Thread: Archive Latest News - Think Tank - 01/01/08 - 14/04/08

Middle East Economic Survey

21-January-2008

The Future Importance of Iraqi Oil in The International Oil Market

By Ali Hussain

The following article was written for MEES by Dr Hussain, Oil Consultant and former OPEC Officer

In the future, Iraqi oil can play a very important role in the oil market to the extent that its production, and hence exports, may prove to have a positive impact on the global economy. This will happen provided that the Iraqi oil industry is developed efficiently and the authorities adopt the right and effective policies. In order for the Iraqi oil industry to develop rapidly and oil production to increase substantially this industry must go through two important phases simultaneously, namely rehabilitation and expansion.

A. Rehabilitation
During the last few decades the Iraqi oil industry faced substantial difficulties and severe problems. Before March 2003 these issues included: negligence, lack of maintenance and repair, UN sanctions, lack of investments, war damages, etc. After March 2003 these issues included: corruption, smuggling, sabotage, lack of sufficient investments, etc.

The rehabilitation of the Iraqi oil industry is required in both upstream and downstream operations. This includes drilling and development of oil fields, storage tanks, pipelines, refineries, pumping stations, oil terminals as well as training of staff and labor. Such rehabilitation can be implemented by the present South Oil Company in Basra and the North Oil Company in Kirkuk, and by the Iraqi National Oil Company (INOC) in the future as proposed by the draft Iraqi Oil Law.

Rehabilitation will help Iraqi oil production to increase from its present 2.5mn b/d to the pre-1979 level of 3.5mn b/d. According to some reports Iraq will have to invest at least $35bn to achieve this goal.

B. Expansion
With its huge proven oil reserves of at least 225bn barrels, according to some reports, Iraq can increase its oil production in the next 10 years to 10-15mn b/d. This increase can be achieved in two ways: through national and international investments.

The Future Importance of Iraqi Oil in The International Oil Market

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1. National Investment
Through its present oil companies or in the future through the proposed INOC, Iraq can expand its oil production from the currently operating and producing oil fields, using its own financial resources. These fields such as Rumaila South and Rumaila North in the south, Kirkuk in the north etc, still contain large oil reserves. It must be mentioned here that whilst at present Iraq is earning annually between $30-40bn from oil exports, it will still have a limited ability to provide enough domestic investments for its oil industry. This follows as the Iraqi economy and its infrastructure are still in ruins, and to develop the infrastructure alone is estimated to require investment of at least $200bn in the next 10 years. Therefore in the next few years national investment may help Iraq to reach a maximum of 3.5mn b/d.

Domestic efforts to expand the oil sector are facing and will continue to face in the coming years the following problems:

a. Shortage of qualified and experienced staff, engineers and skilled labor, as many personnel have already fled the country.

b. Corruption.

c. Lack of efficient domestic private sector to provide the necessary goods and services.

d. Shortage of capital to invest in the oil sector.

e. It will take a long time to make the proposed INOC carry out its key duties and be in a position to function properly like ADNOC in the UAE and Aramco in Saudi Arabia. For example, these two companies with their vast experience can make use of foreign service contracts to develop their oil industries, while it will take INOC some time to reach their high levels of project implementation.

Therefore to say, as some argue, that service contracts are at present sufficient to develop the Iraqi oil industry is completely false. For example, during the last four years the Iraqi Ministry of Oil drastically failed to fully implement its budgets. Consequently Iraqi oil production remained below its pre-2003 level. It is therefore obvious from the above-mentioned problems that allocating all operating as well as discovered oil fields only to INOC, as some suggest, would be a very big mistake.

The Future Importance of Iraqi Oil in The International Oil Market

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2. International Investment
For Iraq to expand its oil industry rapidly and be able to generate enough income to develop its economy it will have to rely to some extent on foreign investments.

