Iraq needs an 'oil for peace' deal
Tuesday, 18 September 2007
Nick Butler
THE war in Iraq is not, of course, about oil. Coalition troops are there to advance democracy and to protect the innocent. But the consequences for the world's energy markets of an unresolved conflict in a country that holds the world's third largest accumulation of oil reserves cannot be ignored. General David Petraeus's report on the progress of the war could usefully be accompanied by an audit of what regime change has done for the oil sector within Iraq and for global energy security, and by some creative thinking on how the country's economic strength can be used in the cause of stability.
In 2002, before the shooting war began, the consensus in the international oil industry was that Iraq -- free of sanctions and with only limited judiciously applied investment -- could produce more than 3.0m barrels a day from existing fields within a matter of months after a transfer of power.
The infrastructure was in place and the Iraqi state company was highly competent. Its leadership may have been Ba'athist in name but its skill owed more to the pre-revolutionary Iraq Petroleum Company than to any political ideology. The engineers who ran the company were pragmatists who had kept oil flowing through the 1980s and 1990s in spite of wars and sanctions. A change of regime, it was assumed, would bring increased oil output funding reconstruction and even, on optimistic assumptions, repaying the costs of the war. Within a matter of years with the help of international capital and technology Iraq could be producing 4.0m or 5.0m b/d -- or even more.
The reality has been rather different. Production in recent months has fallen to less than 2.0m b/d, of which a good deal is stolen. With domestic demand boosted by prices at a fraction of world levels, exports have slipped below 1.5m b/d - well down on pre-war levels.
The oilfields appear largely undamaged but the infrastructure, including pipelines, is ageing, investment since the collapse of the old regime has been minimal and, most important, there has been an exodus of skilled professionals. In the short to medium term even sustaining the current level of production looks challenging. If the conflict continues, production and exports could well fall sharply.
The result of all this is that events in Iraq are contributing to the escalation of oil prices. Spare capacity across the world is limited and Iraq is a downside risk in a tight market.
Of course, civil wars are about religion and personal enmities, but economic factors can usually be found somewhere in most such conflicts. In Iraq, where 60 per cent of gross domestic product and 89 per cent of government revenue comes from one sector, that factor is not hard to find. The oilfields in the north around Kirkuk and the fields in the south, outside Basra, will be the prizes in the continuing conflict involving the Madhi army of Moqtada al-Sadr, the peshmerga guerrillas who provide the security for the Kurdish enclave and the residual, if splintered, Sunni forces. If the short-term consequence is increased oil prices, the longer-term impact of what has happened in Iraq is greater insecurity in the world's energy system.
With about 50m new vehicles on the world's roads each year and no obvious substitute for the oil-driven internal combustion engine in sight, demand for oil is set to increase to more than 100m b/d in the next decade. Sources of supply are becoming dangerously concentrated. Output from the North Sea is falling by 10 per cent a year. Alaskan oil production is almost 75 per cent below its 1987 peak. The Caspian and Angola provide some new supplies but the volumes are limited when measured against the growth in consumption, especially in Asia. The winners in terms of market share will be Russia and the states around the Persian Gulf -- Abu Dhabi, Kuwait, Saudi Arabia, Iran and Iraq. By 2020, on the latest forecasts, Saudi will need to export 17m b/d to meet growing global demand -- almost double today's level.
The dependence on Saudi supplies will be even higher if all the other producers are not delivering at full capacity, which for Iraq means close to 5.0m b/d. The reserves to achieve this are available, not least from undeveloped giant fields such as Rumaylah, but the institutional structure is not.
Perhaps the most useful parting gift that the coalition could leave for future Iraqi governments is a practical model for renewal of the oil sector. One way forward would be the creation of an international Iraqi company that recognised Iraqi ownership of resources, the need for global skills and manpower and the value of giving Iraqi citizens a stake in economic renewal. Seventy five per cent of this company would be held by the government in Baghdad; the remainder, after an auction, by a consortium of international companies, perhaps on a fixed-term basis. The company would be managed transparently to the highest international standards with a simple strategy designed to increase production from existing and new fields on a progressive basis.
The foreign companies would receive a fair return on their investment of people and technology, leaving part of the Iraqi company's annual surplus after investment to be distributed to Iraqis - a growth dividend which would spread wealth and capital across the country and provide the seed for the economic renewal which is essential if Iraq is to return to stability.
The creation of a collective interest in peace is of paramount importance. As a slogan "oil for peace" carries some dark ironies. But we have surely learnt over the past five years that a sustainable solution to a complex conflict cannot be won by military means alone.
