Iraq Oil and US Influence

‘US wants to use the Iraqi government as carrot and stick against Kurds’

Published time: May 07, 2015 14:38
Kurdish Peshmerga fighters. (Reuters/Azad Lashkari)

Kurdish Peshmerga fighters. (Reuters/Azad Lashkari)

Providing Kurds with weapons through the Iraqi central government lets the US maintain its influence over it while direct weapon supplies to the Kurds serves none of the US strategic interests, former US diplomat Peter Mark Van Buren told RT.

US senators are pushing for a bill allowing direct military aid to the Iraqi Kurds fighting the Islamic State terrorists. The bill has been sharply criticized by the Iraqi government.

RT: We've heard that Baghdad is against this bill. Why would the US risk losing the support of the Iraqi government?

Peter Mark Van Buren: It’s important to understand that this bill is being put forward by a select group of individuals in the US Congress, not by the US government. The White House obviously opposes it and the chances of this bill changing any American policy on the ground are exactly zero. The US continues to funnel the weaponry to the Kurds through the Baghdad central government largely to maintain its influence over that central government, and to be able to use the central government as a bit of a carrot and stick against the Kurds. There is nothing in America’s broader strategic interest that would be served by directly supplying weapons and I don’t think that’s what you are going to see happen.

RT: Are you surprised that we haven’t heard any sort of words from the US government reassuring the Iraqi leadership because clearly they are concerned?

PB: I think Obama has once again found himself in between a rock and a hard place which appears to almost define American policy in Iraq and in the greater Middle East these days. He is facing increasing criticism from the right in the US, particularly two core sponsors of the bill - Rand Paul and Marco Rubio, both of whom are Republican presidential candidates - are using the issue to picket Obama’s alleged weakness. So he’s got to be careful what he says but I think at the end of the day what is going to matter is what he does and that is going to be no substantive change.

RT: The Kurdish leader also said that Iraqi Kurds will hold a referendum on independence. What are your thoughts on that because presumably that could be extremely disruptive for Iraq and also the wider region?

PB: Absolutely, it would be inflammatory to hold such a referendum particularly as the Islamic State is still in some form of disillusion. The Kurds were careful to say that once the Islamic State is defeated, they’re going to hold that referendum. And of course, the defeat of the IS can be defined by a number of people in a number of ways. Essentially, what you’ve got is the Kurds arguing for a little more room in terms of their future independence, a little more muscle in their relationship with the US. These often times apocalyptic statements that the sides make are really part of this negotiating process. The US is going to have to give a little towards Kurdish independence, as will the Baghdad central government, but not very much. And the way things are done in that region - you start off with these big statements and then negotiate yourself on the details.

RT: There hasn’t been any public statement from the US concerning the possible Kurdish independence, has there?

PB: I haven’t heard any statements and it’s a little bit surprising that the White House hasn’t at least confirmed earlier statements about Kurdish independence. My belief - the US has some official standing policy that’s a bit vague but essentially says “not right now, people”. It’s surprising that they haven’t confirmed it. But again with the Kurdish leader in town and the Republican presidential candidates barking at his heels Obama may be waiting a little bit in order to say something about that. This is largely about politics in Iraq and politics in Washington - and very little about weapons in the Middle East.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.


American and Israeli military advisors were arrested while aiding Islamic State terrorists in Iraq.

Iraqi counter-terrorism forces arrested four foreign military advisors from the United States and Israel who were aiding the Islamic State, Iranian Tasnim News Agency reports.

Three of the arrested military advisors are dual citizens of the United States and Israel, while the fourth advisor is from a Persian Gulf country, Iraq’s Sarma News Agency said.

The foreign military advisors were captured in a headquarters, from where the Islamic State organized its military operations in Iraq’s Northern Province of Nineveh.

During the arrest, a number of other Islamic State fighters have been killed. The detained foreign advisors have now been transferred to Baghdad.


Iraqi Oil: Resource Curse or Glorious Blessing?

Posted on 31 August 2012. Tags:

Iraqi Oil: Resource Curse or Glorious Blessing?

Our Expert Blogger Ahmed Mousa Jiyad talks to Robert Tollast about Iraq’s energy revolution.

RT: The involvement of major US IOC’s such as Exxon and Chevron in Iraqi Kurdistan has sparked a war of words between Baghdad and Erbil. Possibly concerned about a breakdown in relations between the KRG and Baghdad, the US State Department has warned US IOC’s to be cautious, as a US State Department spokesperson recently said:

We speak about it in Iraq. With regard to our own companies, we continue to tell them that signing contracts for oil exploration or production with any region of Iraq without approval from the federal Iraqi authorities exposes them to potential legal risk, and we continue to tell them – obviously, they’ll make their own business decisions, but unless and until we have federal legislation in Iraq governing these things, something that we’ve been urging, that there are risks for them. So that’s our message to our companies.

