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Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy

The following guest essay is by Kevin Kane. Kevin is a market analyst, economist, Asia political affairs strategist, and Korean language linguist living in Seoul, South Korea. Kevin previously published American Freedom from Oil: A Bipartisan Pipedream.

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Iraq Oil&Gas Production: Geopolitical Compromises and Kurdish Autonomy
By Kevin Kane

As Royal Dutch Shell and other majors increase their investments in Iraq, some oil market analysts argue that Iraq could export over 12 mb/d (million barrels per day) within a decade, significantly shifting global production closer to 100 mb/d from the present 83.5 mb/d inventory supply. Are Iraqi oil production estimates too ambitious or perhaps, not optimistic enough?

The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. The Kurdistan Regional Government (KRG) publicly claims to possess oil reserves greater than half the cumulative value of all the oil reserves within the Organization of Economic Cooperation and Development (OECD) community. Kurdish-Iraqi production may reach 250,000 b/d by the middle of this year and up to one mb/d before 2012.

As American forces draw down as a part of the U.S. exit strategy, many oil and gas uncertainties remain. Specifically, the KRG possess few incentives to accurately report proved reserves or encourage oil investment while the U.S. hands over political and military control to the Iraqi people—meaning that Kurdish-Iraq could possess even greater reserves than publicly stated.

Kurdistan Sovereignty over Oil Reserves

When some in the U.S. were encouraging partitioning Iraq several years ago, one could only imagine that the Iraqi-Kurds were not exactly disappointed at the prospect of having sovereign control over the future of their nation, including its oil reserves. Thus, one would be rational to assume that many Iraqi-Kurds had little intention and few incentives to cooperate with the Iraqi Central Government after liberation in 2003 from Saddam Hussein’s control of Kurdish territory Iraq.

After 2003, 7.5 million Iraqi-Kurds immediately secured their own perimeter within Iraq and set up a visa system requiring Arab-Iraqis to obtain permission to enter KRG-governed territory. The KRG then asserted themselves as an autonomous international power by establishing diplomatic channels with a number of countries including the US, UK, Germany, France, Russia, and Italy via consulates and representative offices independent of Baghdad. The KRG simultaneously took control of their oil fields and signed Exploration and Production (E&P) contracts with Hunt Oil, Det Norske Oljeselskap AS, SK Energy, and countless other oil companies to explore, develop, produce, and export oil without intending to share profits with the Iraqi Central Government.

The KRG only began to take a real interest in working with the Iraqi Central Government after the U.S. started to focus on stabilizing Iraq, which included the surge as well as encouraging sectarian cooperation and parliamentary coherence. Following the success of the U.S. troop surge in 2007 and the stabilization of Iraqi’s political affairs in 2008, the Iraqi Central Government, now more organized and confident, ruled in June 2009 that all foreign investment oil contracts made directly with the KRG are illegal.

The Iraqi Central Government now takes 83% of all oil export revenue from Kurdish territory. Because the U.S. is drawing down its forces and turning internal conflict matters over to Iraq, the world should expect the KRG to ignore central government authority and revenue-sharing agreements after the U.S. is gone.

Once the Iraqi Central Government is unable to enforce their legal authority over the KRG after the U.S. exits Iraq, the KRG will likely encourage more wildcat drilling, draw soil samples, and collect the data necessary to potentially transition reserve classifications from possible and probable to proved reserves (U.S. Reserve Classification System). The Iraqi-Kurds will then both claim all, or most, of the potential oil profits and potentially increase their commercially recoverable proved reserves estimates.

Geopolitics, Intervention, and Energy Supply Compromises

Some analysts argue that the official establishment of a Kurdistan state could create a domino for anywhere from 21 to 28 million other Kurds to stand up and demand autonomy in Kurdish-dominated regions across the Middle East. Therefore, these analysts argue that Turkey and Iran might take military action to prevent the KRG from asserting autonomy over Kurdish territory in Iraq in order to prevent the dominos from falling. However, it is unlikely Turkey and Iran would undertake such military action for fear of a blowback from Kurds within their own border regions, an outcome that would only emboldened regional Kurdish solidarity. What is more, Turkey and Iran would also be wary of taking responsibility for nation building in Iraq given the very costly U.S. experience. Thus, it is unlikely any outside forces will forcefully intervene in the Kurdish pursuit of sovereign control over northern Iraq.

