yet been able to meet hydrocarbon production and export targets since as long ago as 2004.
The northern Kirkuk field, first discovered in 1927, forms the basis for Northern Iraqi Oil production, with an estimated 8.7 billion barrels of remaining reserves. Given that only about 10% of the country has been explored, according to the Oil and Gas Journal, estimates of Iraq's oil reserves and resources vary widely. It is believed that Iraq has additional undiscovered oil reserves, which could, potentially raise the total well beyond 250 billion barrels, putting Iraq closer to Saudi Arabia and far above all other oil producing countries.
Over the second half of last year, one stretch of pipeline connecting Kirkuk with the Turkish Mediterranean port of Ceyhan - the main outlet for Iraq's northern oil exports - pumped oil for only 43 days. The rest of the time, the pipeline lay idle, leaking crude through dozens of holes drilled along its 320 km, through the Iraqi desert.
Kirkuk now produces just 180 000 bpd, with the potential to produce at least 400 000 more a day, which, at current market prices, would net Iraq US $7 billion in revenue per year. However, companies are starting to see significance in exploring certain undiscovered areas of Iraq.
Last month, European OMV Petroleum Exploration signed two production-sharing contracts for two exploration blocks with the Kurdistan Regional Government.
"Covering an area of approximately 800 km2 - the contract is for the duration of three years to complete 2D seismic, and one drilling in each block with the possibility to expand the time frame for another 3 years - and we plan to start these exploration activities next year," said Thomas Huemer, OMV spokesperson.
The exploration project will take place in blocks Mala Omar and Shorish, located in the vicinity of Erbil, the capital of the Kurdistan Region of Iraq and are both believed to offer significant potential for major oil discoveries.
"We can only be sure of the exact amount of reserves once drilling begins of any hydro-carbon reserves, we haven't yet been engaged in exploration - but there is a lot of opportunities to find oil in that area. Due to political tensions going on at the moment, it's obviously not that easy to increase production, but the reserves are definitely in place," said Huemer.
"Any reserves within the Kurdistan region of Iraq are relatively undiscovered, but with screened information that we've received; it really is a significant place to make important discoveries. We expect substantial oil discovery in northern Iraq, as far as I know there isn't much production but we see success all over - this is the first time our company has entered the country but we hope for many discoveries," he added.
In 2006, Iraq's upstream crude oil production, under the control of the regional state-owned oil companies averaged 2 million bpd down from around 2.6 million bpd, of which three-quarters were allocated to the international market. Today, estimates of Iraq's current production levels vary and metering systems have been put in place at Basrah to improve export accounting.
Historically, two-thirds of production came from the southern fields and the remainder from the north-central fields near Kirkuk. At present, the majority of Iraqi oil production comes from just three giant fields: North and South Rumaila and Kirkuk. The Rumaila fields, operated by Iraqi parastatal South Oil Company, along with a ring of nearly a dozen smaller fields, including Subha, Luhais, West Qurna and Az-Zubair, have been producing between, 1.5 and 1.9 million bpd; close to pre-war levels.
Conversely, average production at Kirkuk and the northern fields of around 200 000 billion bpd is only a fraction of the pre-war peak of around 680 000 bpd, due to a mixture of reservoir damage and poor management resulting from gas and water injection. In May 2007, the Iraq Ministry of Oil (MoO) reported that total production from the northern fields was 206 000 bpd, all of which went to domestic consumption.
Ravaged by over a decade of economic sanctions and war damage, most Iraqi refineries operate way below their expected capacity levels. Poor reservoir-management during Saddam Hussein's reign, including the re-injection of excess fuel oil, also made an impact and there are worries that Iraq's oil fields may have been seriously, and even permanently damaged.
Iraq reportedly has nearly 600 000 bpd of refining capacity at eight facilities, but due to unreliable electric power supplies, sabotage and deferred maintenance over the consequent years, refinery operations are insufficient for the country's domestic consumption. As a result, Iraq has heavily relied on the reserves of neighbouring countries to replace its need for further refining capacity, and in turn keep up with country's requirements.
Despite Iraq's current political tensions, the increased interest shown from companies operating outside of the region is promising, proving that the possibilities of increased exploration and production activity are high, if the opportunities to be productive and profitable are there.
However, although Iraq's oil is of high quality and inexpensive to produce - perhaps making it one of the most attractive and profitable oil sources in the world - the country's full economic potential will not be reached without the necessary investment in the exploration activity required to find it all.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.