145 billion barrels of oil, but patience is running dry in Iraq

Reuters/Essam Al-Sudani

• Baghdad has vast oil reserves and big ambitions to raise its production
• Western oil majors had hoped for mega-profits but some are now exiting
• ‘Decisions about oil are driven by politics,’ says one US ex-ambassador

Iraq has vast reserves of crude oil – 145 billion barrels as of 2022 and more than 8 percent of the global total – but economists and analysts have warned that Baghdad will struggle to meet its output targets unless it offers better operating terms to Western oil majors.

The country remains hugely reliant on oil. Crude revenues provided 99 percent of Iraq’s exports, 85 percent of the government budget and 42 percent of GDP in the decade to 2022, according to the World Bank.

But some of the oil giants that have flocked to the country in recent years are heading towards the exit, after the mega-profits they had hoped to generate failed to materialise. 

“Decisions about oil are currently driven by politics and aren’t taken on a commercial basis,” said Douglas Silliman, president of the Arab Gulf States Institute in Washington and US ambassador to Iraq from 2016 to 2019. 

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Iraq does not have a functioning national oil company. Instead, the oil ministry owns and runs five oil firms. International oil companies operating in federal Iraq hold technical service contracts, which unlike production-sharing agreements do not enable foreign firms to include oil reserves on their balance sheets. 

“The oil ministry has been serially unable to propose contracts that major oil companies are willing to sign,” said Silliman, explaining that the service contracts allow Iraqi officials to avoid accusations that foreign companies are being handed national resources. 

“The terms offered to international oil companies offer insufficient returns given the political and security risk, but without foreign help the Iraqis can’t accomplish what they want to do in terms of upstream exploration and the development of new fields on their timeline,” he added. 

Iraq’s cluster of super-giant fields – those containing more than 5 billion barrels – are the biggest concentration worldwide and represent up to 80 percent of its reserves, according to the US Department of Commerce. The remainder are in northern Iraq – including Kurdistan, which wants independence. 

Raising production capacity to 8 million barrels

Baghdad aims to raise its production capacity to 8 million barrels per day (bpd) by 2028, primarily by boosting output at these super-giant fields in the south of the country.

This is a significant increase from the 4.4 million bpd recorded in the first half of 2022, with customers led by China and India.

To hit the 8 million target, Iraq needs to repair and expand its pipeline infrastructure and raise export capacity at its Gulf terminals to 6 million bpd, according to Mamdouh G Salameh, a UK-based oil economist. The terminals’ capacity slumped to 3.3 million bpd in early 2022. 

Iraq will also have to boost its water injection capacity in order to raise oil production. In September 2021 France’s TotalEnergies signed a $10 billion deal for several energy projects, including a large-scale seawater treatment plant that will increase injection capacity.

Yet there has been little progress amid reports of difficulties with Baghdad. TotalEnergies did not respond to requests for comment. 

“If the water project doesn’t materialise, Iraq cannot reach those plateau production levels,” said Fernando Ferreira, director of geopolitical risk service at Rapidan Energy Group. 

“If the deal falls through, it would send a really negative signal. The risk is you get an Iraq later this decade where most Western oil companies have left and the upstream sector is dominated by Chinese oil and Iraqi service companies.”

PetroChina in the ascendancy

Should Chinese companies replace their Western counterparts, they can maintain Iraq’s production, said Ferreira.

“The environment may even be advantageous, because many Chinese companies are horizontally integrated and can do everything in-house,” he added. “But so far we haven’t really seen Iraq being open to that idea.”

Last June BP and PetroChina launched a joint venture, Basra Energy Company, that owns the duo’s interests in Rumaila oil field – Iraq’s largest – and acts as lead contractor. BP holds a 47.6 percent “participating interest” in Rumaila. 

A BP spokesman declined to comment on whether the company wants to quit Iraq.

Another Western giant, ExxonMobil, was lead contractor in a consortium that agreed in 2010 to redevelop Iraq’s West Qurna-1 field under a 20-year contract. Royal Dutch Shell was also part of the project. PetroChina and Indonesia’s Pertamina joined the partnership in 2013, while Shell sold its stake in 2018.

In February, ExxonMobil agreed to sell a 10 percent share in West Qurna-1 to Pertamina for an undisclosed amount. The US firm is now in negotiations with Iraq’s Basra Oil Company to sell its remaining 22.7 percent interest. 

“The sale of West Qurna-1 would mark our exit from Iraq,” an ExxonMobil spokeswoman said. 

PetroChina will become West Qurna-1’s lead operator and is tasked with raising production to more than 700,000 bpd by late 2025 from around 450,000 bpd at present, said Salameh.

The Chinese firm also aims to more than double production at Majnoon oil field, which Shell has returned to Iraq’s government.

Western firms’ departures comes despite Iraq’s oil production costs being the lowest globally at around $1 to $2 per barrel, according to Salameh. 

“China’s influence is in the ascendency … the US says it wants to exit Iraq but its actions belie its claims,” he added, pointing out that American troops occupy Syrian oil fields near the Iraq border. 

“It wants to keep an eye on Iraq’s huge oil wealth at least to prevent China from completely wresting control of Iraq’s oil.”