This has provoked a furious response from Kurdistan’s Minister for Natural Resources, Ashti Hawrami. Is it correct to say that US IOC’s should pay more attention to Iraqi politics and be a lot more careful?

AMJ- This question covers a plethora of issues.Firstly, it is my humble view that all IOCs should be careful and refrain from getting involved in the internal politics of any country, especially Iraq, and this is particularly true for IOCs with an unfavourable image in the national memory of Iraqis. They are oil companies and they should work as operators to develop the upstream petroleum sector as stipulated in their related service contracts, and thus should not assume any political or diplomatic function- it is not their job to do so. Politics should not be their preoccupation especially when their involvement in domestic politics will add more “fuel on the fire,” to borrow the title of an excellent book by Greg Muttitt.

Second, there is nothing new in the above position of the American administration on the issue under discussion. This citation reconfirms the content of a letter from the American President to Mr. al-Maliki answering the request of the latter for intervention in the ExxonMobil case with the KRG. However, misquotation, misinterpretation and different interpretations become probable depending on who reads this statement, how and why; and this applies to both sides of the isle. Nevertheless, this does not change the fact that production sharing contracts signed by IOCs with the KRG carry serious and daunting legal risks and face very serious uncertainties.

Third, with regards to ExxonMobil I believe the company might have made a grave error of judgement. The views expressed by my contacts among many Iraqi and non-Iraqi professionals suggest that ExxonMobil acted probably out of arrogance, short-sightedness, a misreading of Iraqi national memory and a disrespect for sovereignty with a covert and overt agenda.

We have to remember that ExxonMobil (along with Shell) did not win West Qurna 1 (giant Iraqi oil field- WQ1) during the first bidding round held in June 2009. It did so only after its competitor (Russia’s Lukoil) announced its decision to accept the ministry of oil’s remuneration fees of $1.9/barrel in October 2009. Then and only then ExxonMobil acted quickly by accepting the same term, which it refused in June, and proposed a higher production plateau target or PPT of 2.350 million barrels a day (mbd.) The ministry favoured ExxonMobil over Lukoil!

Moreover, when the contract for WQ1 was finalised, ExxonMobil and Shell were the first IOCs who benefitted from the “first right” provision in the service contract by including the discovered, undeveloped formations of Yamama, Khasib, S’adi and a few smaller reservoirs to their contract. This had added 0.5 mbd, for a $2/b remuneration fee (RF) bringing WQ1 PPT to 2.850 mbd with a RF weighted average of $1.92/b. Finally, the Ministry favoured ExxonMobil to lead the project for the Common Seawater Supply Facility (CSSF), for the water injection needs of the southern oilfields.

The ExxonMobil’ WQ1 contract says clearly that  the “Iraqi Government has sole right to explore, develop, extract, exploit and utilize such natural resource.” The said contract is governed by the “Law,” broadly defined to mean “any constitution, law, decree, resolution, statute, ordinance, rule, directive, order, treaty, code or regulation and any injunction or final non-appealable judgment, as adopted, enacted, issued, promulgated or ratified by the Republic of Iraq.” Finally, credible senior source assets, “Before they signed the contract [with KRG], and after they signed the contract, (Exxon) received a letter from the prime minister and from the minister of oil telling them that signing contracts without the approval of the federal government is a breach of their contract for West Qurna Phase 1.”

Obviously, ExxonMobil disregards all the above and thus many inside and outside the ministry who favoured ExxonMobil must have felt betrayed by this company when it signed the KRG deals, and even provoked to know that some of the blocks are within the so-called “disputed areas,” which is a very sensitive issue between the federal and KR governments.

So far ExxonMobil have been excluded from participating in the fourth bid rounds of 30 May 2012 (which could be a non-issue for ExxonMobil anyway) and removed from the CSSF project. But many in the country are forcefully calling the government to take a tougher and more decisive stand against the company on three matters: 1-terminate their interest in WQ1; 2-remove it from the state oil marketing company’s buyers list of Iraqi crude, and 3, blacklist the company from any future deals within and outside the petroleum sector. These measures require thorough and careful consideration. However, the first matter could eventually be settled through international arbitration. The second could be done by a gradual monthly cutting-off in crude sales to arrive at zero sales within a specified period. But this measure has to be applied to other blacklisted companies such as SK Energy (of South Korea), Spanish Repsol and of course Total and Gazprom. The longer the list of blacklisted companies the more difficult it becomes for Baghdad to pursue this option. The third measure has already been implemented and could be implemented immediately.

