Iraq recently released the full statistics for its oil production for August 2010, with the figures illustrating the continuing decline of Iraq's oil industry since the end of 2009. In August, total output stood at 55.4 million barrels, as opposed to 61.3 million barrels in December 2009. Consequently, government revenue from petroleum has now dropped, with earnings at $3.9 billion in August compared to $4.4 billion last December.
The reality illustrated by these trends is in stark contrast with announcements from Iraqi officials that followed the completion of the second round of petroleum bids, which resulted in ten contracts being signed with foreign companies such as the Russian firm Lukoil and Royal Dutch Shell. For example, the Oil Minister Hussein al-Shahristani claimed that Iraq could boost production capacity from the approximate current level of 2.5 million barrels per day (bpd) to around 12 million bpd in six years, rivaling Saudi Arabia's capacity of 12.5 million bpd. Similarly, Prime Minister Nouri al-Maliki affirmed that additional revenues generated by increased oil production would not only help to pay off Iraq's foreign debts of roughly $120 billion, but also solve problems of reconstruction.
It is extremely unlikely, however, that Iraq could meet these targets for expansion of the petroleum industry. current trends aside, the World Bank estimates that $1 billion in investment is required just to maintain present production levels because of the outdated and damaged infrastructure, such as, among other things, ports and pipelines. Meanwhile, a boost to 5 million bpd will cost $30 billion over the next eight years.
In contrast, Saudi Arabia's production capacity is the result of 75 years of development worth hundreds of billions of dollars, without the problems of three decades of warfare and sanctions or a corrupt and inefficient bureaucracy that Iraq suffers from.
Whereas Saudi Arabia ranks 13th out of 183 countries in the World Bank's 2010 "Ease of Doing Business Index," Iraq stands at 153rd (a drop of three places from the 2009 index). The reasons for such a large difference include the fact that Iraq's economy is still largely centralized and state-managed, a legacy of what Daniel Pipes describes as the "Stalinist nightmare of Saddam Hussein," as well as the general lack of security and stability owing to an Al-Qaeda insurgency of around 2000 members, as well as the ongoing political stalemate. These are all big obstacles to attracting the investment needed to develop the oil industry, despite the contracts signed with international firms. The Organization for Economic Cooperation and Development (OECD) gave Iraq the worst score of seven (on a scale from zero to seven) on its credit-risk classification system. Likewise, a survey of 300 business executives by the Economist Intelligence unit in July found that 64% believed Iraq was too dangerous to invest in right now.
It is therefore not surprising that certain analysts considered the various pronouncements from Iraq's politicians as mere rhetoric, which is perfectly understandable as the second round of bidding was relatively successful in terms of the number of deals agreed on. The government may have seen the event as a sign of Iraq's return to a prominent position in the world's oil-market after 30 years of war and sanctions. After all, the first round of oil-bidding in June 2009, which was broadcast live on Iraqi television and began with 22 companies placing bids, turned out to be an almost complete failure as only one deal was agreed on with a consortium from British Petroleum (BP) and China's CNPC. This lack of success arose from the fact that the Iraqi government was thinking far more in terms of profits for the state, rather than on creating workable business deals that foreign firms could accept.
Nonetheless, while it is to be expected that foreign firms will be able to increase petroleum production and repair damaged equipment and infrastructure in the coming years, Iraq's political elite should think about toning down their unrealistically high ambitions for the nation's oil industry, and make it a priority to move the country away from dependence on petroleum revenues, which presently account for 70% of GDP and 90% of government income.
The best way to go about this would be to diversify Iraq's economy by gradually liberalizing the predominantly centralized, command infrastructure. Such a policy might entail reducing the number of permits required to build on a given site: at present, an average of 14 permits are required to build anything in the country, and take 215 days to complete. This would not only allow reconstruction efforts to proceed more swiftly and alleviate Iraq's housing crisis, but also reduce corruption by increasing transparency in the system. Iraq must not fall victim to the oil curse that afflicts many of its neighbors: the sooner dependency on oil revenues is reduced, the better for the country's future.
Aymenn Jawad Al-Tamimi is an intern at the Middle East Forum and a student at Brasenose College, Oxford University.
