Iraq oil industry experiences new boom

BAGHDAD — Over the past four decades, Iraq’s oil production has traced the path of a roller coaster, propelled upward by geysers of crude and dragged downward by the weight of war and sanctions. In the aftermath of the 2003 U.S.-led invasion, Iraqi output has failed to achieve the heights it reached under Saddam Hussein — until now.

In April, Iraq exported more crude than it has in any month since it invaded Kuwait in 1990. This success, according to analysts and policymakers, could jolt the global economy and help offset the loss of oil supplies from Iran.

It also signals the rise of Iraq as a modern petro-state, with all the power and problems that enormous oil wealth brings.

“Over the next five to seven years, Iraq could be supplying nearly half of the incremental growth in world oil demand,” said Larry Goldstein, director of the nonprofit Energy Policy Research Foundation.

The cornerstone of Iraq’s progress has been the government’s ability since 2008 to reduce violence and then to maintain security after the U.S. troop withdrawal at the end of last year. Militias and terrorist groups still detonate bombs, attack security forces and target government officials for assassination. But the death toll has dropped dramatically.

These security gains have helped the oil sector. A strategic pipeline to Turkey was once unusable because it was bombed so often; for the past few years, it has carried about 20 percent of the country’s exports.

The revenue is supercharging Iraq’s economy. The government, which relies on crude sales for more than 95 percent of its income, has begun funding ambitious reconstruction projects, including roads, hospitals and power plants.

Yet oil has also amplified many of the country’s problems. The influx of cash has often overwhelmed fledgling institutions, creating opportunities for large-scale corruption. And Iraq’s semi-autonomous Kurdish region has claimed authority to develop oil fields independently, inflaming tensions with Baghdad.

Iraq’s oil boom started in earnest in 2009 and 2010, when it signed 11 contracts with companies such as BP, Exxon Mobil and Royal Dutch Shell. A year later, those companies were pumping more crude than the country’s antiquated infrastructure could handle, and the Oil Ministry often had to order them to curtail production.

The surge in Iraqi exports has influenced the U.S. government as it has evaluated sanctions targeting Iran’s oil sector. One key question has been whether the world’s other oil producers can replace the lost Iranian output; if they couldn’t, the price of oil would probably rise, hurting global economic growth.

According to a State Department official, who spoke on the condition of anonymity because he was not authorized to talk on the record, analysts at the U.S. Embassy in Baghdad have reported to Washington that Iraq will add 500,000 barrels per day of production this year, equal to about one-quarter of Iran’s current exports.

That figure jibes with the estimates of other analysts, including Goldstein, who said Iraq’s output is especially important because Saudi Arabia does not seem ready to offer much more. The Saudis typically use their massive oil reserves to make up for global shortfalls, but they have already increased their output substantially in the last year.

“Their export capability is getting squeezed,” Goldstein said.

Output that’s overdue

Iraqi production appears ready to rise even further.

From a technical perspective, an oil boom is overdue. Geologists have long been impressed by Iraq’s underground seas of oil — one enormous field is named Majnoon, which is Arabic for “crazy” — but the limiting factor has been a lack of investment.

International companies are now pouring billions of dollars into the fields, and the government is making significant, if uneven, progress toward building the supporting infrastructure.

Skeptical analysts have long regarded Iraq’s oil sector as a series of bottlenecks, any one of which could choke the flow of crude. They have not doubted the potential of prolific Iraqi fields, but they have been wary of the inadequate pipelines, pumping stations and storage tanks that transmit oil from wellhead to tanker. One facility in Kirkuk, for example, which processes about one-tenth of Iraq’s crude, is 80 years old and sometimes closes because of poison gas leaks.

But the recent easing of one key bottleneck has inspired some optimism. In March, the Oil Ministry opened an export facility in the Persian Gulf, off the coast of Basra. It takes days to load a supertanker with crude, but after building additional moorings, Iraq can now pump to more ships at the same time.

Because of the new facilities, Iraqi exports rose to 2.5 million barrels of oil per day in April, according to Falah al-Amri, the head of Iraq’s State Oil Marketing Organization — a one-fifth increase since the beginning of the year.

The deepest fissure

The progress on infrastructure may be inspiring international optimism, but Iraq still suffers from a legacy of war, political conflict and inefficient bureaucracy — what industry officials sometimes call “above-ground factors,” in contrast to the relatively straightforward challenges of drilling through thousands of feet of rock.

Oil has tended to compound those problems rather than solve them.

Perhaps the deepest fissure in Iraq’s polity divides the Kurdistan region from the Arab-majority central government. The two sides have long disagreed about how to distribute authority over the country’s oil, and they have signed contracts based on diverging interpretations of Iraqi law.

This conflict has led to a string of controversies that escalated April 1, when Kurdistan shut off its oil exports, which have accounted for as much as 8 percent of Iraq’s international oil sales.

Iraq achieved its record production last month without Kurdistan’s contributions — a testament to its technical advances in Basra — yet the dispute highlights how oil can lead to wealth and dysfunction. Rising oil production in the south has eliminated one major incentive for Baghdad to seek a compromise: Iraq will be able to fund its entire $100 billion budget without Kurdistan’s oil, according to Oil Minister Abdul-Kareem Luaibi.

A central point of contention has been Kurdistan’s decision to sign six contracts with Exxon Mobil despite Baghdad’s warnings that such deals would be considered illegal. Three of those deals require Exxon to explore territory claimed by both Kurdistan and Baghdad.

Since Kurdistan’s export cutoff, leaders in Baghdad have threatened to dock the region’s share of the federal budget, and the Kurdish president, Massoud Barzani, has repeatedly made veiled threats to declare independence.

The standoff could result in violence. If so, the world might see the roller coaster of Iraqi production fall again.