With proven reserves of over 115 billion bbls of oil and additional estimated reserves of 45 to 100 billion bbls in the previously unexplored western and southern deserts, Iraq holds the planet's single largest untapped pool of traditional (easily extractable) oil.
About 75 percent of Iraq's proven oil reserves are concentrated in the three southern governorates, with 25 percent in the middle and the north. The Kurdistan Regional Government (KRG) controls about six percent of these northern reserves (or 20 percent, if the Kirkuk area is included).
Iraq has other mineral resources, including largely unexplored reserves of natural gas and phosphates, but these are dwarfed by its oil wealth. In 2011, the Iraqi government issued contracts for the development of natural gas to be used for domestic consumption.
Iraq's oil and gas reserves have been historically underdeveloped, both by the international companies who sought to keep output and prices under control, and then by Iraqi authorities who missed many opportunities due to political unrest, wars and sanctions. Now, Iraq's leaders are keen to develop these reserves to their fullest potential, as oil is the main source of government revenue, but significant investment is needed to update crumbling infrastructure.
Iraq's oil output peaked at 3.5 million bbl/day shortly after the start of the Iraq-Iran war in 1980. In 2009, output stood at more than 2.4 million bbl/day, with exports of approximately 1.8 million bbl/day, a decline from earlier years since the U.S.-led invasion. The government's stated long-term production goal is 12 million bbl/day, which would put Iraq ahead of Saudi Arabia as the world's leading producer.
Most oil is produced in the giant fields of southern Iraq. Kirkuk produces around 300,000 bbl/day, according to company and outside estimates in 2011. Disruption to pipelines is responsible for limited production in that area, where production could potentially increase to two million bbl/day. Most associated gas is flared, although it is beginning to be captured for domestic consumption.
There are two main outlets for export of Iraq's oil: terminals in the Persian Gulf in the south, and a pipeline through Turkey in the north. Pipelines to Syria in the west and the Kingdom of Saudi Arabia in the south are in disuse. In the immediate post-war period, sabotage reduced northern pipeline exports to almost nothing, but they have shown improvement in the years since. Although militants continue to target Iraq's oil fields and pipelines, security forces and an oil police force have an increased presence protecting facilities from both attacks and smuggling.
Historical Background
Before the establishment of the modern Iraqi state, oil was controlled by the Turkish Petroleum Corporation (TPC), formed in 1918. The TPC was owned in equal shares by the predecessors of BP, Exxon and Total, with an additional five percent owned by Galoust Gulbenkian. TPC's concession covered the entire territory of the just-defeated Ottoman Empire, including Iraq. After the formal establishment of the modern Iraqi state in 1921, TPC's concession area in Iraq was separated as the Iraq Petroleum Corporation, which continued to manage Iraq's oil until nationalization in 1970.
In 1960, the same year that the Organization of Petroleum Exporting Countries (OPEC) was established in Baghdad, the Iraqi government revoked IPC's concession for 99 percent of Iraqi territory. The new concession area was limited to those areas where it had operations at the time.
The Iraq National Oil Company (INOC) was established in the early 1960s with a high degree of operational independence. Staffed by former IPC employees, it was one of the most efficient NOCs in the region. But its independence and efficiency gradually eroded until it was abolished in 1987. Since then the Iraqi oil industry has been run directly by the Ministry of Oil.
After a brief boycott in the early 1970s, international oil companies returned to Iraq, but only as service providers. In the 1990s, Saddam Hussein signed several production sharing agreements with international companies including Lukoil of Russia and China National Petroleum Corporation. In order to comply with the nationalization laws, each agreement had to be adopted by parliament individually.
More recently, the Iraqi government negotiated technical service agreements in 2008 with five oil majors including Exxon, Total, BP, Shell and Chevron. The agreements covered five major fields and sought to raise output by 100,000 bbl/day for each field within two years.
In February 2008, the Ministry of Oil finished short-listing companies for the first bidding round for long-term exploration and development contracts. During the first round of bidding in June 2009, companies were awarded partnership deals with Iraq's South Oil Company to share management of the fields. The fourth round of bidding for 12 blocs across the country has been set for January 2012. As of mid-2011, almost 40 companies had also Production Sharing Agreements (PSAs) with the Kurdish Regional Government to operate in the Kurdistan region.
Revenue Management
Despite ongoing conflict and instability, Iraq generated over $51.4 billion in oil revenues in 2010. Oil accounted for over 75 percent of GDP and almost 90 percent of government revenues. The economy was expected to grow by 0.8 percent in 2011.
