After more than a decade of sanctions and two Gulf Wars, Iraq’s oil infrastructure needs modernization and investment. Despite a large reconstruction effort (including Iraq Relief and Reconstruction Fund (IRRF) support of $1.72 billion), the industry has not been able to meet hydrocarbon production and export targets since 2004. According to the January 2007, Special Inspector General for Iraq Reconstruction (SIGIR) report, Iraq’s petroleum sector faces technical challenges in procuring, transporting and storing crude and refined products, as well as managing pricing controls and imports, fighting smuggling and corruption, improving budget execution, and managing sustainability of operations. Oil production has not recovered to pre-war levels, and parliament and cabinet officials are working to map out investment and ownership rights that will help move the industry forward.

Another challenge to Iraq’s development of the oil sector is that resources are not evenly divided across sectarian-demographic lines. Most known hydrocarbon resources are concentrated in the Shiite areas of the south and the ethnically Kurdish north, with few resources in control of the Sunni minority (Click HERE to link to oil resources maps). For this reason a legal framework for investment in the hydrocarbon sector remains a main policy objective.

According to reports by various U.S. government agencies, multilateral institutions and other international organizations, long-term Iraq reconstruction costs could reach $100-billion or higher, of which it is estimated that more than a third will go to the oil, gas and electricity sectors. In addition, the World Bank estimates that at least $1 billion in additional revenues needs to be committed annually to the oil industry just to sustain current production.

According to the Oil and Gas Journal, Iraq’s proven oil reserves are 115 billion barrels, although these statistics have not been revised since 2001 and are largely based on 2-D seismic data from nearly three decades ago. Over the past two years, multinational companies, at the request of the Government of Iraq (GoI), have reexamined seismic data and conducted comprehensive surveys of Iraq’s hydrocarbons reserves in locations throughout the country. Geologists and consultants have estimated that relatively unexplored territory in the western and southern deserts may contain an estimated additional 45 to 100 billion barrels (bbls) of recoverable oil. While internal Iraqi estimates have ranged into the hundreds of billions of barrels of additional oil, the seismic data under review by a host of international firms seem to be pointing to more conservative, but significant, increases. Iraq has the lowest reserve to production ratio of the major oil-producing countries.

The majority of the known oil and gas reserves in Iraq form a belt that runs along the eastern edge of the country. According to the GoI, Iraq has around 9 fields that are considered “super giants” (over 5 billion bbls reserves) as well as 22 known “giant” fields (over 1 billion bbls). According to independent consultants, the cluster of super-giant fields of southeastern Iraq forms the largest known concentration of such fields in the world and accounts for 70 to 80 percent of the country’s proven oil reserves. An estimated 20 percent of oil reserves are in the north of Iraq, near Kirkuk, Mosul and Khanaqin. Control over rights to reserves is a source of controversy between the ethnic Kurds and other groups in the area.

The Western Desert is of interest to oil prospectors as well as to the sectarian groups occupying these areas where there is no active oil production. Minor oil formations beneath western territory have been known of for decades, but little has been done in the way of development. Much of this area is just now undergoing exploration, although it belongs to same geological formation as part of the Saudi Arabian deposits. According to an Egyptian news source from February, 2007, a test well at the Akkas field in the Al-Anbar province is flowing at rates equivalent to larger fields elsewhere in Iraq.

In 2006, Iraq’s upstream crude oil production under the control of the regional state-owned oil companies averaged 2.0 million barrels per day (bbl/d), down from around 2.6 million bbl/d of production and a nameplate capacity of 2.8 to 3.0 million bbl/d in pre-invasion January 2003. Estimates of Iraq’s current production levels vary and metering systems have been put in place at Basrah to improve export accounting.

According to 2007 report from the U.S. Government Accountability Office (GAO), the Energy Information Administration (EIA), State Department and GoI reported differences in daily production volumes ranging between 100,000 to 300,000 bbl/d. While EIA reported significantly lower average daily production numbers than the State Department, annual averages only differed by approximately 100,000 bbl/d. Some analysts suggest that differences could be accounted for by oil smuggling, although discrepancies could arise from differing methods used to measure production (e.g. estimating re-injection at the well-head).

Historically, two-thirds of production came from the southern fields and the remainder from the north-central fields near Kirkuk. At present, the majority of Iraqi oil production comes from just three giant fields: North and South Rumaila and Kirkuk. The Rumaila fields, operated by Iraqi parastatal South Oil Company, along with a ring of nearly a dozen smaller fields, including Subha, Luhais, West Qurna and Az-Zubair, have been producing 1.5 to 1.9 million bbl/d; close to pre-war levels. Conversely, average production at Kirkuk and the northern fields of around 200,000 bbl/d is only a fraction of the pre-war peak of around 680,000 bbl/d, due to reservoir damage from gas and water injection as well as shut-in export routes. In May 2007, the Iraq Ministry of Oil (MoO) reported that total production from the northern fields was 206,000 bbl/d, all of which went to domestic consumption.

The table below represents reported installed oil production capacity in Iraq, all of which is not online. Effective capacity, or actual production, is subject to change based on the security situation.

Currently, the MoO has central control over oil and gas production and development in all but the Kurdish territory through its two operating entities, the North (NOC) and South Oil Companies (SOC). According to the North Oil Company’s website, their concession and jurisdiction extends from the Turkish borders in the north to 32.5 degrees latitude (about 100 miles south of Baghdad), and from Iranian borders in the east to Syrian and Jordanian borders in the west. The company’s geographical operation area spans the following governorates: Tamim (Kirkuk), Nineveh, Irbil, Baghdad, Diyala and part of Babil to Hilla and Wasit to Kut. The remainder falls under the jurisdiction of the SOC, and though smaller in geographical size, includes the majority of proven reserves.

