Iraq has abundant human and natural resources: a population of 30 million, the world's third-largest oil reserves, considerable gas reserves, and ample water resources. It attained the status of a middle-income country in the 1970s, developing good infrastructure and well-performing education and healthcare systems. However, over the past 25 years, dictatorship, wars, and international sanctions have undermined the country's institutions and crippled its economy.
The oil sector still dominates Iraq's economy, accounting for two-thirds of GDP and over 98 percent of exports and government's own revenues. Between 2004 and end 2007, oil production averaged at about 2 million barrels per day (mbpd), below government targets and below the pre-2003 levels. Oil production and export volumes have picked up as well during 2008, reaching record highs since 2004 of 2.4 mbpd and 1.9 mbpd respectively. This is mostly due to the recent security gains in Iraq.
Iraq has also undergone rapid political transition. A constitution was approved through public referendum in October 2005, followed by parliamentary elections in December 2005, and a constitutional government was appointed in May 2006. The current government - in power since 2006 - has moved to get key reforms back on track, and is working flat out to encourage much needed foreign direct investment. The highly insecure environment of the years 2005 - 2008, and the transitional nature of Iraq as a state and an economy have impeded reconstruction efforts, and the delivery of basic services. Iraq's abundant hydrocarbon and human resource base could be the engine for a remarkable economic diversification and revival if conditions in Iraq are conducive.
Although the first field development bid round was widely reported as a failure, the allocation of the super giant Rumalia Field, west of Basra was in itself a massive achievement. The Iraq Oil Ministry's award to BP and CNPC is of genuine global significance, and could see the Rumaila super-giant oil field become the second highest producer in the world, after the Ghawar field in Saudi Arabia. "BP and CNPC have targeted a production plateau of 2.85 million barrels per day (mmb/d) over the next six years - a level of growth from a single field which is almost unparalleled in the history of the oil industry," says Colin Lothian, Middle East upstream research analyst for Wood Mackenzie. Indeed, the largest fields, including West Qurna 2 (12.9 billion barrels), and Majnoon (12.58 billion barrels) have been awarded. If output targets from these two fields are achieved, they alone will bring an extra 2.6 million barrels of oil each day to the surface.
The BP led partnership on Rumalia is expected to invest over $20 billion alone over the course of its contract. If other supermajors are to achieve their production targets (the ramping up of production will be prolific over the coming three years), then foreign direct investment in the upstream business alone is likely to see that figure balloon by a factor of ten. However, much work beyond upstream field development must also be factored in if the oil produced can successfully find its way to market, according to Samuel Ciszuk, IHS Global Insight's Energy Analyst for the Middle East and North Africa. "Iraq has a huge problem with infrastructure bottlenecks. The pipeline system in Iraq is a shambles. In some places dilapidated, in other completely destroyed. On top of that the export facilities are in a bad state, and simply do not have the extra capacity to handle the millions of extra barrels of oil each day that the country has targeted for production in a relatively short timeframe," he says.
The Iraqi Oil Ministry has demanded, as part of the contract agreements that work progresses quickly. "Large incremental increases in output, initially from the southern fields such as Rumalia, West Qurna 1 will come within the next 36 months. Getting that extra oil to market is a massive challenge. If they are to come close we would need to see pipeline and terminal improvement contracts awarded this year," observes Ciszuk. On top of the physical export infrastructure work, many millions, possibly billions of dollars will also need to be spent on basic civil infrastructures such as housing, roads and power and water projects to support the hoards of workers needed to facilitate these massive projects.
The current planned investment figure is sufficient to dwarf what else will be going on throughout the region for the next ten years. However, the work outlined above may be just the tip of the iceberg for EPC firms and oilfield service providers. Much of the outlay we can safely expect in the coming decade is based on Iraq's estimated oil reserves today - but these may prove far short of the real resource wealth that is in place. "Exploration is Iraq hasn't really been going on in any meaningful way for the last 30 years. Deeper horizons haven't been investigated," says Ciszuk. Indeed, where supermajors have done work in Kuwait (where geophysical similarities are high), it has been proved there is a huge potential for even greater reserves in deeper terrain. "The general feeling is one of optimism regarding the fields being greater rather than smaller then currently thought," he adds.