It should be noted that the oil industry is a capital intensive industry, requiring large amounts of investments. For example, according to Citigroup, global upstream spending in 2008 will reach $354.6bn, compared with $324.4bn in 2007. For Iraq to increase its oil production rapidly to 10-15mn b/d will require several billion dollars worth of investments. This is due to the recent big global increase in the international costs of developing the oil industry for both upstream and downstream operations. Therefore Iraq is not in a position to provide the necessary capital to expand its oil production to very high levels. Its security and infrastructure expenditure alone will absorb most of its oil revenues. Thus domestic finance, as mentioned earlier, cannot help to increase Iraqi oil production beyond 3.5mn b/d.

Under the present circumstances, Iraq has no choice but to rely on foreign investment to raise its oil production to high levels. However, such investment must not exploit the Iraqi oil industry to the sole benefit of international oil companies (IOCs). Iraqi interests must come first to maximize Iraqi benefits from its oil operations. Iraq can do that by formulating international contracts including production-sharing agreements (PSAs) that will safeguard Iraqi interests.

It is absolutely unacceptable to exclude any kind of contracts including PSAs. The Iraqi authorities must choose those contracts most suitable to develop the oil industry and benefit the country to the maximum. The terms and conditions of such contracts can be stipulated by the Iraqi authorities and issued as tenders to make IOCs compete for them. To secure maximum benefits from such contracts Iraq can formulate them with the help of international consulting companies. Furthermore, there are now many oil producing countries using PSAs, which started in Indonesia and have since been adopted by Libya, Angola, Egypt, etc.

With the present international oil market conditions of high oil prices and limited surplus production capacity within OPEC countries, Iraq is in a very strong position to impose its terms and conditions on the IOCs wishing to invest in Iraq. Conditions can include the period of the contracts and the percentage of profitability which these companies can get. In addition, Iraq can include in these conditions a preference for oil companies prepared to invest in Iraq's downstream operations, ie to construct refineries and petrochemical industries to produce refined products and petrochemicals not only for domestic consumption but also for exports. In this way Iraq will not only increase its crude oil production but also expand its industrial base and add value to its oil operations.

Iraqis must realize that oil underground is worth nothing. At the same time, to keep the majority of the Iraqi people in poverty without exploiting the oil sector properly and sufficiently with the help of foreign investments can not be tolerated any more. We have to ignore all empty slogans against foreign investment as long as such investment is in the interests of the Iraqi oil industry. We must not be emotional when it comes to foreign investments in the oil sector. We must be realistic and try our best to use such investment to raise oil production and exports, and hence oil revenues, which can be invested to raise living standards of Iraqis which are at present among the lowest in the world.

It must also be mentioned that foreign investment in Iraq can be allowed for a certain period of time until it is able to develop its oil industry by itself through generating enough income to invest in its oil sector. Furthermore, in signing international contracts Iraq must be selective in allocating its oil fields and allow oil production to increase gradually without negatively affecting international oil prices. Thus oil production policies in Iraq must be studied and adopted carefully and wisely.

The Future Importance of Iraqi Oil in The International Oil Market

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The Future Role Of Iraqi Oil Production In The World Oil Market
The Iraqi oil industry has many positive features, among them:

1. Large oil and gas reserves.

2. Low cost of oil production ($1-2/B).

3. Oil fields are located across Iraq.

4. Iraqi oil export routes are many and can go through several directions such as the Gulf, Turkey, Syria, Saudi Arabia, Iran, Jordan and Kuwait.

Given these advantages, Iraq can expand its oil production rapidly and supply the international oil market with substantial amounts of oil exports that may reach more than 10mn b/d. Considering the above possibilities Iraq can make use and benefit from the future development of the international oil market and especially the future rapid increase in the global demand for oil. The IEA estimates that world demand will increase from the present level of 85mn b/d to 116mn b/d in 2030. In other words, in the next 23 years the global demand for oil will increase by about 30mn b/d. How will this increase be met and by whom?

