Global Insight Perspective | |
Significance | Pledged increments in Iraqi oil production through the rehabilitation of oil wells and water injection will fall short of expectations, according to the report from the Office of the Special Inspector General for Iraq Reconstruction (SIGIR), which effectively rules out net production gains from the donor-financed reconstruction programme or current Iraqi spending. |
Implications | Lack of improvements in the country's production export figures had already suggested problems with the reconstruction timetable, but this report essentially dims remaining hopes that increments are "just around the corner". |
Outlook | The Iraqi oil sector remains in a sorry state some three years after the U.S.-led invasion, with sabotage, security spending, and theft doing as much as years of neglect to wipe out the impact of new investment. The report indirectly highlights the need for immediate and direct investment in new oilfields to achieve any sustainable production increases, with all eyes now focused on the draft Iraqi hydrocarbon law to see how the country intends to go about this. |
Another Day, Another Report
This week has been notable for two Iraq reports: the bombshell Iraq Study Group (ISG) offering; and a periodic update from the Office of the Special Inspector General for Iraq Reconstruction (SIGIR). Neither of them holds good news for the U.S. programme in the country, but both of them reflect long-held observer opinion on events.
While the ISG report focused on the political level, SIGIR returned to reviewing events in the reconstruction effort, drawing the conclusion that Iraq will not be able to meet its crude oil production capacity targets, or indeed raise production, because of existing damage to oil reservoirs and infrastructure that renders new projects less effective without an increase in spending. At the start of his term in office, Iraq's Oil Minister Hussein al-Shahristani had pledged production of 3 million b/d by the end of 2006, rising to 4.5 million b/d in the next three to four years, although these have been long held at arm's length by the market.
Of note, the second-phase Qarmat Ali reinjection plant in the southern oilfields will not deliver a 200,000-b/d increment in the Rumaila oilfields when completed in December, because an increasing water cut in the fields has actually taken some wells out of production. Meanwhile, well work-overs on 30 wells in the Rumaila oilfields may bring onstream a further 300,000 b/d on completion in July 2007, but these gains will, in the words of the SIGIR report, be "overtaken by production losses in the near future due to inadequate maintenance and lack of replacement of critical parts, if nothing is done to change the current constricting budgetary system for the Ministry of Oil".
That leaves Iraqi production at around 2.2 million b/d, with an easy ability to reach 2.5 to 2.6 million b/d, if the northern oil pipeline allows an outlet for Kirkuk crude, but with hopes of anything higher held back. The report estimated that Iraq had lost some US$16 billion in potential oil export revenues from January 2004 to March 2006 because of export limitations and the spending on imported fuel products.
Corruption Again
The report recapped on some of the previous SIGIR themes, including the role of corruption in the poor performance of the oil and gas sector and the role that lack of metering plays in facilitating theft. It said that the metering system at the Basra terminal is behind schedule and is unlikely to be completely until April 2007, with 33% progress made so far.
The "virtual pandemic" of corruption across government was costing the country some US$4 billion a year, of which oil smuggling alone is netting some US$100 million a year directly for the insurgency.
SIGIR officials have referred 25 cases of fraud to the justice department for criminal investigation, four of which have led to convictions, and about 90 more are under investigation. However, the body is expected now to continue its role in monitoring reconstruction until late 2008, after U.S. lawmakers extended its remit last month.
Outlook and Implications
In many ways, the SIGIR report is saying nothing new, although it is adding an official seal and greater detail to assessments by outside players and figures on the ground (see Iraq: 16 November 2006: Gloomy Prognosis for Iraqi Oil as Politics of the Green Zone Fails to Convince).
Like many, it concludes that the long-awaited Iraqi hydrocarbon law is the key milestone on the horizon, which has the potential to significantly alter the outlook, either for better or for worse (see Iraq: 6 December 2006: Draft Oil Law- Iraqi Prime Minister Says Oil Law "Ready" to Go to Parliament). As yet, some details on the law have still to be concluded, most notably those on the regional allocation of revenues and control over oil resources. However, early signs are that consensus is strongly in favour of production-sharing agreements as a way of attracting the targeted outside investment and expertise clearly necessary for Iraq to realise even a fraction of its known potential.