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|| Iraqi oil: black gold or curse?

by Jaafar Altaie

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The world's most advanced economy and largest oil consumer, the United States, is likely to spearhead efforts to develop alternative energy sources on a global scale. When this happens, producers are likely to respond to a diminishing oil market by trying to diversify their economies to reduce dependence on oil exports. Until such a process begins to materialize, high dependence on oil is a short-term reality for consumers and producers.

According to the US Department of Energy, 2001 world oil demand is forecast to rise by an average of 1.2 percent per year. In a low economic growth scenario this takes demand from a 2001 average of 403.9 million barrels per day (mbpd) to 477.5 mbpd in 2010. In a high growth scenario, demand is forecast to increase by 2.4 percent per year, from 403.9 mpbd to 491.1 mpbd in 2010.

As long as oil remains the world's dominant energy source, net consumers and producers have to improve the management of this strategic resource.

On the consumer side, the US yet again finds itself in a position where the management of its global oil interests must be improved to mitigate persistent price and market shocks.

The problem of management, however, especially affects producers. They stand to lose the most in the event of a global shift to viable energy alternatives. On the supply side, the Iraqi oil industry provides a good example of how producers need to focus the management of strategic oil interests toward improving domestic stability and allowing for economic growth, diversification and less dependence on oil exports.

For Iraq, oil is potentially the engine of growth. How it is managed will shape Iraq's future. Historically, Iraq has seen more problems than benefits from its oil industry, which has been characterized by negligent mismanagement, mainly in terms of revenue accounting, legal frameworks, production sharing, training and institutional development.

Iraq's oil industry has persistently experienced patterns of poor accounting and administrative corruption. Most recently, a minimum of $5 billion of oil revenue (during 2003-2004) is still unaccounted for. This amount was under the administration of the Coalition Provisional Authority (CPA), under the auspices of the Development Fund for Iraq (DFI). Only by launching formal investigative processes can the new Iraqi government set the required legal precedent for the more efficient and transparent management of Iraq's oil revenue. Without such efficiency and transparency, oil is unlikely to act as an engine of growth, facilitating sustained economic development and the diversification of Iraq's economy. In this case, Iraq's economy will continue to depend on an inefficient and antiquated oil industry.

In addition to better revenue management, Iraq's oil industry also requires appropriate legal frameworks and effective legislative authorities to regulate the Iraqi government's interaction with the international market, particularly in the areas of exploration and production. Iraq's oil industry also suffers from outdated skills, as well as a lack of specialized technical and training institutions needed to maintain global technical standards. In reality, transnational oil companies are best placed to facilitate the resources, skills and technology required for the rehabilitation of Iraq's oil industry and the sustainable expansion of Iraqi production.

This is best achieved through a comprehensive field development program, with production sharing agreements (PSA) as the most effective mechanism with which to pursue strategic production targets. Iraq's Supreme Petroleum Council (SPC), established by the previous interim government, was a step in the right direction in terms of establishing the appropriate legal frameworks to allow foreign companies to successfully operate in Iraq's industry, although the SPC's authority still needs to be formally ratified as an integral part of Iraq's constitution.

Reforming Iraq's oil industry is certain to have a positive impact on improving Iraq's security situation, especially if such reform expands job opportunities for ordinary Iraqis who have historically seen little benefit from the country's considerable reserves. The situation in Iraq has gone from the need for ambitious long-term projects, to realistic short-term targets. Only by focusing on the fundamentals of revenue management, production sharing and institutional development can Iraq transform its oil industry from its current state as a volatile and inefficient asset into an engine of growth and stability. This in turn can only be achieved by an Iraqi government genuinely committed to promoting the stability and territorial integrity of Iraq. To a large extent, the ability to reform Iraq's oil industry also depends on the political will of the US government as arguably the most significant external influence on Iraq's oil industry.

For net consumers and producers, the search for alternative energy sources remains a long-term challenge, although this prospect is more realistic for technically and economically advanced consumers like the US. Most producers, as in the case of Iraq, must drastically reform the management of their oil industries in order to diversify their economies, reduce dependence on oil exports and avoid the long-term adverse impacts implicit in the shift to sustainable alternatives.- Published 5/5/2005 © bitterlemons-international.org

Jaafar Altaie is a geopolitical analyst with over 10 years experience in Iraqi geopolitics, with emphasis on the energy and financial sectors. He currently runs his own consulting practice in Iraq.

Gas potentially more unifying than oil

by Nigel J. Lucas
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There is mounting evidence that the production of oil throughout the world will reach a peak in the next two decades or, at best, will grow only slowly over the period. The most optimistic estimates, such as that of the US Department of Energy's International Energy Outlook 2004, envisage oil production increasing from about 80 million barrels a day now to 120 million barrels a day by 2025. This is equivalent to annual growth of about two percent a year, but the large developing countries show economic growth of five or six percent a year and even more rapid growth in vehicle ownership and oil consumption. With present trends, China alone would take half of the projected increase to 2025. And this is the most optimistic of scenarios; many experts think that peak oil is only a few years away.

