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Can Iraq become world’s largest oil producer?

Unofficial estimates put Iraq’s oil reserves at 350 mbpd

Iraq has been grabbing headlines lately, not only because of the uncertainty surrounding the formation of the new government, but also due to the great potential the country holds when it comes to foreign investments, particularly in the oil sector. Not even the delay in passing the hydrocarbon law nor the ongoing disputes with Kurdistan have deterred investments from flowing in.

Iraq has already signed 11 deals with foreign oil companies which will see its production quintuple to about 12 million barrels per day (mbpd) by 2017. Such a boost would threaten Saudi Arabia’s status as the world’s biggest oil producer, whose current production capacity is estimated at 11 mbpd.

However, Saudi Arabia has already announced plans to increase its production capacity to over 12 mbpd. Going back to Iraq, there has been lots of speculation regarding whether or not the country would be able to meet its ambitious goal in such a short time.

Those who argue that Iraq can increase its production to 12 mbpd base their argument on the fact that Iraq has huge oil reserves, many of which are still undiscovered, estimated at 350 billion barrels. Official figures on the other hand estimate Iraq’s proven oil reserves at 115 billion barrels, valued at $9 trillion based on current oil prices.

On the sidelines of the Iraq Future Energy 2010 conference, Dr. Ali Hussain, an oil consultant, argued that another factor is the cost of production of Iraqi oil which is the lowest in the world; not to mention the fact that Iraq has the capabilities to export through a number of countries including Turkey, Syria, Jordan, Saudi Arabia, and Kuwait. Furthermore, Dr. Hussain stresses that Iraq will be able to market and sell its extra production as the International Energy Agency forecasts that demand for oil will grow 23% from current levels to reach 106 mbpd by 2030. In addition to this, Dr. Hussain says: “Iraq needs to make use of its oil wealth in order to rebuild its economy”.

Flow of investments

Investments are currently flowing into the country, “International oil companies have pledged $120 billion to increase Iraq’s oil production over the next 5 years” said Abdullah Al Ajaji, director of Merchant Bridge. Investments have also flowed into the construction sector with international and national oil companies and the Iraqi government pledging to spend $250 billion over the next 5 years according to Al Ajaji.

But the challenges that face Iraq are many and some argue that if Iraq increases its production five fold in 7 years, it will come to face problems of a new kind.
According to Ahmed Moussa Jiyad, an Iraq Development Consultant, these problems include either too much oil revenue that cannot be spent or so much production Iraq will be forced to lower its prices. Nevertheless, Jiyad believes that Iraq won’t be able to meet its ambitious goal because the time frame is very tight to place the entire necessary infrastructure in place.

A more realistic goal according to Dr. Thamir Al-Uqaili, an Independent Oil Consultant, would be a production target of 8 mbpd by 2017. The cost of this infrastructure according to Ben Lando, Bureau Chief for The Iraq Oil Report, is estimated at $50 billion. The rehabilitation of existing pipelines and the building of new ones alone is estimated at $12 billion by David Stanley, CEO of The Penspen Group. If those pipelines are put in place, Iraq’s export capacity can be raised to 14 mbpd by 2017.
Those pipelines include one between Kirkuk and Ceyhan in Turkey, with an export capacity of 1 mbpd. Its current capacity is 700 thousand barrels per day.
The Iraqi government signed on September 19th a 15-20 year agreement with Turkey to keep this export outlet open. Iraq also signed a draft deal with Syria which includes a 1.25 mbpd light oil pipeline and a 1.5 mbpd heavy oil pipeline. Furthermore, the Basra terminal is projected to have an export capacity of 8 mbpd by 2017 according to Stanley.

Ambitious plans

And, to confirm that Iraq is on its way to increase export capacity, Ali Al Dabbagh, the official spokesman for the Iraqi government told Reuters on September 28th that the government had awarded a $733 million contract to Leighton Offshore Private Ltd to expand its export capacity from Basra to 3 mbpd from the current capacity of 1.8 mbpd. Yet another pipeline which can help Iraq increase its exports is the one linking Basra to Yanbu in Saudi Arabia, with a capacity of 1 mbpd. This pipeline is currently inactive. Last but not least, the pipeline which links Basra to Al Aqaba in Jordan has a potential capacity of 1 mbpd.

Hence, the plans for the growth of Iraq’s oil sector are quite ambitious and will likely face many challenges along the way. This brings to mind one more factor i.e. Iraq’s participation in OPEC. Iraq does not currently have an official OPEC quota as its production compared to its reserves is relatively small.

Current production stands at around 2.5 mbpd compared with holding the third largest oil reserves in the world. But, according to Dr. Abdul Hadi Al Hassani, Vice Chairman of the Oil and Gas Committee in Iraq, the country will be back under the OPEC quota system when its production exceeds 4 mbpd. This is a view shared by many among whom are Thamir Al Ghadban, Chairman of the Advisory Committee to the Iraqi Prime Minister and by Assem Jihad, the Oil Ministry spokesman.

Iraq currently ranks 12th in global oil production despite its large reserves which means it has huge potential to realize and revenue to make up for. To say the least, increasing Iraq’s production to 12 mbpd, if successful, will no doubt reshape the oil landscape going forward and will keep us guessing as to whether it may truly become the world’s largest oil producer.