Following the U.S.-led invasion in 2003, all Iraqi revenues from export sales of petroleum, petroleum products and natural gas were deposited into the Development Fund for Iraq (DFI), an account held by the Central Bank of Iraq (CBI) at the Federal Reserve Bank of New York. Expenditures from the DFI are carried out via checks issued by the CBI upon instruction from the Iraqi Ministry of Finance on the basis of the budget.
The DFI is governed by UNSCR 1483 of 2003 and protected from creditors by a U.S. executive order. The DFI is managed by the Iraqi Ministry of Finance and administered by the CBI. Until June 2011, it was monitored and audited by the International Monitoring and Advisory Board (IAMB) which includes, among others, IMF and World Bank controllers. IAMB-appointed international accounting firm Ernst & Young were to audit the DFI on an annual basis. The DFI expired in June 2011 and the IAMB was replaced by the Iraqi-led Committee of Financial Experts (COFE). This new leadership plans to continue the work of the IAMB and to establish a successor to the DFI in order to promote transparency and deter corruption.
The budget, which is passed as a law by parliament, is drafted by the Ministry of Finance in consultation with other ministries, governorates and the regional government. The investment (capital) budget is drafted with the assistance of the Ministry of Planning.
Budgets for 2005-2011 included a negotiated lump sum allocation of 17 percent for Kurdistan, after the deduction of sovereign and so-called governing expenses, which include Ministry of Defense, the president and prime minister's office, and the Ministry of Foreign Affairs, as well as the Public Distribution System (food-basket) and any other in-kind transfers to the region.
Other governorates receive investment allocations, which totaled $4 billion for all governorates in the 2008 budget. In the 2011 budget, capital investment increased to $25.7 billion. The 2011 budget bases provincial allocations on population, even though the country's official census has been delayed three times due to political tensions.
The KRG has not accounted for the spending of its allocation over the past 13 years (from 1995-2003 the KRG received an allocation of 13 percent of all oil revenues after deductions for compensation and UN expenses).
The 2011 budget also calls for a no confidence vote for any minister who does not accomplish at least 75 percent of the projects for which funds were allocated. In recent years, the audit board has begun to review accounts in order to recover these unused funds and return them to the treasury.
Emerging Legal Framework for Hydrocarbon Resources
The Iraqi constitution declares oil to be the property of the Iraqi people in all the regions and provinces. It calls for the sharing of revenues according to population. The constitution is not clear on the specific authority over the management and regulation of the oil sector. In general, however, the constitution envisions a high degree of decentralization.
Iraq has been developing a new legal framework for the management of its hydrocarbon resources since 2005. But negotiations between the national Ministry of Oil and the KRG have not fully resolved fundamental disagreements over the distribution of power between the central government and the regions, and the role of the private sector.
While the Ministry of Oil has sought to establish continuity with the national industry model, the KRG has argued for a highly decentralized and deregulated system, blaming centralization for inefficiency, abuse and the repression that befell the Kurds at the hands of successive oil-financed Baghdad regimes.
The two parties eventually reached a compromise, with plans to establish a separate transparent legal mechanism for revenue sharing in the financial resource law, reassuring Kurdistan and other regions of a fair share of revenues, while allowing for a separate hydrocarbon law providing for a more coherent management structure.
The legislation was planned as a package of four laws, including agreements to establish the Iraqi National Oil Company (INOC) and restructure the Ministry of Oil. Initial compromises collapsed in early 2007, and the KRG adopted its own Oil and Gas Act and signed some 40 contracts with independent international oil companies (in a process that was neither competitive nor transparent, and without an agreed development strategy).
The KRG continued to negotiate new deals as final agreement on a national hydrocarbon law remained out of reach. As of 2011, 40 oil companies have a presence in Kurdistan. In January 2011, likely spurred by high oil prices, the Iraqi central government and KRG reached a deal to allow exports from the Kurdish region. The central government has paid out reimbursements to the KRG, based on independently audited statements. There are still several areas of disagreement, including the status of the previously negotiated contracts, but this agreement will likely pave the way for future progress on these issues and could lead to resolution of the hydrocarbon law.
Output in Kurdistan has increased to approximately 181,000 bbl/day, as of 2011. The region has also begun to export oil through the northern pipeline to Turkey.
Production in Kirkuk, which is outside the official remit of the KRG, is carried out by the North Oil Company on behalf of the Ministry of Oil. Kirkuk is a disputed territory, which the KRG seeks to annex. Under previous agreements the main Kirkuk fields were supposed to be managed by INOC. It is not clear what the intentions for them are now considering the collapse of the deal. Recently the KRG awarded a contract for part of the Kirkuk field to its own oil company, which had previously been developed by the oil ministry.