Most of the world oil reserves (1,200bn barrels) are located in OPEC countries with its share reaching 76%. The Gulf countries’ share (Iraq, Iran and GCC states) is 62%.Therefore, there is a concentration of global oil reserves in a few countries, namely in the Gulf region including Iraq.

With its present oil production policies, it is doubtful that output in the Gulf countries will increase sharply to meet the rapid expected increase in global demand. For example, Saudi Arabia, with the largest oil reserves in the world, intends to increase production during the next few years by only 1.5mn b/d. Similar increases are expected in Kuwait, the UAE and Iran. In total, these four major oil producing countries may only increase output in the coming few years by 6mn b/d. So who can help to fill the gap and be able to meet some of the future increase in the world demand for oil? The answer is very simple: Iraq.

Hence, if the IEA prediction materializes, then Iraq will certainly play a very important role in supplying the international oil market with a large quantity of oil to meet the expected increase in global demand, particularly if it increases production to 10-15mnm b/d.

To support the above possibility is the fact that global oil will, sooner or later, reach its peak simply because oil underground is limited in quantity. Peak oil means that global oil production will reach a peak and then start to fall. This has already happened in the US since the late 1960s. It is happening now in the UK, North Sea and Indonesia. It is expected to happen in five years in Mexico and perhaps in other major oil producing countries. Thus it is evident that the increase in Iraqi oil production in the future will play a vital role in the international oil market to meet increasing world oil demand and act as an engine of growth for the world economy.

It is time Iraqi policy makers, oil officials and experts realized this fact. In pursuing its own interests Iraq must also understand and recognize its global obligation. Iraq can combine maximizing benefits from its oil industry while playing a positive role in the growth of the world economy. With the right policies regarding national and international investment, Iraq can achieve these goals.

The Future Importance of Iraqi Oil in The International Oil Market

Addax Petroleum Announces Update to Continued Appraisal Program at Taq Taq

TT-09 Appraisal Well Flows at an Aggregate Rate of 16,170 Barrels per day

Addax Petroleum Corporation ("Addax Petroleum" or the "Corporation") (TSX:AXC and LSE:AXC) today announced flow test results for the TT-09 well, the fifth appraisal and development well recently drilled on the Taq Taq field by Taq Taq Operating Company, the joint venture company formed by Genel Enerji A.S. ("Genel") and Addax Petroleum to carry out the petroleum operations in the Taq Taq license area.

Two reservoir intervals were tested separately and flowed at an aggregate rate of 16,170 bbl/d of light oil, measured gravity of 48 degrees API with low gas oil ratio. The intervals tested were a 231 meter completion interval in the Shiranish formation which flowed at a rate of 2,580 bbl/d and a 104 meter interval in the Kometan formation which flowed at a rate of 13,590 bbl/d. The testing of the third formation, the Qamchuqa formation, experienced completion problems and produced test results which the Corporation believes are not representative of the formation. Oil flow rates from the Shiranish and Kometan intervals were restricted by 40/64" and 128/64" choke sizes respectively. Evaluation of these flow test results is ongoing.

Commenting, Jean Claude Gandur, President and Chief Executive Officer of Addax Petroleum said: "The success of our appraisal program at Taq Taq continues to be very encouraging and is a significant further step towards our goal of producing first commercial oil in the second half of 2008. We are pleased with the positive and proactive nature of our partners in the Kurdistan Regional Government and we are delighted that Addax Petroleum has been and continues to be at the forefront of the development of this fast emerging oil region."

TT-09 is a step-out well located approximately 1.7 kilometres southwest of the TT-04 well, which was located near the crest of the Taq Taq field. TT- 09 is the first of two wells designed to appraise the flanks of the Taq Taq structure. The TT-09 well was spudded the last day of August and completed drilling in the end of October at a total depth of 2,444 metres. Testing of TT-09 commenced in mid-December, 2007. Interpretation of data acquired from TT-09, including wireline and 27 metres of core, confirmed the presence of a significant and extensive fracture system in the tested formations as observed in the TT-04, TT-05, TT-06 and TT-07 wells.

