The door to Iraq’s oil opens

With the inability of Saudi Arabia to increase supply of oil in the international market and the real threat of recession in USA, the Americans have turned their attention towards Iraq to bail it out of the situation. It is, therefore, drawing new strategies among which the Turkey-Israel-India cooperation in energy will play a significant role. Not surprisingly, the symbols and faces of reason are being wooed in Iraq.

by M K BHADRAKUMAR

The cynosure of Western eyes at the meeting of the Organization of Petroleum Exporting Countries, commonly known as OPEC, in Abu Dhabi, the United Arab Emirates, last December 5 was an unexpected personality - Iraqi Oil Minister Hussain al-Shahristani.

But that wasn’t a chance occurrence. By the time OPEC gathered in Vienna six weeks later, it was beyond doubt that Shahristani was on the way to becoming a celebrity in the West.

Shahristani is “a rare thing” in politics, to quote Toby Lodge, the well-known scholar on Iraq at the International Institute of Strategic Studies in London - “not too religious, not too political, not too secular, not too pro-American Shi’ite who [Grand Ayatollah Ali] Sistani would talk to”.

But for the ease with which Shahristani traversed in his later years the dividing line that separates religiosity and idealism from worldliness and pragmatism, Shahristani would have become a cult figure for human-rights activists, given his extraordinary background as a top nuclear scientist who turned a stubborn dissident, and then a reckless jail breaker from Saddam Hussein’s Abu Ghraib prison where he was tortured and tucked away in solitary confinement for an impossibly long 10 years till 1991.

But in Abu Dhabi, if Shahristani became a rising star for the Western media, that was for an entirely different reason. It was hardly metaphysical. Plainly speaking, the media had good enough reason to flatter him and pamper his vanities.

Of course, the soft-spoken, English-speaking Iraqi Shi’ite dissident leader was a familiar face in Western capitals through the 1990s. But today, he is no longer a political fugitive. He is no longer an Iraqi dissident seeking patronage. On the contrary, Shahristani finds himself in an enviable position as a creator of wealth for the Western world. He holds the key to the door that opens out to the magical world of Iraqi oil.

Iraq’s proven reserves of oil are only smaller than those of Saudi Arabia and Iran - and Iraq is only about 30% explored. Experts are generally of the view that Iraq’s actual oil reserves could well turn out to be at least double the 115 billion barrels of proven reserves. Beyond that, it is anybody’s guess as to the scale of Iraq’s as-yet-untapped gas reserves.

And Shahristani is visibly getting ready to negotiate the contracts for Iraq’s “super giants”. In the idiom of Big Oil, “super giants” are fields with at least five billion barrels of oil in reserve. Iraq’s super giants are Kirkuk (in Kurdistan), Majnoon (bordering Iran), Rumaila North and South (in the south), West Qurna (west of Basra) and Zubair (in the southeast) fields, and, possibly, the Nahr Umr and East Baghdad fields. In addition, Iraq is estimated to have 22 “giant” fields, each having more than 1 billion barrels of oil.

In fact, Iraq may host the largest untapped reserves in the world. There is a strong likelihood that Iraq’s reserves may turn out to be exponentially higher than the current estimations, which are based on old-style seismic surveys. All said, unsurprisingly, the world oil market is in a tizzy when Shahristani says something, anything. He is about to sign the contracts for these and many other large Iraqi oil-producing fields.

“We’re in a new oil policy ball game”, as author Steve Yetiv and economist Lowell Feld recently wrote, which is that the US’s capacity to ease oil prices is diminishing. On his recent visit to Saudi Arabia, US President George W Bush pushed the subject of high oil prices increasing the likelihood of an American, and therefore, a global recession. There was a time since the late 1970s until quite recently when the US’s Saudi allies would have promptly pumped the market with additional oil for depressing the price. This time around, the Saudis heard out Bush, “noted that the weakening US economy is a valid concern, but they remain reluctant to increase oil supply”.

The two writers pointed out, “Saudi Arabia’s reluctance to address sustained high oil prices, even in the face of a potential recession, represents an important break with past Saudi oil policy ... Why? The answer may define oil in the 21st century - or at least underscore the reasons for the US to seek greater oil independence.”

Yetiv and Feld, with much hesitancy, proceed to make an absolutely unthinkable suggestion that the Saudi reluctance might be borne out of a possibility that Riyadh is “getting global markets ready for the possibility that they may not have enough oil to be a long-term fuel pump to the world”.