Moving past the domino fear, economics proves to be the true ruler of Kurdish regional relations. Insofar, Turkey and Iran appear to prioritize investment over fear of this domino theory as both countries continue to send millions of dollars in Foreign Direct Investment (FDI) into Kurdish-Iraq due the neo-liberal nature of the KRG’s economy. In fact, in June 2009, a Turkish oil company investing in Kurdish-Iraq began exporting 40,000 b/d of oil back to Turkey through an agreement with the KRG: an estimated one billion dollars worth of oil per year at $80 per barrel.

In addition to potentially becoming a significant oil import source for Turkey and the rest of the Western world, the KRG also controls strategically located natural gas reserves that could become increasingly valuable to Europe’s diversification strategy. With almost 89% of Iraqi’s natural gas reserves within Kurdish territory—an estimated 2.83 Trillion Cubic Meters (TCM)—the European Union will likely pressure Turkey to work with the KRG—even should it become sovereign—to bring this gas to European consumers.

The KRG may be able to support some of Europe’s greater strategic needs to diversify their gas import sources and supply their fastest growing energy input source—natural gas—over the next two to three decades, particularly due to the increasing use of combined cycle gas turbines to generate electricity. Thus, if the KRG asserts itself as a sovereign country by ignoring Iraqi Central Government authority, Turkey will not cease oil and gas imports from Kurdish-Iraq out of fear of a Kurdish autonomy domino theory, whether this be by dint of personal economic interest or foreign pressure. In fact, such an outcome may induce Turkish leaders to work more closely to resolve internal conflicts with Kurds living in Turkey.

With foreign investment coming into the KRG from all over the world, these nations are sending a subtle message to the KRG: “Our governments prioritize economic development and energy security over politics.” Although regional leaders make speeches discouraging a sovereign Kurdish-Iraq, their investment actions juxtapose their rhetoric, particularly in the case of Turkey. More important than the words in a leader’s speeches are the measurable actions of their government.

Kurdish Nationalism, Oil, and Power

Like Israel after 1945, the KRG have not wasted anytime to ensure they are powerful enough to never be dominated by an occupying culture or military force, including by Arab-Iraqis that once forced on Kurds their language, culture, and rule of law. The Iraqi-Kurds are securing support from the international business community, tapping into economic integration, organizing a loyal and professional military, and developing close ties with liberal nations that prioritize development over ideology.

While Kurdish-Iraq could hold one of the keys to increasing or decreasing the expected Iraqi oil production over the next 10 years, we must remember that asking the Kurds in northern Iraq to remain unified with the rest of Iraq would be like asking Koreans after 1945 to remain unified with their previous Japanese occupiers. Thus, Iraq will not be unified should the Iraqi-Kurds have their day to decide for themselves, and that day may be coming soon.

January 12, 2010 Posted by | geopolitics, globalization, guest post, Iraq, Kurdistan | Comments Off on Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy

Future Reserves

Just going through some files on my hard drive, and I ran across the following story. Unfortunately, I don’t have the source. But it’s an interesting look at where projected future oil reserves are expected to come from. It also reinforces the difficulty that the international oil companies are going to have replacing their reserves – as most of the remaining reserves are in the hands of national oil companies.

Who Will Supply the World?

Africa

The continent has about 10 per cent of proven global oil reserves and 8 per cent of the world’s gas. The biggest oil producers are Nigeria, Algeria, Libya and Angola, which account for roughly three- quarters of Africa’s oil production. West Africa has become a focus for exploration and has attracted huge investment, such as BP’s dollars 900m deal with Tripoli. The US is expected to buy about 25 per cent of its oil from the area within the next 10 years, up from 15 per cent, which accounts partly for an increase in US military cooperation with African states. China is also securing exploration and drilling licences.

