The Fuse

Iraq’s Oil Prospects After ISIS

March 08, 2017

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

Looking back, we might call it the “Iraqi Miracle.” At a time when Iraq’s politics were upended, its cities were under siege by terrorists, and its sectarian fabric was coming undone, Iraq’s oil industry thrived—achieving historic highs in production and exports. In 2009, the year Iraq signed its first major contracts with foreign oil companies after the 2003 invasion, production averaged only 2.4 million b/d. Five years later, in 2014, ISIS exploded onto the scene when it captured Mosul, Iraq’s second-largest city. Yet production averaged 3.4 million b/d that year. The average jumped to 4 million b/d in 2015 and at the end of last year production surged to 4.6 million b/d.

For Iraq, defeating ISIS will be a milestone along the path to economic recovery and political rehabilitation.

Today ISIS is losing ground steadily on both sides of the Iraqi-Syrian border. Many battles have yet to be fought but the tide has turned. Half of Mosul was declared liberated in January; no doubt the other half will fall later this year. Recapturing Mosul will mark a major turning point in the global fight against ISIS. For Iraq, it will be a milestone along the path to economic recovery and political rehabilitation. Success and security over the long-term, however, depend not  on only defeating ISIS soon but on addressing new and unique priorities, lingering vulnerabilities, and old grievances, many of which are oil-related.

Baghdad’s post-ISIS priorities include projects that will expand refining capacity.

Baghdad’s post-ISIS priorities include projects that will expand refining capacity. A top priority will be to rebuild or replace the Baiji refinery. Baiji was once Iraq’s largest refinery; with a nameplate capacity of 310,000 b/d, it supplied more than half of the country’s fuel. It first came under attack in the early days of the ISIS blitz in June 2014 and changed hands more than once in the year that followed. In October 2015, Iraqi forces re-established full control of the damaged facility. What followed was unchecked looting, aided and abetted by pro-government forces who outright stole equipment or sold it to the highest bidders. What’s left is barely more than scrap metal. Thus, Baghdad will have to start from scratch. Besides Baiji, Iraq needs to revive its fuel distribution network in the north, no matter where the fuel comes from. Liberated areas desperately need diesel and other fuels for generators and reconstruction efforts.

Another top priority will be raising crude production volumes. In the short-term, Iraq stands to benefit from rehabilitating fields that were damaged during the fight against ISIS. Some northern fields, like Qayyarah, need urgent maintenance because they were sabotaged when ISIS abandoned them or came under attack from the coalition—or both. Combined, these projects have the potential to boost production modestly and relatively soon. Besides fixing up older fields, Iraq plans to finally join the offshore bonanza in the Gulf, which is long overdue. That will take longer.

Northern exports vulnerable

Exports from the south will be easier to ramp up because infrastructure there has relieved bottlenecks since 2012. However, exports from northern Iraq will be hamstrung for the foreseeable future. Lately, some federal oil (produced by Baghdad’s North Oil Company) have been pumped into the same pipeline that the Kurds use to independently export oil via Turkey. This is in keeping with an informal deal reached last year. But the Kurds have their own plans and space is limited. Unfortunately, the old pipeline—which carried oil from Kirkuk to Ceyhan on the Mediterranean coast of Turkey—is no longer an option. ISIS sabotaged the pipeline in 2014, before it took over Mosul, and since then the group has dismantled tens of miles of the pipeline, which has been repurposed for other ISIS oil projects.

The ISIS threat will endure as the group gradually devolves from a pseudo-state into a more traditional insurgency.

Even if Iraq makes progress, it will remain vulnerable. The ISIS threat will endure as the group gradually devolves from a pseudo-state into a more traditional insurgency. Oil infrastructure will remain a very appealing target. The bulk of Iraq’s federal oil production is based in the south, however, which is much safer. By contrast, protecting northern infrastructure will be trickier so long as ISIS can activate sleeper cells and attack lightly-defended, above-ground infrastructure far from government strongholds. Even if ISIS disappeared tomorrow, Iraq’s prospects would still be clouded to some extent by political dysfunction, corruption and budgetary constraints during a period of low prices.

National reconciliation to be a generational project

Then there are those big looming problems that will come to a head only after today’s crisis subsides. Going forward, national reconciliation will be a generational project for Iraq’s various ethnic and sectarian groups. It will not be easy. With respect to oil, the single greatest question is whether Kurdistan will ultimately seek independence from Baghdad. Oil is often described as being at the “heart of the dispute” but reconciliation can’t be ruled out. In fact, there have been more signs of cooperation lately, as Baghdad recently began supplying Kurdistan’s refineries with oil from Kirkuk-area fields, which would have otherwise been exported. It’s a start. Meanwhile, both sides are hedging their bets in case of divorce. Erbil plans to increase oil and gas exports to Turkey under a bilateral deal reached in 2013, while Baghdad is open to the idea of exporting oil from northern Iraq to Iran. Kurdistan’s nasty internal politics are another complicating factor.

With respect to oil, the single greatest question is whether Kurdistan will ultimately seek independence from Baghdad.

Iraq is the number two producer in OPEC. Without its consent, there is no way OPEC members and non-OPEC producers could have come together last November to seal a supply pact that has buoyed prices significantly. To build on the extraordinary progress made in recent years—and become an even bigger player in the market—Iraq must recover what it has lost, protect fragile gains, and navigate political minefields, which are just over the horizon.

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