Iraq Upgrades Reserves to 350 bil. Barrels, Invites New IOCs for Pre-Qualification

All in a Barrel

Deputy Prime Minister Barham Salih yesterday told an audience at the Middle East World Economic Forum in Sharm el-Sheikh (Egypt), that Iraq's reserves were now standing at 350 billion barrels—well above Saudi Arabia's 260 billion barrels, giving Iraq the world's most abundant oil reserves. The new numbers are more than three times Iraq's hitherto official reserve estimate of 115 billion barrels, which has widely been seen as far below the country's actual potential, given how under-explored it has remained and the discovery rates of previously undertaken exploration.

Although Salih was quoted by The Times as saying that the new numbers were the result of recent geological surveys and seismic data compiled by "reputable international oil companies" and that this was a "serious figure from credible sources", there has not been any opportunity for an oil company or surveying contractor to undertake seismic exploration in Iraq since the 2003 invasion, and even less possibilities for any exploration drilling programmes to have been conducted in most of Iraq outside the Iraqi Kurdistan region during that time. The numbers are therefore taken from a roughly year-old study undertaken by the U.S. consultancy HIS, which—while affirming the 115-billion-barrel reserve figure—identified expectations of the potential of an additional 100 billion barrels in the country's Western Desert region, bordering Jordan and Syria. This number has subsequently taken on a life of its own and grown to an additional 200 billion barrels, despite the Anbar province, where the bulk of the added reserves would be placed, hitherto having been off-limits for IOCs due to heavy fighting during much of 2007.

Truthful Statistics?

Official oil and gas reserve figures in the Gulf region have been treated with extreme caution by the oil industry for decades, given the politicised nature and the virtually opaque way in which they have been calculated since the nationalisation of the oil industry in the region's states. Since the oil reserves figure is the groundplate for the statistical estimate of the national wealth and potential of the oil economies, the states have had a lot to gain from steadily growing their reserves over the past decades, despite a growing suspicion that the almost-yearly additions to the numbers were increasingly disconnected from the results of exploration. Reserves have also played a significant role politically, soothing populations into seeing oil wealth as being virtually unending, hence reducing questions about year-on-year spending and potential wasteful behaviour.

Although the hope has been that a new Iraqi administration, applying more openness in the oil sector, would not seize the opportunity to politicise the reserve figures, there is great potential domestic gain to be had if it is to "confirm" for its Sunni population—afraid of losing out to a Shi'a population in control of most of the vast southern reserves and a Kurdish population seeking far-reaching autonomy over the country's northern reserves— the existence of large crude reserves in the western and central parts of the country.

For the oil industry, the affirmation that Iraq's oil reserves all of a sudden have more than trebled and become the largest in the world without any advanced exploration having taken place, will just serve to weaken the government's professional image in the eyes of the IOCs and demonstrate that the tendency to politicise the oil industry and financial statistics continues to exist.

Continued Pre-Qualification

Meanwhile, the Iraqi Oil Ministry has said that it is getting ready to review new applicants for its pre-qualification process. In April, 35 IOCs were pre-qualified to bid for Iraq's upcoming oil and gas development projects, out of around 120 applicants. The list is meant to be open-ended; Iraq will review companies who are interested in bidding on projects in the country and have registered their application with the Iraqi Oil Ministry. If the companies pass the review process, they make it on to the pre-qualification list and gain the right to bid on specific projects.

Iraqi is hoping to get bidding under way for a number of the so-called second-tier projects sometime in the second half of the year, after the six pilot contracts for the reinvigoration of six major fields have been completely finalised with six IOCs or IOC consortia. The pilot technical service contracts (TSCs) are hoped to be signed from June onwards, but the timetable has already slipped from the early part of the year, also delaying the subsequent wider tendering process. Recent less official estimates from within the Oil Ministry anticipate that the awarding of the first tenders from the second-tier process might not be ready before November. IOCs, while eager to get a foothold in Iraq, have shown themselves reluctant to commit financially before a legal framework in the shape of an oil law is enacted by parliament and before the Iraqi Army and security forces have demonstrated more clearly that they are able to maintain security in the advent of a U.S. troop draw-down following the coming U.S. presidential election.
Outlook and Implications

With virtually no-one in the oil and gas industry doubting that Iraq holds reserves significantly higher than 115 billion barrels, oil company investor interest in Iraq is high. The interest will neither be lowered nor raised with a premature hike of Iraq's estimated reserves, made on such shaky grounds, given the industry's experience with the region's pollicisation of reserve statistics. It will, however, further weaken some of the trust in official Iraqi communications, as well as further signal that the government is not averse to playing statistics to its own advantage.

Nevertheless, the issue of the reserve upgrade is mostly aimed at Iraq's Sunni population, in order to weaken some Sunni groups' adversity to the proposed Iraqi oil law and invalidate their current fears that the country's Kurds and Shi'as will take control of almost all Iraq's oil. Promising vast reserves in the Western Desert before they have actually been found might be morally questionable, but on the other hand indications show the probability of at least some reserves being there, making the potential full political cost of the claim payable so much later that it becomes irrelevant for Iraq's current government.

Meanwhile, the Oil Ministry is trying to move the oil and gas development onwards in the country, despite the main two obstacles for the IOCs not yet being lifted. Many oil companies will prefer to wait out the U.S. presidential elections to ascertain the U.S. Army's future commitment levels to Iraqi security, as well as U.S. support for the political process, but the Iraqi government looks likely to attempt to force the IOCs to commit before that, perhaps as early as June.

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