In the current circumstances of the world energy scene, the above underscores why any plan to hasten the US effort to achieve greater oil independence translates in political terms as taking control of Iraq’s oil reserves. There is simply no other viable alternative open to the US. Essentially, it boils down to the 20 words that the former US Federal Bank chief Alan Greenspan wrote towards the end of his memoir, The Age of Turbulence: Adventures in a New World, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: The Iraq war is largely about oil.”

According to the International Energy Agency, the world demand for oil is set to increase from the current level of 85 million barrels a day ( mn b/d) to 116 mn b/d in 2030. Three quarters of the world’s oil reserves (1,200 billion barrels) are located in the OPEC countries, with the Persian Gulf countries accounting for 62%. But the Persian Gulf countries are disinclined to raise their oil production sharply enough to meet the increase in global demand. Saudi Arabia, which has the world’s largest oil reserves, for instance, is only planning to increase its oil production by 1.5 mn b/d over the next several years.

Therefore, it becomes imperative that Iraq plays a major role in meeting the additional global demand of 30 mn b/d during the coming two decades. There is yet another side to it. Peak oil - when global oil production will reach a peak and then begin to fall - is a real possibility sooner or later. It has happened in the US; it is happening in Britain, the North Sea and Indonesia; it is expected to happen in Mexico and some other major oil producing countries during the coming five-year period.

A major impediment has been the dangerous security situation within Iraq. But a significant US achievement in recent months has been the end of much of the fighting inside Iraq. Clearly, the US has bought off large segments of the Iraqi insurgency. Thousands of Arab Sunni fighters in western Iraq and parts of Baghdad have converted themselves as “comprador” militia at the beck and call of the US military. Such US-financed “resistance fighters” could number over 80,000 former insurgents.

Oil production is now expected to cross the pre-war level of 2.6 million barrels by end-2008. Shahristani says that he expected production to reach 6 million barrels per day within the next four years. The International Monetary Fund has predicted that Iraq’s economy, boosted by the increase in oil revenues, is slated to grow by 7% this year as compared to 1.3% last year. The Times newspaper recently reported that the real estate market has been sharply picking up in parts of Baghdad city and there are visible signs of a construction boom

In sum, as Ben Lando, United Press International’s energy editor put it, “Big Oil’s big dreams are close to coming true ... According to insiders, Shell, which produced a technical study of Kirkuk in 2005, wants a deal for the field. BP wants one for Rumaila, which it studied last year. Shell and BHP Billiton are angling for the Missan field in the south. ExxonMobil is interested in the southern Zubair field while the Sabha and Luhais fields are being targeted by Dome and Anadarko Petroleum. ConocoPhillips is talking with the [Iraqi] ministry about the West Qurna oil field ... Chevron and Total have teamed up in a bid for the Majnoon field.”

Washington counts on Shahristani to push the oil deals through despite the vehement opposition within Iraq. First, about 70% of Iraqis firmly oppose what Shahristani is attempting. The Iraqis see what is happening as a capitulation of their national sovereignty. Iraqis look back at the nationalization of their oil industry in 1972 as a source of pride and empowerment. Second, there is vehement opposition from the labor unions in the Iraqi oil industry. They say that Iraq could increase its oil production by investing its own money and there is no pressing need at this juncture to solicit foreign investment.

Today the rest of the world has already decided that it is time to take the Bush legacy in Iraq seriously. The alacrity with which Moscow is hurrying to get onto Shahristani’s gravy train is the latest tell-tale sign. Moscow is highly unlikely to waste its time in rhetoric ridiculing the Bush administration by pointing out that the US needs assistance to save face and leave Iraq with dignity or that Russia could help stabilize the situation, and so on.

Shahristani visited Moscow last August, but at that time Moscow committed the folly of not taking him seriously. (Actually, Shahristani was a university student in Moscow in the 1960s.) A Moscow commentator wrote after his visit, “The oil minister may say whatever he wants about the operations of foreign companies in Iraq, but the Iraqi Parliament has not yet passed a law on oil and gas. Therefore, oil companies can only make assumptions about work in Iraq.”

But Moscow didn’t need much time to revise its opinion and to take Shahristani very seriously. In November, Shahristani, guided by American legal advisors, canceled Russian oil company Lukoil’s contract with Saddam’s regime for the vast oil field in Iraq’s southern desert, West Qurna, with estimated reserves of 11 billion barrels of oil. Shahristani announced the field would be opened to new bidders as early as 2008. “We will defend our interests,” a senior Kremlin official warned. Moscow threatened to revoke a 2004 deal with creditor nations to forgive $13 billion in Iraqi debt.

