Can Iraq meet its oil potential? / Asking Van Wilgenburg

By Afeef Nessouli, Special to CNN – The debate over whether the Iraq War was really all about oil may never be fully resolved in some minds, but one thing is clear – either way, Iraq has yet to really cash in. The country’s GDP may have risen several fold in the decade since the war began, yet its income per capita lags not only oil rich neighbors such as Kuwait and Saudi Arabia, but also relative economic minnows including Botswana, Turkmenistan and Albania. This is despite the fact that it sits upon the world’s fourth largest oil reserves and could double its production in the next few years.

The question, then, is will Iraq be able to meet its oil potential?

Iraq currently pumps around 3 million barrels per day (bpd), but the International Energy Agency recently suggested that it could in fact generate more than any other supplier if the major causes of uncertainty – governance, deteriorating infrastructure and insufficient water supplies – are overcome.

To surpass Russia and even Saudi Arabia, though, would require an about $530 billion investment in the country’s infrastructure, according to the IEA. But even if it is able to muster this level of investment from oil revenues, Baghdad faces some unique and potentially crippling political challenges as well, including tensions between the central government and the Kurdistan Regional Government (KRG) in northern Iraq. The effects of disputes over oil contracts and infrastructure holdups, stifling its development, were underscored earlier this year, when the Kurds halted exports following a dispute with Baghdad over the KRG’s right to sign contracts and sell petroleum – exports through the Kirkuk pipeline tumbled from 325,800 bpd in December to 264,500 the following month.

The dispute between the two sides essentially revolves around Kurds demanding the right to sign oil contracts independently, while Baghdad’s oil ministry resists over fears of Kurdish autonomy. About 10 percent of Iraq’s oil is produced from Kurdish areas, and a hypothetical Kurdistan would be rich in resources. But the central government, sensitive to the perceived danger of secession, believes that any oil contract signed with the KRG without its approval is illegal.

This hasn’t stopped the KRG continuing to sign oil contracts with foreign companies, and it is quick to argue that articles of Iraq’s constitution cited by the central government don’t apply to fields that were yet to be developed when the law was signed.

Multinationals have, for their part, been quick to exploit these differences. “There are better operating conditions [in the Kurdish region], with less bureaucracy, better security and more openness to foreign companies,” says Wladimir van Wilgenburg, an analyst and correspondent for Rudaw English.

Perhaps more worrying to Baghdad is that the Kurds have not used the so-called Green Line, which separates the Arab and Kurdish regions, as a stopping point, meaning they have been signing contracts for plots within disputed territory.

The problem for the Kurds is that despite their desire for independence over oil laws and contracts with foreign companies, they are unable to export without Baghdad, and the federal government has used its power over the national pipeline network, as well as its hold on the treasury and budget, to check the KRG. Complicating all this is an apparent push by the KRG leader to construct a Kurdish pipeline to Turkey by 2014, a development Van Wilgenburg says the U.S. opposes.

The ongoing tensions were on display during last month’s annual budget discussions, talks that are typically seen as a unifying, “benefits all” factor. The Kurdish Coalition boycotted the vote on the 2013 budget, Musings on Iraq analyst Joel Wing says, because it included “minimal compensation for oil companies working in Kurdistan and includes ways to cut the Kurdish share of the budget if they do certain things.”

So are ongoing tensions a foregone conclusion? Not necessarily, suggests Wing, who argues there are some ways in which the two parties can work together.

One way, he suggests, would be for the two sides to repair and expand the existing Kirkuk northern pipeline that ships oil to Turkey – “the pipeline could potentially pump 1 million bpd, but is only currently pumping between 300,000 and 400,000” Wing says. Another, perhaps less likely, agreement could see the two sides agree for now to jointly develop oil fields in disputed territories. The Kirkuk field is a good case in point –while the southern half of the field is run by the Oil Ministry, the KRG repeatedly declines ministry suggestions on repairing and expanding the field.

Clearly, it would be in both sides’ interests for Baghdad to give the Kurds more autonomy. But for this to happen, the Kurds need to reassure Baghdad that they aren’t trying to secede. If the two sides can come to some kind of lasting resolution, it could mean significantly increased resources to invest in developing health care, education and infrastructure. And it would likely make international energy markets happier, too.