Iraq’s Energy Economy

By Ryan Walsh

​In 2008, Iraq was only the 13th largest oil producer even though it holds the third largest proven petroleum reserves. Iraq’s energy sector faces a period of development ahead and the industry has not yet reached its pinnacle. This from a country where oil export revenues account for more than 75% of GDP, proving that energy infrastructure will be critical to Iraq’s future economic success.

Nonetheless, challenges abound concerning oil development. Though Iraq is rich in resources, its oil is concentrated in the Shiite-dominated and Kurdish-controlled areas. For instance, Southeastern Iraq, which holds 70 to 80 % of Iraq’s proven oil resources, is controlled mostly by Kurds. The near-constant risk of sectarian conflict is a difficulty that the government will need to overcome. This is particularly noteworthy because the government is has considerable clout over the industry; the Ministry of Oil maintains control over nearly all the oil and gas production infrastructure through three entities: the North Oil Company, the South Oil Company, and the Missan Oil Company.

Although the Ministry of Oil maintains control over oil fields, it has moved towards a system of awarding contracts, as an answer to international pressures. It has also formed bonds with its neighbors, with sharing agreements on oil fields with Kuwait and Iran. Iraq has also signed agreements with Russian, South Korean, and Malaysian companies to develop oil fields in the Bedra region, where production is expected to be 170,000 barrels per day for the next 20 years.

Iraq’s tumultuous past has certainly complicated its path going forward. For instance, contracts signed during Saddam Hussein’s government have to be reviewed or renewed, while a new legal framework for oil development is being established. Moreover, the Kurdistan Regional Government has created its own hydrocarbon laws for the oil fields in Northern Iraq. It is unclear how these laws will be resolved with national Iraqi laws once they are in place. Additionally, Iraq has land and maritime disputes with both Kuwait and Iran, which could hinder future cooperation on oil field development. There are also disputes over the rights to develop oil fields between these nations, which could escalate as new pipelines are discussed.

Looking forward, Iraq is looking to invest in its refineries, with a goal of increasing its refining capacity up to 1.5 million barrels per day from 600,000 barrels in 2017 compared to 2008. This ten-year strategic plan includes five new refineries as well as investment into its existing refineries, and $5 billion for investment in natural gas fields. Hence, from the economic and business side, Iraq’s oil industry has been well planned and organized. This will form the foundation of long-term growth in the energy sector and establish market stability through investment power.

In terms of the general Iraqi economy, improvement is expected in the future as key infrastructure continues to be built after the war. Though unemployment remains a serious problem – it was 17.6% at the end of 2007 – inflation has dropped and oil exports have risen. Rising oil prices have similarly buttressed this growth. This has been fueled by the rise in world oil demand, especially in developing countries. Continued support of high oil prices by OPEC will ensure a healthy economic future for Iraq. With more stability there, private sector investment has also increased. Nevertheless, violence still affects the oil and agriculture industries, and the ever-present threat of sectarian violence weighs down on the economic future. In a future of political and societal stability, though, economic growth is expected to be robust.

Indeed, the oil industry is becoming the foundation, powering economic growth. Oil-field contracts have been awarded to BP, ExxonMobil, China National Petroleum, and other foreign investors, bringing in billions of dollars of foreign cash. This brings along other foreign suppliers who vie for contracts to build infrastructure. The International Monetary Fund estimated 2010 economic growth at 7.3%. Foreign direct investment is expected to grow as the need for infrastructure increases. The central bank has been helpful, relying on the IMF to help stabilize the dinar, reducing inflation from 80% in 2006 to single digits. This has provided a predictable, stable environment for investment.

Cooperation with the United States government will provide a safety mechanism for Iraqi markets as well. Not counting limited security arrangements, the Strategic Framework Agreement provides economic engagement in various sectors, including health, education, science, and technology. American mediation has also helped repair business and political relations with Egypt and Saudi Arabia, paving the way for greater economic investment. The U.S. State Department has also hosted business forums in Iraq to provide opportunities for American corporations in Iraq. Thus, American involvement can provide a baseline level of stability while additionally offering higher levels of economic engagement.

Unfortunately, the Gulf Cooperation Council has offered little substantive engagement with Iraq. Qatar and Kuwait both have bilateral disputes while Oman possesses little capital to invest. Saudi Arabia, on the other hand, views Iraq only in terms of balancing against Iran, and as such rarely pushes for more direct economic relationships. Through this all, Iraq still needs foreign investment. Luckily, Iran and Iraq still have a strong trade relation – they have signed several Memoranda of Understanding to build their economic ties, which have resulted in nearly $10 billion in bilateral trade in 2010. Nevertheless, black market oil and agriculture have stifled greater growth and could pose bigger problems in the future. Similarly, Turkey, as Iraq’s largest trading partner, and the United Arab Emirates have helped drive reconstruction and investment initiatives.

The global recession and credit crisis has undoubtedly weakened Iraq’s economic positioning for the future. Over-reliance on oil exports means that as soon as oil prices tank, the national budget will collapse and the private sector will lose out on the investment that oil production brings. Moreover, the perception is that the Iraqi government has little vision and economic planning to overcome such an obstacle. The government is much larger than it was during Saddam, meaning it would be less flexible to change during a chaotic investment environment. This is especially true for the investment occurring in Iraq, which is also concentrated in housing and real estate. Investors worried by the global credit crunch will have little reason to continue investing in infrastructure projects if the global recession becomes direr.
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However, a business-friendly regulatory framework and lessening concerns about political stability and security have combined to help Iraq draw in foreign capital. Its oil development plans going forward have provided a measure of stability, as it has averaged about 4.5% real growth over the past four years. The relatively well-educated population has also helped firms transitioning to Iraq. And though mistrust may exist towards the government, its National Development Plan includes more than $100 billion in infrastructure projects over the next four years. Assuming oil prices remain relatively constant, Iraq’s economic and energy future is expected to see stable growth and expansion.
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1 Volkan Guner, “Source of Conflict and Life: Energy Future of Iraq,” Eurasia Critic (Eurasian Intelligence & Strategies), April 2010, http://www.eurasiacritic.com/articles/source-conflict-and-life-energy-future-iraq.
2 Elena McGovern, “Iraq’s New Reality: Finding its Role in the Middle East,” The Stimson Center and The Centre for International Governance Innovation, March 01, 2009, http://www.stimson.org/books-reports/iraqs-new-reality-finding-its-role-in-the-middle-east/
3 Ephraim Kam, “Iraq in Turmoil,” The Middle East Strategic Balance 2007-2008, The Institute for National Security Studies, 2008.
4 Stanley Reed and Nayla Razzouk, “Iraq’s Economy Wakes Up,” Bloomberg Businessweek, April 22, 2010, http://www.businessweek.com/magazine/content/10_18/b4176017884558.htm.
5 Elena McGovern, “Iraq’s New Reality: Finding its Role in the Middle East,” The Stimson Center and The Centre for International Governance Innovation, March 01, 2009, http://www.stimson.org/books-reports/iraqs-new-reality-finding-its-role-in-the-middle-east/
6 Matt Kennard, “American companies look to Iraq as US economy stalls,” The Comment Factory, August 10, 2011, http://www.thecommentfactory.com/american-companies-look-to-iraq-as-us-economy-stalls-5577/.
7 Aiyob Mawloodi, “The global credit crisis and the potential impact on Kurdistan’s economy,” The Kurdish Globe, August 20, 2011, http://www.kurdishglobe.net/display-article.html?id=6AD2FBC7F12F286CA27E112B4EECCD3F.