Saudi Arabia

The kingdom accounts for 19 per cent of world oil exports. Many analysts expect it to supply a quarter of the world’s added production over the next few years. And as the only producer with significant excess capacity, it has played a crucial role in alleviating temporary supply disruptions. The Saudis won’t say how much oil they are extracting from individual wells, or what reserves remain in individual oil fields. But the total amount that the kingdom produces has been declining, down a million barrels a day over the last two years. Giant oil reserves were discovered six years ago in the vast desert known as the Empty Quarter. According to estimates, the new fields could produce up to 2.2 million barrels a day for another 50 years.

Iran

Less than 10 per cent of its territory has so far been prospected for oil. Given adequate investment and technological modernisation, Iran could more than double its present production levels to eight million barrels a day, a capacity it had in the early 1970s when oil prices hovered around dollars 11 per barrel. In real purchasing power, today’s oil price is cheaper than it was then.

Siberia

The discovery of new fields in Eastern Siberia could provide between two and three billion tons of oil. In the past two to three years the Natural Resources Ministry has offered a significant number of fields in tenders in Sakha Republic (Yakutia) and Irkutsk region.

China

In the next decade, PetroChina plans to increase its proven oil reserves to 100 million metric tons a year at its Daqing oilfield to meet rising energy demand.

Iraq

Important new fields are being prospected all the time, most notably and recently in the Anbar province, where al-Qaeda forces have been making their strongest challenge. Iraq has the third largest oil reserves of any nation, and that’s if you take the lowest estimate of its reserves. Its oil is of purer quality, and nearer to the surface, than that of many of its rivals. Basra could be as rich as Kuwait in five years.

Brazil

A huge offshore oil discovery could help Brazil join the ranks of the world’s major exporters, but full-scale extraction is unlikely until 2013 and will be very expensive. The “ultra-deep” Tupi field off the coast of Rio de Janeiro could hold eight billion barrels of recoverable light crude, and initial production should exceed 100,000 barrels daily.

Brazilian state oil company Petrobras will start pilot pumping in 2010 or 2011, but full production will take several more years. Getting the oil out will be an expensive and formidable challenge because the oil is so deep under the earth’s surface. The lag time before production means that any impact on world oil prices won’t come soon.

January 31, 2008 Posted by | Africa, Brazil, China, Iran, Iraq, Saudi Arabia | 18 Comments

We Will Not Attack Iran

That the U.S. will attack Iran seems to be the conventional wisdom. I see a lot of people speculating that we will. Today, another article was published suggesting that high oil prices might lead us to do it:

Soaring oil prices could trigger a US attack on Iran

Indeed, Iranian leaders have so far brilliantly manipulated the US difficulties in Iraq, the deteriorating popularity of the US President George W. Bush at home, and their carefully knitted regional alliances to get the Americans to think twice before attacking them.

They have also used the rising oil prices as a tool to expand their influence throughout the region. These same factors could, however, act as a double-edged weapon. For exactly the same reasons the US might seriously think of launching a massive aerial attack on Iran’s nuclear facilities and military outposts.

No way. It will not happen. I have to believe that we have learned something in Iraq. In fact, I suspect that the administration would probably like to go back and un-invade Iraq. I have to believe that we are not seriously considering invading a country much larger than, and with twice the population of Iraq – and yet one that would present the same kinds of problems we have faced in Iraq. Had Iraq not played out like it has, they might be sitting around contemplating Iran. But because Iraq has not gone according to plans, the administration has got to realize how things might go if we added Iran to the mix.

I know I don’t give our political leaders much credit, but I have never believed that this is under serious consideration. Does anyone here seriously think we might attack Iran? Does anyone think that would be a good idea?

October 5, 2007 Posted by | Iran, Iraq | 40 Comments

We Will Not Attack Iran

That the U.S. will attack Iran seems to be the conventional wisdom. I see a lot of people speculating that we will. Today, another article was published suggesting that high oil prices might lead us to do it:

Soaring oil prices could trigger a US attack on Iran

Indeed, Iranian leaders have so far brilliantly manipulated the US difficulties in Iraq, the deteriorating popularity of the US President George W. Bush at home, and their carefully knitted regional alliances to get the Americans to think twice before attacking them.

