Iraq’s Oil Progress

It is now widely accepted that the surge in American troops helped dramatically improve security in Iraq in the last year. But there has been less notice of, or comment on, how the surge has improved the Iraqi oil sector, which contributes more than two-thirds of the country’s gross national product and almost 95 percent of the government’s revenue, and remains pivotal to the country’s development and stabilization.

Oil production has risen about 25 percent in Iraq in the past year. It had been flat from 2005 through mid-2007, hovering around 2 million barrels per day before beginning to climb to its present level of 2.5 million barrels per day. This is roughly equal to immediate prewar levels. Oil exports are now close to 2 million barrels per day–near Iranian levels–after rarely topping 1.5 million barrels per day in the postwar years.

The rise in Iraqi oil production over the last year already equates roughly to the increase in Saudi output over the last few months that has drawn so much attention and for which President Bush publicly pressed so long.

Oil revenue had already been spiking thanks to soaring oil prices, but with exports now also increasing, it is rising even further. Oil exports could yield at least $60-70 billion this year, more than double the level in 2006 and more than triple the level in 2004. Ballooning revenue will strengthen the central government and offer hope to Iraqis about the future of their country, which should contribute to further stabilization of the country.

The significantly improved security situation in the north (thanks mostly to the surge and Sunni Awakening) has played a big role in the more consistent functioning of the northern Iraqi export pipeline to Ceyhan, Turkey. Through the first half of 2008, an average 370,000 barrels per day has been exported through the Turkish line, a tenfold increase over last year.

The south yields over 80 percent of Iraq’s oil, and security there has also improved, largely as a result of the Iraqi government’s spring campaign in Basra against various militias and criminals (aided by American military support). Energy facilities, however, especially those on land approaching the offshore export terminals, remain vulnerable, including to possible action by Iranian allied groups.

Iraqi oil progress can also be seen in the production deals concluded by the Kurdistan Regional Government in northern Iraq. The Kurds have awarded rights to more than 20 of their 40 development blocks, with a couple already producing small quantities of oil. But Iraq’s oil minister, Hussein Shahristani, has declared these deals illegal, and the U.S. government opposes them as well. Shahristani claims the Kurds cannot proceed until there is a comprehensive hydrocarbons law dividing up Iraq’s oil wealth between the regions and threatened to boycott the companies involved.

Iraq has great potential as an oil producer and exporter. It is perhaps the least developed oil exporting country in the world with already the third largest proven oil reserves, and produced as much as 3.5 million barrels per day in 1990 before the Kuwait invasion, the Gulf war, and sanctions. Iraqis have long had plans to reach more than 6 million barrels per day of production, which could be achieved within a decade with security and foreign investment. But despite the obvious potential and recent progress, political factors in both the United States and Iraq continue to constrain Iraq’s oil sector.

The troubles are most evident in the continuing saga of the potential technical service agreements between Iraq and international oil companies. In the absence of the new hydrocarbon laws, Shahristani sought short-term agreements with several Western oil companies. The companies were to help Iraq increase production by 500,000 barrels per day within two years by the provision of equipment, training, and other aid.

These proposed deals, which reportedly were not the result of a bidding process, were worth about $3 billion and were to be finalized first in March and then in June but faced stiff pressure from opponents of Shahristani, the Maliki government in Baghdad, and the oil companies who weren’t included (who feared it would give their competitors a leg up in the bidding for long-term rights to develop Iraq’s oil and natural gas fields). In the end Shahristani changed the terms of the deal to force the oil companies to reject them, though it is expected that some form of technical service agreements will be concluded at some point.

Shahristani remains a key obstacle to future development of the oil sector. He came into the job without any oil experience–as his mis-structuring of the technical security agreements showed. He has alienated many of the technocrats in the oil ministry, hurting morale and accelerating a decline in its expertise. A notable example was his recent removal of the highly regarded director general of the South Oil Company, Abdul Jabbar Lauby. Shahristani’s inability to spend beyond a small percentage of his budget is partly the result of the oil ministry’s declining technical competence. He also has been insensitive to U.S. concerns. For instance, he said at an energy summit in April about $120 oil, “It’s not really so high that it’s beyond the capacity of most countries to cope with it.”

On the American side, opposition by publications such as the New York Times and Democratic senators such as Charles Schumer and John Kerry to the agreements encouraged the Iraqi opposition to them. They claimed these deals resulted from American meddling, should not be done absent passage of comprehensive hydrocarbon legislation, would lead to more sectarian fighting over oil, contribute to the perception of corruption and–in the words of the Times–the “understandable suspicions” especially in the Arab world that the United States went to war for oil. The Times also claimed the projected 500,000 barrels per day increase in production was “minor” in “global terms.”

It is important to address the views expressed by these senators and the Timescollectively in order to make progress in the Iraqi oil sector and the country in general. American influence in Iraqi oil policy has been vastly overstated, as even a quick look at events would show. Also, this emphasis on Iraqi hydrocarbon legislation at the expense of other operational progress in the oil sector has been a mistake, one that the White House began and perpetuated. (See my “Oil’s Not Well in Iraq” in THE WEEKLY STANDARD, February 19, 2007.) However noble the objective of using oil to help unite the country, the proposed cocktail of oil legislation has so far actually had the effect of pulling the country further apart, and the oft-criticized Kurdish deals are actually pressuring Shahristani to make progress.

Further, the idea that more oil production will lead to more sectarian fighting is belied by the facts: There has been more oil output in the last year as sectarian fighting declined, while the pre-surge period was marked by rising sectarian conflict and stagnating oil production. The no-bid nature of the process is debatable but not necessarily condemnable. It is rather curious why American politicians object to American and Western oil companies’ getting contracts, as if Iraqi agreements with less competent Russian or Chinese oil companies would serve Iraqi or U.S. commercial and national security interests.

One must wonder, moreover, why so much credibility should be given to the unproven conspiracy theory that five years ago the United States went to war over oil? Indeed, the fear of giving any credence to this conspiracy theory contributed to the insufficient U.S. effort in the Iraqi oil sector from the very beginning.

Finally, no one should scoff at the further possible near-term increase of 500,000 barrels per day in Iraqi oil production and exports that these contracts promised. That figure represents about 20 percent of total global spare, or unused, oil production. Iraqi progress comes at a time when there is little significant growth in oil production anywhere in the world outside of Saudi Arabia. Russian oil production, for instance, is declining after years of tremendous growth, and Venezuelan and Mexican oil production has been in decline for years.

The surge has given new life to Iraq’s oil sector. This offers promise in Iraq of a stronger central government, reduced unemployment, greater economic development and resources, more stability, and more barrels of oil in a very tight market that badly needs them. Politicians in the United States and Iraq should be encouraging, not constraining, this progress.

Michael Makovsky, foreign policy director of the Bipartisan Policy Center, was a special assistant for Iraqi oil policy in the office of the secretary of defense from 2002 to 2006. He is author of Churchill’s Promised Land.

Originally appeared in The Weekly Standard on August 25, 2008.