Yet Iraq’s sectarian fighting is, to an extraordinary degree, about the very issue of sharing oil. The country’s political future and its energy future have converged. The side that wins in this burgeoning civil war gets control, in theory, over some $35 billion a year in oil revenue, making up 90 percent of the Iraqi budget. The side that loses–well, they fear they won’t get anything at all. And Iraq’s daily spasms of violence are closely tied to maneuvering over the future control of oil, as well as rampant oilfield corruption. Oil monies skimmed off the top are said to be funding the insurgency, say U.S. officials.
Of the competing plans to resolve the conflict, all depend on oil. Calls for a federated Iraq, broken up into three states, are hampered by fears of which state gets the most oil. The answer is well known–the Shiites in the southern region have more than 80 percent of Iraq’s proven oil reserves. Kurdistan, in the north, has access to the fields of Kirkuk, which have been pumping petroleum since the 1920s. And the Sunnis, the minority that once dominated and profited from Iraq’s black gold, are stuck in the middle with a desert and lots of sand, underneath which oil experts expect there is oil, but no fields are anywhere near being developed.
Oil was supposed to be Iraq’s savior, with Bush administration officials promising that profits from oil revenues would pay for reconstruction. It was the Oil Ministry, almost alone among government buildings, that the U.S. forces protected after the fall of Baghdad.
But it’s turned out to be another factor in the country’s rapid decline. Regular insurgent attacks on the pipelines and oil facilities–the first three years saw at least one attack a week on average–have meant that production is only now reaching prewar levels. Iraq still has to import a majority of its fuel. Nearly four years into the war, the country has had four oil ministers. A recent study by economist Colin Rowat at the University of Birmingham revealed that if you factor out foreign aid, Iraq’s GNP is actually $27 billion less than it should be because of the war. And all these factors will come to the fore in early 2007, when the Iraqi Parliament is supposed to pass the country’s new “hydrocarbon law,” legislation that would spell out who gets the oil money now and who profits from any future discoveries.
The hydrocarbon law, though crucial, is beset by sectarian backstabbing. Each side has written its own draft of the law–there are at least three currently floating around–and the Kurdish draft is the most professionally done, says a Western diplomat who advises Iraq’s Oil Ministry. Barham Salih, a Kurd and Iraqi vice president involved in the bill, says his goal is to make Iraq the Arab world’s first “petro-democracy”; the Kurds have already cut a deal, independent of the central government, with a Norwegian firm to start test-producing oil in the first quarter of 2007. Another key player involved in writing the law–Finance Minister Bayan Jabr–is considered one of the worst sectarian offenders. He was pushed out of running Iraqi’s Interior Ministry in June 2006 because Shiite death-squad activity ballooned under his watch.
The infighting has also produced a big controversy over what has not been spent on much-needed investments. According to the Western diplomat, in 2005 to 2006 some $3 billion wasn’t spent from the Oil Ministry’s budget, and $4 billion to $5 billion wasn’t spent in 2003 to 2004. Jabr is also accused of squirreling away funds for southern Iraq. “We have to take the power away. We have to pry their hands from the power,” says the Western diplomat.
Indeed, the squabbling over Iraq’s oil laws has kept the biggest international oil companies out of the country. U.S. and Iraqi officials say they’re the force that is needed to fix Iraqi oil, but without a legal framework–which they hope the hydrocarbon law will provide–the companies haven’t dared make significant investments. According to a U.S. official, who asked to remain anonymous as a condition for the interview, there have been at least 43 memorandums of understanding signed between Iraq’s government and international oil companies. The MOUs are a way for firms to test the temperature of the country with a contract that says “let’s cooperate in the future,” allowing them to make technical studies of the production potential in a nation that holds the world’s third largest oil reserves, many of them largely untapped.
These firms, says the Western diplomat, include all the “big boys,” like ExxonMobil, Chevron and Total. He says the oil companies have already worked with the Iraqi government to do independent analyses and R&D. British Petroleum recently handed over its yearlong reservoir study of the Rumailah field to Iraq’s Southern Oil Co. It’s BP’s first piece of work in Iraq in more than 20 years. The Rumailah field, referred to as one of the world’s super oil-fields, is still capable of producing more than 1 million barrels a day. Shell is currently working on an evaluation study in Kirkuk–a city that still regularly sees massive car bombings between Kurds, Sunnis and Turkomans, who all lay claim to the town’s ownership. “Major oil companies are very interested,” says Catherine Hunter, senior energy analyst at Global Insight in London. “But they’re only dipping their toe in the water.”
On a recent trip to Japan to drum up support from outside investors, Oil Minister Hussein Shahristani told reporters that international companies were the only way Iraq could meet its official target: it aims to attract $20 billion in investment and increase output to 6 million barrels a day by 2012. He said Iraq currently produces just under 2.5 million barrels a day, but added, “We are determined to increase that to 4 to 4.5 million by the end of 2010. But we are also determined to go beyond that by cooperating with international companies.”
He blamed the production declines on sabotage, but said the ministry is learning to cope. “We’ve managed to get it to be repaired on an average of within 48 hours,” he said.
For now, Iraq continues to punch well below its potential weight in global oil markets. At about 2.5 million barrels per day, it contributes just about 2 percent of global output. Iraq’s oil affects global prices minimally on a day-to-day basis, says Vera de Ladoucette, senior vice president of Cambridge Energy Research Associates in Paris. And over the last three years, Iraqi oil officials have consistently overestimated how quickly they can bring back production. Yes, there’s no doubt about Iraq’s future potential. Analysts say the country could contribute up to 8 percent of global oil output by 2020 if all goes well–which means a lot better than it has done in 2006. But that is probably expecting too much.
