Within months, the Iraqi Oil Ministry is expected to decide what its energy strategy will be for the next 17 years. The country is currently in the process of building the infrastructure it will need to support its planned expansion of oil and gas production, which is aimed at transforming the country into a major energy power.
The government's Integrated National Energy Strategy (INES) has been 18 months in the making. It calls for $620 billion of investment in the energy sector until 2030, which is equal to approximately 5 years of Iraqi oil revenues at the present oil prices of more than $90 a barrel. The INES forecasts that oil and gas will bring in up to $6 trillion in revenue until 2030.
A map of Iraq's Oilfields
The 350-page INES blueprint was drafted by the Oil Ministry, with the planning, finance and electricity ministries, as well as the World Bank and U.S. consultants Booz & Co.
The plan has not yet been published in its final form, but an initial outline indicates the government will significantly reduce the high oil production targets set by the Oil Ministry several years ago. Those prior targets included the goal of increasing output, which was then about 1.5 M/bd, to 10M-12M/bd by 2017. The present INES plan significantly reduces the short, medium and long term targets set out in the original plan.
In the short term, Iraq hopes to raise production to 4.5M/bd by next year from its present level of 3.2 M/bd, and then increase that to 9M/bd by 2020, or 157% beyond the present level. At this level, Iraq would join the ranks of Saudi Arabia, Russia and the U.S. as a top producer. Iraq's production has been on the rise, but remains well below the country's sub-surface potential.
But most analysts note several roadblocks that could inhibit Iraq from realizing these objectives. One of these is the country's planned investment of $622 billion in the sector at a time when sectarian violence is pervasive and fostering instability. Another obstacle is the Iraqi parliament, which is notoriously and acrimoniously divided--and it is to this body that the INES plan must be submitted for approval.
A further possible impediment, and perhaps the most significant one, is noted by Adal Mizra, an analyst with the Middle East Economic Digest. She remarks that the planned financial returns anticipated from expanded oil production "are dependent on a raft of assumptions, the most critical of which is Iraq's security situation...To reach the levels of investment planned, Iraq would have to rapidly become one of the most attractive destinations in the world for investors, an unlikely prospect in the medium term..." She went on to note that the plans can only be realized if a stable and efficient government and Oil Ministry are in place. And presently there are neither.
A final possible roadblock to the realization of the INES blueprint is the question of whether the international oil market will be able to absorb the significantly raised output that the government envisions.
Given that Iraq has the fifth largest proven crude oil reserves in the world, the fundamental issue is not the availability of resources, but the ability to utilize the means of exploiting them. To a large extent, this can only be facilitated by surmounting the previously mentioned infrastructural and political challenges--surface challenges remain the key issue in the country.
An interesting way to conceptualize production efficiency is to compare countries' total reserve to annual production ratios. The higher the ratio, the less efficient the country is in exploiting its resource potential (increased levels of sovereign risk for operators are highly correlated with this metric). In the above chart, we've plotted these ratios for the top 15 oil resource countries. Iraq is the third least efficient producer in the world, trailing only Venezuela and Libya, each of which have extensive sovereign risk challenges.
So while production and investment are rising in Iraq's oil patch, the journey ahead remains fraught with risk. Surface challenges will need to be addressed if Iraq is to rise to its full oil and gas potential.