The writer is director of the Cambridge Centre for Energy Studies at the Judge Business School FT Syndication Service. Under syndication arrangement with FE
THE war in Iraq is not, of course, about oil. Coalition troops are there to advance democracy and to protect the innocent. But the consequences for the world's energy markets of an unresolved conflict in a country that holds the world's third largest accumulation of oil reserves cannot be ignored. General David Petraeus's report on the progress of the war could usefully be accompanied by an audit of what regime change has done for the oil sector within Iraq and for global energy security, and by some creative thinking on how the country's economic strength can be used in the cause of stability.
In 2002, before the shooting war began, the consensus in the international oil industry was that Iraq -- free of sanctions and with only limited judiciously applied investment -- could produce more than 3.0m barrels a day from existing fields within a matter of months after a transfer of power.
The infrastructure was in place and the Iraqi state company was highly competent. Its leadership may have been Ba'athist in name but its skill owed more to the pre-revolutionary Iraq Petroleum Company than to any political ideology. The engineers who ran the company were pragmatists who had kept oil flowing through the 1980s and 1990s in spite of wars and sanctions. A change of regime, it was assumed, would bring increased oil output funding reconstruction and even, on optimistic assumptions, repaying the costs of the war. Within a matter of years with the help of international capital and technology Iraq could be producing 4.0m or 5.0m b/d -- or even more.
The reality has been rather different. Production in recent months has fallen to less than 2.0m b/d, of which a good deal is stolen. With domestic demand boosted by prices at a fraction of world levels, exports have slipped below 1.5m b/d - well down on pre-war levels.
The oilfields appear largely undamaged but the infrastructure, including pipelines, is ageing, investment since the collapse of the old regime has been minimal and, most important, there has been an exodus of skilled professionals. In the short to medium term even sustaining the current level of production looks challenging. If the conflict continues, production and exports could well fall sharply.
The result of all this is that events in Iraq are contributing to the escalation of oil prices. Spare capacity across the world is limited and Iraq is a downside risk in a tight market.
Of course, civil wars are about religion and personal enmities, but economic factors can usually be found somewhere in most such conflicts. In Iraq, where 60 per cent of gross domestic product and 89 per cent of government revenue comes from one sector, that factor is not hard to find. The oilfields in the north around Kirkuk and the fields in the south, outside Basra, will be the prizes in the continuing conflict involving the Madhi army of Moqtada al-Sadr, the peshmerga guerrillas who provide the security for the Kurdish enclave and the residual, if splintered, Sunni forces. If the short-term consequence is increased oil prices, the longer-term impact of what has happened in Iraq is greater insecurity in the world's energy system.
With about 50m new vehicles on the world's roads each year and no obvious substitute for the oil-driven internal combustion engine in sight, demand for oil is set to increase to more than 100m b/d in the next decade. Sources of supply are becoming dangerously concentrated. Output from the North Sea is falling by 10 per cent a year. Alaskan oil production is almost 75 per cent below its 1987 peak. The Caspian and Angola provide some new supplies but the volumes are limited when measured against the growth in consumption, especially in Asia. The winners in terms of market share will be Russia and the states around the Persian Gulf -- Abu Dhabi, Kuwait, Saudi Arabia, Iran and Iraq. By 2020, on the latest forecasts, Saudi will need to export 17m b/d to meet growing global demand -- almost double today's level.
The dependence on Saudi supplies will be even higher if all the other producers are not delivering at full capacity, which for Iraq means close to 5.0m b/d. The reserves to achieve this are available, not least from undeveloped giant fields such as Rumaylah, but the institutional structure is not.
Perhaps the most useful parting gift that the coalition could leave for future Iraqi governments is a practical model for renewal of the oil sector. One way forward would be the creation of an international Iraqi company that recognised Iraqi ownership of resources, the need for global skills and manpower and the value of giving Iraqi citizens a stake in economic renewal. Seventy five per cent of this company would be held by the government in Baghdad; the remainder, after an auction, by a consortium of international companies, perhaps on a fixed-term basis. The company would be managed transparently to the highest international standards with a simple strategy designed to increase production from existing and new fields on a progressive basis.
The foreign companies would receive a fair return on their investment of people and technology, leaving part of the Iraqi company's annual surplus after investment to be distributed to Iraqis - a growth dividend which would spread wealth and capital across the country and provide the seed for the economic renewal which is essential if Iraq is to return to stability.
The creation of a collective interest in peace is of paramount importance. As a slogan "oil for peace" carries some dark ironies. But we have surely learnt over the past five years that a sustainable solution to a complex conflict cannot be won by military means alone.
The writer is director of the Cambridge Centre for Energy Studies at the Judge Business School FT Syndication Service. Under syndication arrangement with FE