Does Maliki's Election Finally Mean Stability For Iraq's Oil Sector?
Iraqi Prime Minister Nouri al-Maliki attends a ceremony marking the 88th anniversary of the founding of the Iraqi Army .
An unexpected and powerful showing in recent provincial elections by Iraqi Prime Minister Nouri al Maliki has buoyed cautious optimism that Iraq’s vital energy sector might soon be getting a much-needed boost.
Voter turnout was good and the election was largely peaceful and transparent, which in it of itself illustrates how stability and security have improved. More importantly though, Iraqis gave a strong mandate to secular and national unity parties at the expense of more religious and sectarian ones, especially among the majority Shiite population.
Maliki’s State of Law coalition promised more security and improvement of the country’s economy. He scored landslide victories in Baghdad and Basra, the country’s two biggest cities, and won seven of eight Shiite southern provinces, according to preliminary results. Other secular and independent parties also made gains.
For decades, Iraq has been one of the world’s most sought-after destinations for oil and gas producers as well as infrastructure providers. The country has billions of barrels of undeveloped oil bounty lies in the vast and untapped oil and gas reserves waiting to be developed. It also has billions of dollars in contracts required to rebuild its oil, gas and electricity industries still in shambles from decades of war and sanctions.
Iraqi proven reserves of 115 billion barrels of oil are vastly understated due to decades of lack of exploration. Iraqi officials believe the country holds as much as 350 billion barrels nearly as much as Saudi Arabia and Kuwait combined. The government plans to increase oil production from 2.4 million barrels per day, to as much as 4.5 million barrels per day by 2013 and to 6 MMbbl/d by 2018. The oil ministry plans to award the first eight exploration contracts this summer, while tenders for almost a dozen more are expected later this year.
Western investors though have so far stayed largely away over political instability, security, and the threat of renewed sectarian strife. Political progress has been slow, dragging with it the legal framework necessary to attract investors. In fact, today, about five years after Saddam Hussein was toppled, oil production is still below its pre-invasion levels, the Kurdish standoff with Baghdad is far from resolved, and electricity remains a hard-to-come-by resource for most.
But while Iraq is anything but predictable, investor sentiment could be ripe for a change. Election results could catalyze stronger investment commitments, especially in its energy industry, analysts say. Maliki’s mandate to strengthen the central government along non-sectarian or religious lines is expected to consolidate security gains. It could also empower him enough to push through vital legislation in the deeply divided country, namely the long-awaited oil law that has been delayed due to resistance by the Kurds, who want to retain control over the oil in northern Iraq.
The election results also catapulted Maliki, once dismissed by most inside and outside Iraq as a weak leader, into the frontrunner position for this year’s parliamentary election, opening up the possibility of a prolonged period of political stability under one strong leader. “The outcome of the election is definitely encouraging for the industry. A lot of companies wanted to see how the country developed strategically and whether legislation is moving in the right direction,” says Herman Franssen, senior associate and Middle East energy expert of the Center for Strategic and International Studies.
Maliki’s government “came out quite strong and that suggests indeed that he will have more power to implement policies. So we might see more movement after the election,” adds Franssen, who is also a former chief economist of the International Energy Agency.
Things do appear to be moving. French President Nicolas Sarkozy visiting Iraq this week, said a delegation of French investors, led by the country’s prime minister, would be visiting soon. “We say to French companies that the time has come to return to Iraq,” Sarkozy said. Total, the oil major, is one of 35 companies vying for oil contracts in Iraq. “We are planting seeds and we will fight to harvest contracts, fight for our companies.”
Not all agree though. Many see a dysfunctional government, regardless of Maliki’s electoral gains. “The problems in the oil sector are not about security, and a stronger government won’t change that,” says Fadhil Chalabi, executive director of the London-based Centre for Global Energy Studies, who is also a former acting secretary of OPEC and a former under-secretary of Iraq’s Oil Ministry. “It’s lack of decision on oil matters. The government is not clear about what it wants.”
To be sure, despite Maliki’s gains, many things could still go wrong, including the threat of a return to arms from the Awakening Councils, who accused rival Sunnis of trying to rob the elections. There are still dozens of active militias in the country. And corruption and lack of transparent governance remain the biggest challenges still to be tackled. The ability of Maliki to address these and other issues will also determine how long stability reigns.
A telling example is Iraq’s electricity sector. Although having more than enough generation capacity, the country is only able to meet two-thirds of demand, and that’s after reaching a generation record in the last quarter of 2008 of just under 5,000 megawatts daily, a 25 percent increase from pre-invasion figures, according to US agencies. Analysts say the problem is not about investment, since more than enough money has been allocated. While security has played a part, most of the blame falls on the government’s inability to manage the reconstruction of the system, from generators, to grids, and the distribution system.
Just about all of Iraq’s power output is oil generated, despite the country’s huge gas reserves and wasteful flaring. Iraq is the fourth biggest offender in the world with almost 250 billion cubic feet flared a year that could generate a big chunk of its demand, according to the World Bank. Late last year, Baghdad signed contracts worth billions with several companies to more than double the installed capacity with gas-powered generators. Last year it also signed a contract with Shell to collect most of the flared gas around Basra.
And then there’s the biggest threat to stability: the years-old political standoff with the Kurdish Regional Government over control of energy resources and the future of several territories also claimed by Arabs and Turkmen, including oil-rich Kirkuk. Maliki refuses to give Kirkuk to the KRG and has postponed a constitutionally-sanctioned referendum on the issue. He has also opposed powers Kurds seek to control oil and gas development in their region.
“The oil law is critical now. Provincial elections were a major issue for the government and there is a greater chance that they can focus on the oil law. Once that law is in place, there will be the basic framework to resolve issues between the KRG and central government,” says Alex Munton, a Middle East analyst with Edinburgh-based Wood Mackenzie.
And even when negotiations over the oil law resume, the KRG and Baghdad will have to resolve the impasse over the more than 20 production-sharing deals that the Kurds have signed with international companies without the central government’s approval. The Oil Ministry says the deals are illegal, but the KRG insists they cannot be reversed. Kurdistan is believed to have huge untapped oil and gas resources, on top of some 15 percent of Iraq’s oil. The central government has barred companies that have contracts in Kurdistan from vying for the larger fields in Iraq, including Talisman, OMV, and Korea National Oil Corporation.
Maliki’s authority in negotiations with Kurds has been insufficient though, creating the stalemate, Chalabi says. But the election could change that though. The prime minister will have more political allies in the Shiite and Sunni camp. “If Iraq becomes more promising as a result of the elections, large companies that look at big projects in Iraq will think twice before investing in Kurdistan,” Franssen says.
That said, it’s still Iraq and many things are uncertain. The KRG asked President Barack Obama to pressure Maliki. And things on the ground remain uncertain. The question is whether foreign companies will risk losing out on Iraq’s oil riches because this time around, the stability might be real.