Passage and implementation of Iraq's Hydrocarbon Law, which was first presented to upper house of Parliament for review on February 27, 2007, is central to the development of the Iraq’s oil and gas industry, and Iraq’s economy overall. The draft law focuses on upstream development and lays out the conditions for investment and international participation in the sector. The law also details a governance model which includes the proposed re-establishment of the umbrella operations company that was the Iraq National Oil Company (INOC) and a central regulatory body, such as a Federal Oil and Gas Council, to review contracts. The original draft law laid out a proposed plan for domestic control of oil and gas fields and a framework for revenue sharing among governorates. Initially, four annexes to the law proposed which fields would be centrally managed and which fields would be under local/regional control, and thus opened to foreign investment at the governorate’s discretion. Annexes I and II, which listed currently producing, partially developed or mothballed fields included some 93 percent of proven reserves. Annex III, listing the “undeveloped” fields, and Annex IV, listing 65 exploration blocks, were to fall under regional development authorities. Upstream development privileges based on the aforementioned thresholds are the subject of ongoing negotiations. Following discussions between cabinet members, parliament and other groups in July 2007, the annexes are reported to have been removed from the current version draft law and will be considered at a later date by the yet-to-be-established regulatory body.

Certain internal groups and some members of the expatriate Iraqi community have voiced reservations about the role of foreign oil companies in Iraq’s upstream oil and gas sector. Such groups claim that defacto “denationalization” would make Iraq the only major oil producing country in the region to allow foreign control in upstream operations, and at generous terms. The Kurds also oppose widening central control over planning, upstream development and revenue distribution. The Kurdish Oil and Gas Minister Ashti Hawrami has called for the reclassification of several field in the Annexes, particularly “boundary fields” with unclear borders or fields that have been contracted to or negotiated with foreign companies, including Kor Mor, Demir Dagh, and Taq Taq. It was reported in late June 2007 that the GoI and the Kurds had come to an agreement on the revenue sharing portion of the law, considered an important step forward for the passage of the bill. Following Ministry approval in early July 2007, parliament is expected to consider the law in an amended form in the fall 2007.

The MoO has announced a goal of 6 million bbl/d of sustainable production by the end of the decade, stating that between $25 and $75 billion in investment is needed to get Iraq’s sector producing at such levels. The southern fields intended for development in the immediate term for export are West Qurna, Halfaya, Majnoon and Nahr (Bin) Umar. Experts suggest that these fields could produce an additional 2 million bbl/d in the medium-time frame with moderate investment. In the north, further development at a number of fields, including Bai Hassan, Jambur, Khabbaz, Ajil, Ain Zalah, Butma and others may depend on the final status of Kirkuk (Tamim) and settlement of Kurdish claims on the Nineveh governorate (Mosul). A referendum is scheduled to take place in late 2007.

Despite the lack of agreement over the national law governing investment in hydrocarbons, the Kurdistan Regional Government (KRG) has a signed a half-dozen oil production sharing, development and exploration contracts with several small foreign firms. In June 2007, the KRG announced an offering of 40 additional exploration blocks during the summer of 2007. In addition, more than a dozen contracts signed by the central government with international companies during Saddam Hussein’s regime are being renegotiated or may come under review when Iraq’s oil law and investment framework is in place. Below is a table detailing the status of reported international investment in Iraq’s upstream petroleum sector:

Iraq’s Upstream PetroleumDevelopment Agreements

(Click above for full chart)

Refinery operations, with antiquated infrastructure, are often disrupted by thievery, employee intimidation, and sabotage to feeder pipelines, lack of feedstock, and unreliable power supply. The fuel mix, including high levels of heavy fuel oil, does not reflect the current demand mix. The sector has not been able to meet domestic demand for refined products like gasoline, kerosene, LPG and diesel for the generators that supplement electric power since 2003, and shortages are reported. In 2006, Iraq’s petroleum product consumption was approximately 545,000 bbl/d.

According to the Oil and Gas Journal, Iraq’s total installed refinery capacity is 597,500 bbl/d. Iraq has four major refineries with an installed/nominal capacity of approximately 570,000 bbl/day. Since 2003, these facilities and their related infrastructure (pipelines, external power supply) have been subject to attacks and repeated disruptions.

The main refineries include:

Other sources report that Iraq’s refining capacity also includes several minor plants (called “topping plants”), which produce 10,000 bbl/d or less each. According to the U.S. Department of State’s Iraq Reconstruction Management Office(IRMO)/Iraq Transition Assistance Office (ITAO) reports, these facilities (including Mosul-Qaiyarah, Kirkuk, Khanaqin, K3-Haditha, Muftiah, Najaf, Maysan, and Nassiriyah-Samawah) primarily produce asphalt and low-grade kerosene and diesel. Some of these smaller facilities have been reportedly “cannibalized” for spare parts for the larger refineries.

In order to alleviate shortages, the GoI has initiated a $4-billion plan to attract investment in the downstream operations and raise refinery capacity by around 1 million bbl/d. Timetables for new additions are uncertain due to security and financing roadblocks. The following table highlights proposed new construction:

Since 2003, the only new facility to come on-stream is a 10,000-bbl/d reconstruction fund-financed facility in the southern city of Najaf, completed in October, 2006. However, the refinery remains generally inactive due to limited storage facilities and inability to secure transport lines. The 20,000-bbl/d partially completed refinery at Bazyan (Sulaymaniyah) is expected to come online in late 2007.

According to the IMF and independent reporting, subsidies have contributed to local supply shortages and an international black market trade with Iran and Turkey. As part of their IMF program, the GoI is slowly reducing subsidies on refined products, as seen in the table below: