The Mideast's Awakening Energy Giant Iraq Progresses toward a Future Built on Oil Wealth

HAT TIP:  The IQD Team


By Bernhard Zand

Scott Nelson/ Focus/ DER SPIEGEL
When the US toppled Saddam Hussein in 2003, few people imagined that it would take another decade before the Iraqi oil industry was rebuilt. Now, progress is finally being made, and the country’s massive reserves could bring untold wealth. But before that happens, Baghdad needs to improve security and get corruption under control.

There’s a fine line between being snubbed and humiliated — and no one in Iraq knows this better than Hussein al-Shahristani.

Two executives from the world’s largest private energy company, ExxonMobil, are sitting and waiting in the outer office of Baghdad’s most powerful government oil official. For the first 10 minutes, they sit at attention, ready to jump up as soon as Shahristani asks them in. But Shahristani doesn’t ask. They sink down further into their deep armchairs and start playing with their smartphones.

After half an hour, they ask their Iraqi escort if something is wrong. The secretary takes pity on them and calls a staff member to sit with the visitors. They tell him about their flight in from Dubai, about the Qatar professional soccer league — and they eventually venture a cautious question: Is it perhaps conceivable that an oil company could one day sponsor a football club in Iraq? FC Exxon Samarra? Mobil Basra United? It’s a bold idea.

Then, nearly an hour after their 12 o’clock appointment at Adnan Palace in Baghdad’s maximum-security zone, the phone finally rings and the secretary asks the two Americans to follow her. Doctor Shahristani now has time for them, she says.

Empty Promises

For the past nine years, the world has been waiting for Iraq’s oil. Ever since Saddam Hussein was toppled from power in 2003, politicians in Baghdad and Washington have been announcing that the country would soon double, triple or perhaps even quintuple its oil exports. After all, former US Deputy Secretary of Defense Paul Wolfowitz, one of the architects of the Iraq war, had promised that the country would finance its reconstruction on its own.

PHOTO GALLERY

7 Photos Photo Gallery: Oil the Key to Iraq’s Future

They were empty promises. For years, neither the Iraqis nor the occupying forces succeeded in developing the country’s neglected oil fields, plugging the holes in the pipelines, or repairing the pumping stations and storage tanks. Twelve years of sanctions, the invasion, the sectarian fighting that followed, and the terror attacks on workers, engineers and facilities have set back the reconstruction of the oil industry by years. Even today, Iraq produces barely more than the nearly 2.5 million barrels per day that it was already exporting before the Iraq war.

And, even now, the country has still failed to introduce binding legislation for the oil and gas sector. Arabs and Kurds, Sunnis and Shiites are wrangling just as bitterly over the distribution of future resources as they did five years ago, when the parliament debated the law for the first time.

Three months ago, the last US soldier left Iraq, putting an end to the certainty that, if push came to shove, an army stood at the ready to prevent the country from becoming mired in sectarian violence again.

Bright Future

Why, then, are two American oil executives from ExxonMobil headquarters in Irving, Texas waiting so patiently for their appointment with Shahristani?

Following Iraq’s depressing past, it likely has to do with this country’s potentially bright future — with its still breathtaking economic prospects: Global demand for oil will increase by at least 10 percent over the next 20 years. Ninety percent of this demand will most likely be met by sources in the Middle East and North Africa. Most countries in this region, however, are already producing oil at the limit of their capacities, some are in the midst of revolts and revolutions, while others may face violent upheaval in the future.

Iraq is currently the only country in the region that has the resources to meet the demand for oil in the coming years virtually by itself: Deep underground lie 115 billion barrels of proven reserves and as many as 200 billion barrels of estimated reserves, which have remained largely untouched over the past two decades.

Shahristani, 69, who was the oil minister for four years and was promoted to deputy prime minister in late 2010, has been charged with bringing this enormous treasure to the surface and selling it on global markets. He knows that time is running out and that he is reliant on the help of the major international oil companies. But he also appears to know what he can demand from them in return.

Strong Nerves

In 1979, the nuclear physicist, a devout Shiite, defied Saddam Hussein’s personal order to establish a military nuclear program. He was subsequently imprisoned for 11 years in the notorious Abu Ghraib prison, where he was tortured. Shahristani is known for his obstinacy and strong nerves.

In the spring of 2009, he opened a first round of bidding for service contracts for Iraq’s largest oil fields. These agreements stipulate that the oil corporations receive a certain amount of money per barrel, but that the oil remains the property of the host country until it is sold. The invitation for bids failed, however, because the oil companies were either dissatisfied with the sums offered or they wanted other concessions — contracts that would reward them with a share of the output, which they could then use as collateral for their stock market transactions. Shahristani only managed to negotiate one contract.

But he stood his ground and, during the second round, the first big oil companies caved in. In a third round, the others then followed suit. Today, almost all the large international companies are drilling for Iraqi oil, including Britain’s BP, the British-Dutch group Shell, Lukoil and Gazprom from Russia, Italy’s Eni, Malaysia’s Petronas and China’s CNPC. They have committed to investing over $100 billion (€76 billion) and expanding Iraq’s oil production capacity to 13 million barrels a day by 2017.

Thirteen million barrels is a magic number. It’s 1 million barrels more than the maximum production quota of Saudi Arabia, the only OPEC country that has a so-called swing capacity — in other words, the ability to balance out any shortfall by another member state.

Just how much the country will actually produce depends on the demand and the price of oil, says Shahristani. If Baghdad were to produce merely 8 million barrels a day, it would still amount to gross daily revenues of nearly $1 billion at today’s crude oil prices — more money than the war-torn country would even be able to absorb in its current state.

‘An Absolute Hit’

Although such figures had hardly been worth the paper they were printed on in the years following 2003, now there are signs that work is actually progressing on Iraq’s oil fields. In the palm groves a few kilometers east of Baghdad, an area where for years foreigners would only venture in heavily armed convoys, Raymond Mallia from Malta is now drilling for the heavy oil of the East Baghdad field, with its stench of sulfur.

With over 8 billion barrels of extractable oil, East Baghdad is what’s known as a super-giant oil field. There are only a few dozen oil fields of this size in the world, and even in this exclusive club East Baghdad is an exception: Part of the field lies under the city of Baghdad, with its 7 million residents — specifically, under the Shiite district of Sadr City, which was the scene of particularly brutal sectarian fighting.

Mallia, 54, has worked in Libya, Kazakhstan and Bangladesh — and on oil rigs off the coast of Kuwait and Iran. It was there, he says, that he saw the first cruise missiles that were fired by US destroyers at Saddam Hussein’s Iraq in the spring of 2003: “At the time, I couldn’t have imagined that it would take nearly 10 years before we also seriously started to dig here.”

Despite all the cynicism that a career in the oil fields of this world breeds in a man, Mallia is upbeat and optimistic about what he’s doing here. “Iraq is an absolute hit in the oil world,” he says. “The Chinese and the Indians need this stuff, and the Iraqis have it. They’d have to do just about everything wrong to keep this country from booming in a few years.”

Day and night, Mallia uses his drilling rig to drive one rod after the other into the loamy soil. He has drilled two wells: the first one is already producing 2,000 barrels a day, and the second one has just struck oil at a depth of 3,600 meters (11,800 feet). Two young Canadian logging engineers use sensors to calculate the expected yield. It will take hundreds of such wells before the East Baghdad oil field can be exploited at anything close to capacity. Since it lies in a densely populated area, the work is proceeding much slower than in the desert regions of southern Iraq.

Part 2: When Oil Alone Isn’t Enough

Mallia’s boss, Majid Abdullah, 61, has also worked abroad for 30 years. One year ago, he decided to finally return to his native country. If he was only 30, he wouldn’t have done it, Abdullah says, but now he’s willing to risk spending the rest of his career in his volatile homeland in the hope of a few stabile years. “East Baghdad is for me the most convenient oil field of my life,” he says, “I can drive home after every shift and sleep in my own bed.”