The TT-09 well is the fifth of a six well drilling and seismic appraisal program by Addax Petroleum and Genel. The drilling of the sixth appraisal well, TT-08, has been completed and is being prepared for flow testing. The TT-08 well is located approximately 1.7 kilometres east of the TT-04 well along the minor axis of the Taq Taq field. In addition to the ongoing drilling program, Addax Petroleum and Genel have recently completed shooting 290 square kilometres of 3D seismic over the Taq Taq field. The results of the drilling and seismic appraisal program are being integrated into a full field development plan which Addax Petroleum and Genel expect to commence implementing in 2008. The first stage of a full field development plan is expected to include an early production system with the goal of producing approximately 10 Mbbl/d during the second half of 2008 from the Taq Taq field.

Addax Petroleum and Genel have also recently finalized the acquisition of 175 kilometres of 2D seismic over the Kewa Chirmila prospect and surrounding area, which is in the same license area as the Taq Taq field. A second, larger drilling rig has been contracted by Addax Petroleum and Genel and is expected to be mobilized for spudding the first exploration well at Kewa Chirmila during the second quarter of 2008.

Addax Petroleum Announces Update to Continued Appraisal Program at Taq Taq

Finns urged to invest in Iraq

Tens of thousands of civilians have been killed in Iraq in the past 4.5 years, although the number of victims has declined significantly in recent times.

A full-scale war is going on in the country with the help of more than 100,000 soldiers.

The country's economy is in a shambles. The rebuilding of the infrastructure alone will cost 100 billion US dollars, and bringing the country back to a situation in which peaceful development is possible is likely to cost another 100 billion.

Basic structures are in poor shape. Electricity failures are a constant problem, only one house in three is connected to a sewer network. Telephone and Internet coverage are sporadic.


All of these might not seem like the characteristics of a country that would attract investors' money, but an auditorium full of professionals in investment matters gathered in Helsinki appeared to think otherwise. The event was part of a "road show" organised by Confidentia Capital, with the theme of investing in Iraq.

Suspicions were certainly high, and to allay them, the organisers brought in a group of Iraqis, whose message, in a nutshell, was that the worst is over: the security situation is improving, and parts of the country, such as Najaf Province, are completely peaceful. Speaking about the situation in Najaf was Hussein al-Tajee, the son of the local governor, who spoke Finnish better than most listeners.

However, the main speaker came from Sweden - or actually from the British Virgin Islands, where the first fund investing in Iraq is located.


The portfolio manager of the Babylon fund,Björn Englund, saw Iraq as an excellent target for investment, because of its vast oil resources and the intense flow of foreign aid coming into the country.

Iraq's total oil resources remain unknown, but Englund's transparencies mentioned the 140 billion barrels, of which only one fifth has been utilised. Some think that there could be much more oil - possibly nearly as much as in neighbouring Saudi Arabia with its 260 billion barrels.

Already now, oil income covers 95 per cent of the government's budget, and is responsible for two thirds of the country's economy. At the end of last year 2.4 million barrels a day were pumped out of Iraq's oil wells, 1.7 million of which was for export.

When output is increased, as much as 3.5 million barrels a day could be produced. At the current price of about 100 dollars a barrel, this would bring the Iraqi state an annual income of 128 billion, which is more than double the present GDP of Iraq.


Iraq's oil resources have been nationalised, and therefore, outsiders cannot invest in petroleum. In the view of Englund, such a large sum of money nevertheless will trickle down into the whole national economy, leading to good investment opportunities.

Babylon seeks out these opportunities mainly through the Baghdad Stock Exchange, which is still somewhat underdeveloped. Trading takes place on just three days a week from 10:00 AM to noon, with just 40 listed companies, and a trading volume of about 50 million dollars a month.

Nevertheless, Babylon, with its portfolio of 14 million dollars, generated earnings of 25 per cent for its investors. Confidentia CEO Juha Kojonen says that Finnish investors were among the beneficiaries.