They have also used the rising oil prices as a tool to expand their influence throughout the region. These same factors could, however, act as a double-edged weapon. For exactly the same reasons the US might seriously think of launching a massive aerial attack on Iran’s nuclear facilities and military outposts.

No way. It will not happen. I have to believe that we have learned something in Iraq. In fact, I suspect that the administration would probably like to go back and un-invade Iraq. I have to believe that we are not seriously considering invading a country much larger than, and with twice the population of Iraq – and yet one that would present the same kinds of problems we have faced in Iraq. Had Iraq not played out like it has, they might be sitting around contemplating Iran. But because Iraq has not gone according to plans, the administration has got to realize how things might go if we added Iran to the mix.

I know I don’t give our political leaders much credit, but I have never believed that this is under serious consideration. Does anyone here seriously think we might attack Iran? Does anyone think that would be a good idea?

October 5, 2007 Posted by | Iran, Iraq | Comments Off on We Will Not Attack Iran

Big Oil and Iraq

I am about to be traveling, but I wanted to throw this out for discussion. Over the past few years, I have heard various claims that oil companies were complicit/ultimately responsible over the Iraqi invasion. People have suggested that Big Oil was behind it, or supported it, and that they should be billed for the invasion. Or, that the military expenditure there is really a hidden subsidy for oil companies. This all seems to be widely-accepted “fact.”

I have stated on many occasions that the military expenditures may indeed be a hidden subsidy, but it is a subsidy for consumers. It is an attempt by politicians to keep energy prices down. If oil prices go up because of instability in Iraq and the Middle East, oil companies still make money. But if oil prices go up and the economy stumbles, politicians risk losing their jobs.

This discussion just came up in a thread at The Oil Drum, when someone claimed:

I do apologize for observing that your friendly neighborhood oil company (XOM, etc.) certainly had a massive role in the march to invade and occupy a foreign country.

I asked for evidence of this (surely there must be evidence of such a massive role?), and when none was forthcoming (“I could only hint at critiques, and speculation”) I wrote:

Think about it. What do you think was the goal of the administration in invading Iraq? Do you think they intended to make oil more expensive? That’s what has happened, but of course that wasn’t the intent. The intent was stability, more supplies, and ultimately lower prices for consumers.

Do you think lower prices for consumers is XOM’s business model?

Someone else posted the following in response to my request for evidence:

Since it was brought up in these comments, I wish to address the question of whether Cheney and the oil companies had a complicity in the invasion of Iraq. Please refer to these documents produced under the Freedom of Information Act.

http://www.judicialwatch.org/iraqi-oil-maps.shtml

Why in the world would they be divying Iraq up unless they planned to gain control of the country — i.e. invasion and occupation?

So, I thought “Here it is. Someone has found a smoking gun.” What I found was nothing of the sort, so I responded:

Unless my eyes deceive me, I don’t seen any American oil companies on either list. What I do see are companies that were doing business in Iraq prior to the invasion. So let me make sure I understand this. A list of non-American oil companies that were doing business in Iraq prior to the invasion somehow implicates Big Oil in the invasion?

I also note that they had maps of Saudi Arabian and United Arab Emirates (UAE) oil fields. Does this mean we are getting ready to invade them as well?

You guys are really reaching here. I thought someone was going to show me where Rex Tillerson made a speech denouncing Hussein and arguing for an invasion.

Now, I am open to evidence. What I say is that I have never seen anything that would lead me to believe that Big Oil wanted Iraq invaded. But I am persuaded by evidence. Does anyone have any to support this idea? I don’t claim that oil companies do no wrong, but I just don’t believe this charge sticks. Convince me.

I know better than to post something controversial like this on my way out of town, as it is sure to bring the trolls out. But I ask that people please stick to discussing this topic: What, if any, role did oil companies have in invading Iraq? What would be their motive? What is the evidence?