But Moscow learned that Conoco Phillips was seriously eyeing West Qurna. Moscow concluded that Iraq’s oil scene was up for grabs, predators were around and there was no more time to lose. Thus, the formal signing of the agreement in Moscow writing off most of Baghdad’s Soviet-era debt has not come a day too soon. The agreement stipulates that Russia will initially write off 65% of Iraq’s $12.9 billion debt, accrued mostly from Saddam’s arms purchases, and of the remaining $4.5 billion, 80% will be forgiven in two stages by 2009 if Iraq meets economic targets set by the International Monetary Fund, leaving Iraq to repay $900 million over a 17-year period from 2011.

The agreement opens the way for Russian oil companies’ return to Iraq. Separately, Russia has agreed to invest $4 billion in Iraq, including the Iraqi oil industry. Close on the heels of the debt-relief agreement, Moscow has indicated that Lukoil and other companies including OAO Zarubezhneft, a state-owned oil producer, and OAO Mashinoimport, a supplier of machinery for energy industry, are “preparing” to return to Iraq. The Iraqi government has promised to pay “special attention” to previously signed contracts with Russian companies. But things may not be easy. The return of the Russian companies will be subject to US acquiescence, which in turn means Moscow will henceforth have to significantly roll back its earlier criticism of the Bush administration’s Iraq policy.

But Iraq is likely to impact Russia’s fortunes in a much more profound way on a second front where Moscow’s ability to influence is virtually nil. Moscow will be watching with anxiety the progress of the energy dialogue that has commenced between the European Union and Iraq. Alarm bells would have rung in Moscow when Shahristani travelled to Brussels and met the EU officials on January 31.

EU officials have openly acknowledged that their desire to seek closer energy ties with Iraq is a critical component of their broader strategy to reduce Europe’s dependence on Russian energy supplies. EU countries currently depend on Russia for roughly a quarter of their gas supplies. EU External Affairs Commissioner Benita Ferrero-Waldner told Shahristani, “Iraq is a natural energy partner for the EU, both as a producer of oil and gas and as a transit country for hydrocarbon resources from the Middle East and the Gulf to the EU.”

She said the EU was keen to see Iraq link into the Arab Gas Pipeline project from Egypt to Jordan near the Syrian border, which is under construction and is expected to allow European customers to tap into supplies from Egypt and other countries along the line via Turkey. The EU’s Arab Gas Pipeline project forms part of the 3,300-kilometer pipeline to transport gas from the Middle East and Central Asia to Europe while bypassing Russia.

The plan is to transport Iraqi natural gas from a gas field in southern Iraq to the EU through the Arab Gas Pipeline, which, when completed, will connect Syria, Jordan, Lebanon, Egypt and Turkey. Iraqi gas could then reach Europe through the planned Nabucco pipeline, which is to run from Turkey to Austria. Iraq has been invited to an upcoming ministerial meeting on the Arab Gas Pipeline project.

Shahristani told his EU interlocutors in Brussels that Iraq planned to develop its gas fields this year and should be in a position to supply Europe with gas “in two or three years”. Iraq is estimated to have 111 trillion cubic feet of natural gas reserves. Royal Dutch Shell, France’s Total and Italy’s Edison are seeking Shahristani’s approval for a deal to develop one of Iraq’s largest gas fields, Akkas, located near the Syrian border, which could be connected to the Arab Gas Pipeline.

On the oil front, Shahristani said in Brussels that Iraq is studying the possibility of new pipelines through Turkey. Oil from the Kirkuk fields in northern Iraq is currently exported through a pipeline that links up the Turkish Mediterranean port of Ceyhan.

EU-Iraq energy ties will be a worrisome development for not only Russia but also for Iran. Tehran has been nurturing the hope that the EU’s strategy to diversify its energy imports would eventually give impetus to the European countries to normalize their relations with Iran and that in turn would prompt them to withstand the US pressure to isolate Iran. But Tehran is watching with dismay that Iraq is fast becoming a golden goose for the EU and the expansion of EU-Iraq energy ties may dampen any sense of urgency in the European capitals for building up an energy dialogue with Iran in the near term.

The virtual “loss” of the EU market - in the near term, at least - compels Iran to turn more toward the Asian region. But here too, US pressure is working on India, one of Asia’s most significant energy markets, from linking up with Iran. Washington is instead encouraging Indian companies to become active in Iraq. Ideally, Washington would like to promote a Turkey-Israel-India energy grid that could tap into the Iraqi reserves. This approach also fits in with the US geo-strategy of developing Turkey, Israel and India as three “pivotal” states that are Washington’s natural allies in the regions surrounding the volatile Middle East.