Abdullah’s confidence doesn’t have much of a political spin — it’s purely an oil man’s view. As he knows, especially after having to flee the turmoil of revolutionary Libya, producing oil is not enough to build a sustainable economy and establish a stable state. It requires a modicum of security, and legal and political predictability. And it necessitates pipelines, pumps, oil depots and secure ports to export the crude oil.

At least the Iraqis have started expanding their port facilities. In early March, at the mouth of the Shatt al-Arab River, the first of four new mooring stations went into operation. They are colossal installations, attached to deep-sea buoys, where oil tankers can be filled. Until now, Iraq has had only one functioning oil terminal, which was crucial to the economic survival of the entire country: Ninety-five percent of the national budget is financed by oil exports — and 80 percent of this oil was pumped into the tankers via the eight filling stations at the Basra terminal.

A Degree of Security

Another condition for the long-term expansion of the oil industry now also appears to have been nearly fulfilled: the security of engineers, facilities and supplies. Granted, the experts from the oil companies and their suppliers still live and work today in heavily guarded camps, and avoid making trips that take them away from the safety of their compounds. There are still bomb attacks, political assassinations and kidnappings every day in Iraq, claiming the lives of over 4,000 civilians in 2011 alone — far more than the number who died during the upheaval of the Arab Spring in Egypt and Tunisia. Yet compared to the height of the sectarian fighting in 2006 and 2007, when it was even dangerous to work behind blast-proof walls, today the oil companies see the risk as calculable at least. No one can say how long this will last, though.

Indeed, two other conditions which are necessary for Iraq to join the ranks of the world’s major oil producers have by no means been fulfilled. As long as Baghdad and the government of the autonomous Kurdistan Region in northern Iraq fail to agree on national legislation on petroleum exploitation, the state remains divided. The central government insists that all contracts with international oil companies may only be negotiated by Baghdad. But the government of the Kurdish autonomous zone began bypassing Baghdad back in 2005, and has been negotiating its own contracts ever since. There are currently 48, mainly smaller, companies working in Iraqi Kurdistan.

In November, it was announced that ExxonMobil has become the first major international oil company to sign a contract with the Kurds. Shahristani’s voice becomes cold and hard when he talks about the two ExxonMobil representatives who he left in his waiting room for the better part of an hour. “Companies who conclude contracts like this have no right working on Iraqi territory.” He has nothing more to say about Exxon. This is not the tone that entrepreneurs like to hear, especially if they are investing billions in a country that has recently emerged from a period of violence bordering on civil war.

Incredibly Corrupt

But these legal uncertainties are an abstract issue compared with a daily problem that stands in the way of establishing a modern oil industry: Iraq is one of the most corrupt countries in the world. The demands made by officials from Iraqi ministries and provincial councils during negotiations are often so brazen and outrageous that they astonish even experienced business people. “I encountered a minister who straight out asked for 12 coaches for his private bus company,” says a European oil executive who preferred not to be identified.

Iraq’s rise as a major oil producer probably depends more on progress on the domestic front than on big geopolitical upheavals in the Middle East. Issues such as whether the power finally remains on all day in Baghdad, clean drinking water flows from the tap and a halfway reliable civil service starts administering the country weigh more heavily than the question of whether Israel will attack Iran and the Strait of Hormuz will be closed.

If Iraq succeeds in doubling its oil production over the coming two years and reaching a critical mass of some 5 million barrels a day, it will nevertheless raise a geopolitical question. After being excluded from the OPEC quota system in the wake of its 1990 invasion of Kuwait, where does Iraq now stand among the world’s leading oil-producing countries? Does it side with the hardliners, such as Iran, Venezuela and formerly Libya, which are pushing for the highest possible oil price — or does it side with the moderates, such as Saudi Arabia and the United Arab Emirates, which are interested in seeing the price remain as stable as possible?

“I can reassure you,” says a former oil minister, Ahmed Chalabi, when asked this question. One of the most influential politicians in Iraq, Chalabi once fought alongside the Americans against Saddam Hussein and is now said to be loyal to Tehran. “Tempermentally, Iraq has never been moderate,” he says.

THANKS MRM

http://www.spiegel.de/international/world/0,1518,826447,00.html

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