Probably offline now for a few days, although I will try to check in at some point and deal with trolls as needed. In the mean time, the trolls are in your hands. I do want to note that I have received some recent legal counsel over the blog, and will be putting up some disclaimers soon. One of them revolves around the fact that I am only speaking on behalf of myself. I do not identify myself as an employee of a specific company, as that might imply that I am authorized to speak on their behalf. I am not. However, at times people have attempted to “out me.” From now on, any comment that identifies me as an employee of a specific company will be automatically deleted in order to avoid any appearance of official sanction.

August 16, 2007 Posted by | Iraq, oil companies | 43 Comments

Big Oil and Iraq

I am about to be traveling, but I wanted to throw this out for discussion. Over the past few years, I have heard various claims that oil companies were complicit/ultimately responsible over the Iraqi invasion. People have suggested that Big Oil was behind it, or supported it, and that they should be billed for the invasion. Or, that the military expenditure there is really a hidden subsidy for oil companies. This all seems to be widely-accepted “fact.”

I have stated on many occasions that the military expenditures may indeed be a hidden subsidy, but it is a subsidy for consumers. It is an attempt by politicians to keep energy prices down. If oil prices go up because of instability in Iraq and the Middle East, oil companies still make money. But if oil prices go up and the economy stumbles, politicians risk losing their jobs.

This discussion just came up in a thread at The Oil Drum, when someone claimed:

I do apologize for observing that your friendly neighborhood oil company (XOM, etc.) certainly had a massive role in the march to invade and occupy a foreign country.

I asked for evidence of this (surely there must be evidence of such a massive role?), and when none was forthcoming (“I could only hint at critiques, and speculation”) I wrote:

Think about it. What do you think was the goal of the administration in invading Iraq? Do you think they intended to make oil more expensive? That’s what has happened, but of course that wasn’t the intent. The intent was stability, more supplies, and ultimately lower prices for consumers.

Do you think lower prices for consumers is XOM’s business model?

Someone else posted the following in response to my request for evidence:

Since it was brought up in these comments, I wish to address the question of whether Cheney and the oil companies had a complicity in the invasion of Iraq. Please refer to these documents produced under the Freedom of Information Act.

http://www.judicialwatch.org/iraqi-oil-maps.shtml

Why in the world would they be divying Iraq up unless they planned to gain control of the country — i.e. invasion and occupation?

So, I thought “Here it is. Someone has found a smoking gun.” What I found was nothing of the sort, so I responded:

Unless my eyes deceive me, I don’t seen any American oil companies on either list. What I do see are companies that were doing business in Iraq prior to the invasion. So let me make sure I understand this. A list of non-American oil companies that were doing business in Iraq prior to the invasion somehow implicates Big Oil in the invasion?

I also note that they had maps of Saudi Arabian and United Arab Emirates (UAE) oil fields. Does this mean we are getting ready to invade them as well?

You guys are really reaching here. I thought someone was going to show me where Rex Tillerson made a speech denouncing Hussein and arguing for an invasion.

Now, I am open to evidence. What I say is that I have never seen anything that would lead me to believe that Big Oil wanted Iraq invaded. But I am persuaded by evidence. Does anyone have any to support this idea? I don’t claim that oil companies do no wrong, but I just don’t believe this charge sticks. Convince me.

I know better than to post something controversial like this on my way out of town, as it is sure to bring the trolls out. But I ask that people please stick to discussing this topic: What, if any, role did oil companies have in invading Iraq? What would be their motive? What is the evidence?

Probably offline now for a few days, although I will try to check in at some point and deal with trolls as needed. In the mean time, the trolls are in your hands. I do want to note that I have received some recent legal counsel over the blog, and will be putting up some disclaimers soon. One of them revolves around the fact that I am only speaking on behalf of myself. I do not identify myself as an employee of a specific company, as that might imply that I am authorized to speak on their behalf. I am not. However, at times people have attempted to “out me.” From now on, any comment that identifies me as an employee of a specific company will be automatically deleted in order to avoid any appearance of official sanction.

August 16, 2007 Posted by | Iraq, oil companies | Comments Off on Big Oil and Iraq