Is Iraq Doomed to Become Just Another Mideast Petro State?

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The data provided by BP on yearly production tallies cannot be starker when it comes to the impact on oil output of the insurgency, rampant corruption, the loss of the nation's oil professionals (many of whom fled into exile amid sectarian warfare), and other related factors. Prior to the American invasion, Iraq was pumping 2.6 million barrels of oil per day, already significantly below its pre-invasion peak of 3.5 million barrels per day. In the first year of the ill-starred U.S. occupation, production quickly plunged to a paltry 1.3 million barrels per day. Only in 2007 did it finally top the two million mark and, with improved security, 2.4 million in 2008. Assuming conditions continue to improve, Iraqi output could, for the first time, exceed pre-invasion levels, though barely, in 2009 or 2010 -- six years or more after Baghdad fell to American forces.

A Sea Change in Iraqi Oil Production?

Until recently, most analysts assumed that Iraq would continue, at best, to make modest progress in its efforts to increase daily output. There were too many obstacles, it was argued, to achieve dramatic breakthroughs. These included continued insurgent attacks on pipelines and production facilities; corruption in the Oil Ministry and major energy production enterprises; the failure of parliament to adopt a national hydrocarbons law; differences between the Kurdish Regional Government (KRG) and the central government over who has the right to award what sort of oil contracts in Kurdish-controlled territories; and the reluctance of major foreign oil firms to venture into, or invest in a major way in such a dangerous and unstable place.

Recently, however, the Oil Ministry has made noticeable progress in overcoming at least some of these obstacles. Under the leadership of Oil Minister Hussain al-Shahristani, a former nuclear scientist who was jailed and tortured by Saddam Hussein for refusing to assist in the development of nuclear weapons, corruption has been substantially reduced and various production bottlenecks eliminated. Shahristani has also won support from Prime Minister Nuri Kamal al-Maliki for the participation of foreign firms in the development of Iraqi oil fields, even though this has alienated many in Iraq who oppose any such involvement. Once derided for ineptitude, the Oil Ministry is beginning to be viewed as a functioning, professional operation.

As a result, there are clear indications that Iraq's oil industry could be poised for a major turnaround. Among the most significant recent developments:

* Late last year, Iraq's state-owned North Oil Company signed a $3.5 billion, 20-year service contract with the Chinese National Petroleum Corporation (CNPC) to develop the Adhab oil field in Wasit province, southeast of Baghdad. Originally negotiated under the Saddam Hussein regime, the deal was put on hold after the 2003 invasion and only given final approval in November 2008. This is the first major contract the government in Baghdad has signed with a foreign oil firm since the Iraq Petroleum Company was nationalized in the 1970s. It also represents the first significant investment by a company from China in Iraq. Under the agreement, CNPC and its partners will develop the Adhab field and deliver all resulting crude oil to state refineries; as the field's main operator, CNPC will be paid a fee by the Iraqi government for its engineering work and all delivered petroleum.

* In May, the Oil Ministry reached an accord with the Kurdistan Regional Government that, for the first time, will allow the Kurds to export oil from fields under their control. Previously, the Baghdad government had refused to recognize any contracts signed by the KRG with private oil firms to develop fields in their territory and had prevented the Kurds from exporting oil from these fields through pipelines controlled by the central government. Under the accord, the KRG will initially be allowed to export 100,000 barrels per day from the Tawke and Taq Taq fields, with higher rates expected in the future; 73% of the resulting revenues will go to the central government, 15% to the Kurds, and 12% to the foreign oil companies that signed production contracts directly with the KRG, bypassing the central government in Baghdad. This agreement paves the way for a significant increase in output from Kurdish-controlled areas, which are thought to hold substantial reserves of untapped petroleum.