April 16th, 2013
06:51 PM ET

Can Iraq meet its oil potential?

By Afeef Nessouli, Special to CNN

Editor’s note: Afeef Nessouli is an intern with Fareed Zakaria GPS. The views expressed are his own.

The debate over whether the Iraq War was really all about oil may never be fully resolved in some minds, but one thing is clear – either way, Iraq has yet to really cash in. The country’s GDP may have risen several fold in the decade since the war began, yet its income per capita lags not only oil rich neighbors such as Kuwait and Saudi Arabia, but also relative economic minnows including Botswana, Turkmenistan and Albania. This is despite the fact that it sits upon the world’s fourth largest oil reserves and could double its production in the next few years.

The question, then, is will Iraq be able to meet its oil potential?

Iraq currently pumps around 3 million barrels per day (bpd), but the International Energy Agency recently suggested that it could in fact generate more than any other supplier if the major causes of uncertainty – governance, deteriorating infrastructure and insufficient water supplies – are overcome.

To surpass Russia and even Saudi Arabia, though, would require an about $530 billion investment in the country’s infrastructure, according to the IEA. But even if it is able to muster this level of investment from oil revenues, Baghdad faces some unique and potentially crippling political challenges as well, including tensions between the central government and the Kurdistan Regional Government (KRG) in northern Iraq.

The effects of disputes over oil contracts and infrastructure holdups, stifling its development, were underscored earlier this year, when the Kurds halted exports following a dispute with Baghdad over the KRG’s right to sign contracts and sell petroleum – exports through the Kirkuk pipeline tumbled from 325,800 bpd in December to 264,500 the following month.

The dispute between the two sides essentially revolves around Kurds demanding the right to sign oil contracts independently, while Baghdad’s oil ministry resists over fears of Kurdish autonomy. About 10 percent of Iraq’s oil is produced from Kurdish areas, and a hypothetical Kurdistan would be rich in resources. But the central government, sensitive to the perceived danger of secession, believes that any oil contract signed with the KRG without its approval is illegal.

This hasn’t stopped the KRG continuing to sign oil contracts with foreign companies, and it is quick to argue that articles of Iraq’s constitution cited by the central government don’t apply to fields that were yet to be developed when the law was signed.

Multinationals have, for their part, been quick to exploit these differences. “There are better operating conditions [in the Kurdish region], with less bureaucracy, better security and more openness to foreign companies,” says Wladimir van Wilgenburg, an analyst and correspondent for Rudaw English.

Perhaps more worrying to Baghdad is that the Kurds have not used the so-called Green Line, which separates the Arab and Kurdish regions, as a stopping point, meaning they have been signing contracts for plots within disputed territory.

The problem for the Kurds is that despite their desire for independence over oil laws and contracts with foreign companies, they are unable to export without Baghdad, and the federal government has used its power over the national pipeline network, as well as its hold on the treasury and budget, to check the KRG. Complicating all this is an apparent push by the KRG leader to construct a Kurdish pipeline to Turkey by 2014, a development Van Wilgenburg says the U.S. opposes.

The ongoing tensions were on display during last month’s annual budget discussions, talks that are typically seen as a unifying, “benefits all” factor. The Kurdish Coalition boycotted the vote on the 2013 budget, Musings on Iraq analyst Joel Wing says, because it included “minimal compensation for oil companies working in Kurdistan and includes ways to cut the Kurdish share of the budget if they do certain things.”

So are ongoing tensions a foregone conclusion? Not necessarily, suggests Wing, who argues there are some ways in which the two parties can work together.

One way, he suggests, would be for the two sides to repair and expand the existing Kirkuk northern pipeline that ships oil to Turkey – “the pipeline could potentially pump 1 million bpd, but is only currently pumping between 300,000 and 400,000” Wing says. Another, perhaps less likely, agreement could see the two sides agree for now to jointly develop oil fields in disputed territories. The Kirkuk field is a good case in point –while the southern half of the field is run by the Oil Ministry, the KRG repeatedly declines ministry suggestions on repairing and expanding the field.

Clearly, it would be in both sides’ interests for Baghdad to give the Kurds more autonomy. But for this to happen, the Kurds need to reassure Baghdad that they aren’t trying to secede.

If the two sides can come to some kind of lasting resolution, it could mean significantly increased resources to invest in developing health care, education and infrastructure. And it would likely make international energy markets happier, too.