Helsingin Sanomat - International Edition - Business & Finance

Barham Salih: Investment Can Start from Kurdistan Region

During his visit to Netherlands, Dr. Barham Ahmed Salih the Iraqi Deputy PM has participateraq Reconstruction Conference in Lahai. In his speech, Dr. Barham Salih asserted the importance of the economic relations between Iraq and Netherlands, he talked about the political, security and economic develops in Kurdistan Region, he said “Investment in Iraq can be started from Kurdistan Region.”

After the meeting, Dr. Barham Ahmed Salih met with Mrs. Maria Deer Hoffin the Minister of Finance and Economy in Netherlands. Ways of developing Economic and Commercial relations between both countries and encouraging Netherlands’ investment in Iraq were discussed in the meeting which was attended by Mr. Seyamind Binna the Iraqi Ambassador to Netherlands and the Deputy of Iraqi Oil Ministry.

Dr. Barham Ahmed Salih, in his lecture at Netherlands National Relations Academy, shed light on the obvious security improvement; he said “It is necessary, this security improvement be a preface for political development and reform in all fields.”

On the other side, Dr. Barham Ahmed Salih talked about the regional relations, Iraq’s relation with the neighbor states, the internal situation in the country and Article 140 implementation he asserted in this aspect the necessity of implementing this constitutional Article and returning Kirkuk to its normal situation, considering the opinion of all components in the city in addition to the historical documents, all efforts must be gathered to build a new Iraq according to Federal, Democratic, Multiple and respecting Human Rights bases. The lecture was attended by 120 persons including Ambassadors from Europe and Middle East states, Political Figures and Specialists on Strategic Affair.

PUKmedia :: English - Barham Salih: Investment Can Start from Kurdistan Region

Ahmadinejad to make Landmark visit to Iraq - Ministry

President Mahmoud Ahmadinejad has accepted an invitation to visit Baghdad, Iraq's Foreign Ministry said on Wednesday, a landmark trip that would make him the first leader of Iran to visit the country.

Iran and Iraq fought an eight-year war in the 1980s in which hundreds of thousands were killed, but relations have improved since Saddam Hussein was ousted in the U.S.-led invasion of Iraq in 2003 .

"President Ahmadinejad has accepted an invitation from President Jalal Talabani to come to Iraq," Iraqi deputy Foreign Minister Labeed Abawi told Reuters.

An aide to Ahmadinejad, who asked not to be identified, said: "We have heard about it but no date has been scheduled."

PUKmedia :: English - Ahmadinejad to make Landmark visit to Iraq - Ministry

Iraqi Executive Council discusses Issues related to Political Reforms

Today the Executive Council, which includes His Excellency President Jalal Talabani, Iraqi Prime Minister Nuri al-Maliki, both Iraqi Vice Presidents, Dr. Adel Abdul Mahdi and Dr. Tariq Hashimi, and the Representative of Kurdistan Region President, Dr. Roje Nouri Shaways, held a meeting.

They discussed important issues related to the political process and the ongoing political and ministerial reforms.

They also discussed expanding the scope of national participation through involvement of the elements, personalities and bodies that believe in the Iraqi political process.

Dr. Nasir Ani, Head of the Iraqi Presidency Office during a press conference following the meeting pointed out the most important issues discussed, saying ”Passing pending legislations in the Parliament such as oil and gas, the electoral law and the issue of the budget for the current year have been discussed during the meeting.”

PUKmedia :: English - Iraqi Executive Council discusses Issues related to Political Reforms

KRG and Central Government Meetings continue, No Agreement Yet

An exclusive source told PUKmedia that the joint meetings between Central government and KRG in Baghdad are ongoing.

The meetings, in which oil and gas, and oil contracts are discussing, have not reached an agreement so far, despite optimistic views hoping to bring these pending issues to end.

PUKmedia :: English - KRG and Central Government Meetings continue, No Agreement Yet