The implications are serious both for countries that have few energy resources and for those that have based their development on oil products. Convenient to use and easy to transport, petroleum products are the easy way to run a country. The affordability and availability of oil and oil products has been an important contributor to development. That affordability and availability will certainly be much reduced in the next 20 years. For the Middle East this discriminator will be important. Within the region, some countries have large reserves of oil and some have none. Forty years ago, both groups benefited from the development of oil: it was the basis of development for all and producers collected rents. When oil was cheap this distinction was tolerable; for many years it has been less tolerable and in the future it may be a source of friction.

Another hydrocarbon fuel, more expensive to produce and more expensive to transport, is gas. Within the region and around its edges, lie more than half of the known gas reserves in the world. Egypt and Algeria together have four percent of proven reserves; Iran has 15 percent; in other countries around the Caspian there is another four percent; Qatar has nine percent and Russia, outside the region but a potential supplier, has 30 percent of proven world reserves. Europe is interested in these reserves of course, because it is a huge importer of energy. Gas is potentially more unifying than oil. Many countries of the Middle East could reap the direct and indirect benefits of this communality of interest between Europe and the producing countries. The direct benefits are transit payments and the indirect benefits arise because the need to carry vast volumes of gas to Europe makes the fuel available to others along the way and permits the development of smaller deposits in the !
region that might be hard to develop in their own right. Turkey is a key country in this with access to Russian, Iranian and Central Asian resources, and is potentially an important transit country from the Gulf States through to Europe.

The opportunity has not gone unnoticed, either in Europe or in the region. The Barcelona Declaration in 1995 between the European Union and the 12 Mediterranean partners committed the countries to work toward a free trade area through policies based on the principles of market economy and the integration of their economies by 2010. This free trade area would include energy. Nothing much happened in the period immediately following the treaty, but four or five years ago the process was re-launched and progress has been made. The year 2005 has been declared the Year of the Mediterranean in recognition of the tenth anniversary of the Barcelona Process. The bilateral association agreements that are the key feature of the implementation of the partnership have now been signed with all countries; the final agreement with Syria was concluded in October 2004.

Of course the ambitions of the Barcelona progress go far beyond gas; the main aim is to create a region of economic and political stability on the borders of the EU; a rather abstract aim for which enthusiasm has perhaps been lost as the pace of reform in the Middle East continues to disappoint and the region, not always of its own volition, persists in ceaseless political turmoil. But gas is a common, concrete cause of sufficient importance to all partners to concentrate the mind.

Much has been done in the Arab states to develop the use of gas for domestic and bi-lateral purposes. Construction of the Arab Gas Pipeline has begun; the pipeline from El Arish to the port of Aqaba in south Jordan has been completed and is now being extended to north Jordan and will eventually link to the gas system of Syria and will supply Lebanon. Regional institutional arrangements have also been provided for the marketing of pipeline services and regulation of the operation. Eventually the gas pipeline could be extended further north and could link into the Turkish system and the pipelines to Europe.

When political conditions permit, Israel will be an important player in this regional market; it offers a large market and access to Mediterranean ports; it can be supplied initially from Egypt and subsequently from further east. The reserves of gas that have been proven off-shore Gaza should be developed in any Israeli-Egyptian accord and would provide useful economic support to Palestine. Turkey could become a gas-hub--the physical basis for a spot market in gas from Russia, the Middle East and Central Asia. Egypt could provide a similar service for Gaza gas and its own sources, eventually including other players from the Middle East.

What is now needed is a political initiative on a scale to match the importance of the undertaking both for the security of supply of energy to Europe and for the support of economic development in the Middle East. The implications are above all important for the eastern Mediterranean. The Mahgreb countries are in a process of integrating their energy markets with Spain and then into Europe and there are not so many strategic consequences in the Mahgreb. But in the Eastern Mediterranean there is a lot to play for.

The solution cannot be dramatic; the scope is too great to be amenable to a single common action. Progress must be systemic and depends on two main factors: first, a common approach to the management of gas networks and second, vast financial resources to construct the pipelines. But the elements are there. The principles of common carriage and third party access are well established; the European Investment Bank has money for infrastructure projects to underpin regional markets; and commercial banks will always be happy to fund financially viable projects with serious partners.

What is lacking is a convincing partnership between the public and private sectors. The implementation of such a vision can easily be conceived at the extremes of the political spectrum. At the extreme of the state controlled economy, which probably characterizes most of the Middle Eastern countries, the governments get together and decide and then state corporations implement and the consumer picks up any loss; so all that is needed is planning. At the liberal extreme, which probably characterizes the European position, government sets the rules of the market and then lets private enterprise get on with it; so all that is needed is reform. For many reasons neither extreme is viable in this context. It needs private enterprise and it needs agreed rules and it needs reform, but it also needs political vision. In the Year of the Mediterranean it would be fitting that the EU-Mediterranean governments, with the participation of those countries beyond the region, provide that vis!
ion.- Published 5/5/2005 © bitterlemons-international.org

Nigel J. Lucas is a retired professor of energy policy at Imperial College, London, and a fellow of the Royal Academy of Engineering in the UK. He has worked extensively across Europe and Asia, and for the last three years directed a project on energy sector reform in the Middle East and North Africa.