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Topics: Iraq • Oil

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soundoff (23 Responses)
  1. Joseph McCarthy

    Can Iraq meet it's oil potential? Yes, it can if Iraq is divided into three different states free of foreign control by giving the north to the Kurds, the south to the Shiites and the west to the Sunnis. Otherwise, the current terrorist attacks will only continue with Iraq under the thumbs of both the U.S. and Great Britain which will not be any good for the Iraqi people. Besides, we don't need a satellite state in the Middle East!

    April 16, 2013 at 7:16 pm | Reply
  2. Ferhat Balkan

    Iraq must stay united and improve it's economy. To do this, they must offer friendlier terms to foreign oil companies who are looking to invest. Also, they must pass a comprehensive deal to share the nation's oil revenue which has been stuck in the framework since 2007. Economic growth and creating jobs is the key for Iraq's success.

    April 16, 2013 at 8:05 pm | Reply
    • wjmccartan

      Please Ferhat, quit trying to be funny. will you? As long as Iraq remains forcefully united and under foreign rule, there will be no peace let alone prosperity! Western companies want to exploit Iraq's oil, come what may!

      April 17, 2013 at 10:08 am | Reply
  3. rightospeak

    A stupid question not worth a comment.

    April 16, 2013 at 8:20 pm | Reply
  4. j. von hettlingen

    Many said al-Maliki, the prime minister were to be responsible for Iraqi politics having taken an increasingly sectarian turn. Maliki has been accused of seeking to concentrate power in the hands of a Shia-dominated central government.
    Under the country's revenue-sharing scheme, more than 80% of the money from Iraq's international oil sales goes to Baghdad, with 17% going to the Kurds. All exports go through a pipeline controlled by the federal government, with Baghdad collecting the revenues for distribution. The Kurds says it has not received enough money to pay the companies working in Kurdish Iraq. If the country cannot work out a hydrocarbon law to settle disputes, Kurdistan would break away.

    April 17, 2013 at 8:30 am | Reply
    • wjmccartan

      The very idea of Kurdistan breaking away is good one indeed. The Kurds have been trying to set up their own home state since the end of WW1. This the British promised the Kurds only to renegg 4 years later on that promise.

      April 17, 2013 at 10:14 am | Reply
  5. Musings on a Beneficent World

    Afeef– A solid take on a tough problem. Americans should be much more concerned about this–after all, it is these oil revenues that represent Iraq's way out of poverty and hardship. And if the central government can manage to keep these revenues out of the hands of a kleptocracy and into the hands of Iraqi citizens, perhaps it can become the beacon of democracy W had in mind when we got rid of Saddam in '03... Keep up the good work!

    April 17, 2013 at 9:41 am | Reply
    • wjmccartan

      Thanks, Musings..... Another stupid post above from another lame brained Tea Partier!

      April 17, 2013 at 10:17 am | Reply
      • JoeP199

        You don't have to be a tea partier to agree with what he said, you just have to be intellectually honest enough enough to recognize logical thought when it's expressed. I'm a proud liberal, and I agree him. Political views are, or at least should be, irrelevant in the face of facts.

        April 21, 2013 at 12:22 pm |
  6. Alex Yastrow

    This information is crucially important in understanding the trials and tribulations facing Iraq and other countries in the Middle East. The nexus between hegemonic tribal relations and the countries' global economic impact is a topic that is little discussed and widely misunderstood. Hopefully this article, and others like it, can lead to broader understanding so that necessary changes can be made.

    April 17, 2013 at 3:05 pm | Reply
  7. Michael

    Informative article. Looking forward to more from Mr. Nessouli

    April 17, 2013 at 3:24 pm | Reply
  8. Pete

    Iraq will never meet its full potential because of the warring ,greedy tribes that inhabit the country..Pipelines crude will always be disrupted and monies suppidly used for future infastructure will be used for bribes to keep the pipeline free and clear for their countries growth but the problem is who holds the wealth and can they as Iraqis be trusted because up to now nobody has been trustworthy have they!!It's time for their country to basicly incorporate and see how comanaging means as working well with others but that's another dream of that countrys isn't it for decades to come!!

    April 17, 2013 at 5:29 pm | Reply
  9. quotreader

    I find it sort of ironic that Iraqi Kurdistan is pushing to work with Turkey on this issue. Perhaps Turkey would want to see an independent Kurdish homeland carved out of Iraq in order to help squash its own "Kurdish problem" (though Ocalan recently called for a PKK ceasefire anyway...). It's interesting to think about how this oil issue ties in with broader political/social currents in the region.

    April 17, 2013 at 7:21 pm | Reply
  10. ratheesh managing partner adn international kuwait

    dear we r looking fuel oil cst 180 required in dubai pls replay 5000 mton to 10000 mton per month

    April 18, 2013 at 9:13 am | Reply

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