Iraqi Oil Ministry Ramping Up Production.   

A consortium of Anglo-Dutch oil giant Shell and Malaysia’s Petronas recently signed a contract with Iraq  to operate the enormous Majnoon oil field in the war-torn country’s south.  The Baghdad government approved the agreement as part of four deals with foreign energy firms to dramatically ramp up Iraq’s oil output following an auction in December.

Shell and Petronas will receive 1.39 dollars per barrel of oil extracted from Majnoon, which has known reserves of 12.58 billion barrels. They expect to produce 1.8 million barrels per day. The Anglo-Dutch company has a 60-percent stake in the project, while its Malaysian counterpart has the remaining 40 percent.

According to a statement from the Iraqi Oil Minister Hussein al-Shahristani  “We look forward to fruitful cooperation with the two companies,” adding that operations were to begin immediately. The government has undertaken efforts to auction nearly all of the countries fields, massively increasing Iraq’s projected crude production to 12 million barrels per. day (bpd) within seven years, up from
current output of around 2.5 million bpd.

But insurgent related security issues and a dilapidated infrastructure remain key obstacles to
achieving that target. Iraq has the world’s third-largest oil reserves – only behind Saudi Arabia and Iran – with an estimated 115 billion barrels.

The geopolitical power balance in the Middle East faces major upheaval if Iraq succeeds in tripling oil output. Particularly impacting rival Sunni oil giant Saudi Arabia. Iraq’s potential leap into the ranks of the top three global oil producers could result in a strengthened Shiite Muslim front within OPEC if Baghdad aligns supply policy with Tehran. That would put off Riyadh, already suspicious of the rise to political supremacy of Iraq’s Shiite majority since the fall of Sunni dictator Saddam Hussein. Disunity within OPEC could increase, undermining efforts to present an image of harmony. But oil development in Iraq is more likely to feed tensions with Iran, draw away potential foreign investment from Iraq’s neighbor and fuel social discord by depriving Tehran of much-needed money should it result in lower oil prices. Revenue from the additional 12.8 million or more barrels per day that Iraq is hoping to pump could also give it the economic might to challenge Iran’s influence over the Shiite world.

Both Iraq and Iran need huge investment in their dilapidated oil industries. Iraq’s opening to global energy firms, albeit on tough terms, gives it the edge in attracting the billions it needs to execute oilfield development on an unprecedented scale. That would make it harder for Tehran to attract the cash it needs at a time when the Iranian state is already under enormous social and political pressure following the contested re-election of hard line President Mahmoud Ahmadinejad.

Even worse, Chinese state energy giants are aggressively participating in Iraq to supply energy to its spectacular economic rise. Tehran has turned to Asian state firms for money and technology as Western companies have shunned it due to politics and sanctions. “Why would you want to invest in Iran? It’s very risky. You have the sanctions and the politics. If you’re in Iraq, you would want to limit your exposure to another risky country in the region,” said a senior western oil executive. “Iran could well become the destination for those that lose out in Iraq’s Oil auctions”, he added.

If all of the contracts Baghdad is offering are signed, Iraq could boost its output capacity to 12 million bpd – rivaling Saudi Arabia’s 12.5 million bpd and Russia’s 10 million bpd, thus leapfrogging past Iran, which says it can pump 4.2 million bpd. Iran is more dependent than top oil exporter Saudi Arabia on high oil prices to finance social spending programs. Higher output from Iraq would be bearish in the long term for the oil price and could also claw away market share from others.

Saudi Arabia will watch the rise of Iraqi oil power and its relationship with Tehran with caution. Dominated by the puritanical Wahhabi sect, many of whose adherents view Shiites as apostates, Riyadh regards Persian Iran as its arch-foe. But analysts say the view that post-Saddam Iraq is under the sway of Iran is often overstated. Many of Iraq’s Shiite leaders sought shelter in Tehran under Saddam, but Iraqi nationalism runs strong, as do memories of the 8-year Iran-Iraq war that killed a million people.

Even if a general election this spring ushers in an overtly pro-Iranian government in Baghdad, the impact that increased Iraqi oil output might have on economic and political tensions inside Iran may drive the two neighbors apart, analysts say. Ultimately, staunch US ally Saudi Arabia would rather see a developing and prosperous Iraq than a country that serves as a base for Al-Qaida. The kingdom has become entangled in neighbor Yemen’s internal conflict and deepening instability. “It’s in our interest that Iraq emerges stable, we don’t want another Yemen,” said one Saudi official. “If Iraq becomes a regional economic power; that will help the Saudi economy.”

EDITORS NOTE:
For our readers with an interest in the progress of transformation in Iraq “from a Saddam-style police state to a gentler, human rights respecting infrastructure based on civil society”, please see our previous editorial on this site entitled:

Searching for Identity in Post-War Iraq
A sectarian religious government or a pluralistic democratic system?

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