As for Chevron, the company was unsuccessful in securing any deal out of the four bid rounds. Also, its talks with the ministry to develop the giant Nassiriya oil field in southern Iraq had obviously failed. All the government could do is to apply the last two measures mentioned above for ExxonMobil.Finally, while we see the role of the American IOCs decline in the Iraqi petroleum sector (due to their own mistakes)  the Russians (except Gazprom) and Chinese companies are consolidating theirs.

RT: Here are two views of Hussein al-Shahristani:

1) He auctioned off Iraq’s huge oil fields too quickly, and should have been tougher when bargaining with the International Oil Companies, so Iraq got a bad deal. Iraq did not need international companies to develop its oil fields, except maybe some service contracts.

2) He acted quickly at a time when politics in Iraq was moving very slowly. Iraq could not spend years debating what to do about the future of its oil industry, because then it would be too late. Iraq has benefited from the international companies. Do you agree with view 1 or 2, or is the answer somewhere in the middle?

AMJ- As a policy I usually do not address persons and personalities but focus my attention on issues, policies and actions. So, let me elaborate on two main issues pertaining to your question.
First, the “big push” strategy. Iraq, through four bid rounds and one direct deal (for AlAhdab oilfield), signed 19 service contracts comprising 21 gas and oil fields and exploration blocks. The bid rounds took place between June 2009 and May 2012. These contracts cover almost 60% of Iraq’s proven reserves, and would, (if fully implemented) bring total oil production to 12.5 mbd by 2017, and naturally more associated gas in addition to free gas. The time scale and pace outlined above was unprecedented in the history of the world’s oil industry, and has no precedent in developing countries.

Many, (including myself) had questioned the feasibility, sustainability and desirability of such a big push strategy, and there was much analysis, debate and publication on this issue.  In fact, even the Ministry of Oil in 2008 (MoO) was aiming at a total production capacity of 4.5 mbd by 2013 increasing to 6 mbd within 10 years. That level of total production capacity was endorsed by the Baghdad Symposium for Reviewing Iraq Oil Policy in February 2009 as the MoO 10 year plan to achieve 6mbd by 2019. Instead of adopting a gradual approach based on the careful prioritisation and sequencing of developing the oilfields according to economically justified premises linked to sustainable development requirements, MoO opted for a fast tempo big push grandiose strategy by offering and contracting all of Iraq’s prized oilfields to IOCs. It was only when the IOCs inflated the plateau targets for the oilfields during the June 2009 bid round the euphoria of 12.5 mbd threshold began to surface and became a sacrosanct target for some inside and outside the ministry.But MoO and the government are now more receptive to revising the plateau targets, especially after a thorough study partially financed by the Word Bank drew similar conclusions to those of many Iraqi oil professionals. These experts, along with the suggestions of the forthcoming National Energy Strategy, suggested a lower production level was more realistic.

Accordingly, three main parameters would be revised compared with production envisaged under the signed contracts: i- Lower plateau target (probably to a maximum of 9 mbd); ii- a longer development period (to be completed in 2020 instead of 2017 for the major oilfields of bid round one); and iii- longer plateau production period (longer than 7 years).

Before launching the first bid rounds there were other options and, later on, many opposed this big push strategy. However, since the concluded contracts are already implemented, most of the attention is now rightly directed toward “damage limitation” to ensure compliance with the Constitutional principle of the “Best interests of the Iraqi People.”

This has two implications: the first is to focus attention on concluded contracts to safeguard Iraqi interests, and thus it is highly advisable to have moratorium on new contracting and bidding rounds until at least the oilfields offered under round one begin plateau production period. The second is to make necessary preparations for revising, amending and thus re-negotiating signed contracts. Both implications are formidable tasks, and this brings us to the second issue: terms and conditions

All concluded deals are service contracts based on dollar denominated Remuneration Fees per barrel of oil/equivalent. Factoring in corporate income tax, the share of the Iraqi State partner and the R-factor, Iraq gets back 51.25% of every dollar paid in remuneration fees. So, all windfall (or economic rent resulting from oil prices) belongs to Iraq only and is not shared with the IOCs. This is not the case with KRG contracts, and this represents significant financial advantages for Iraq.

But service contracts could prompt IOCs to be less cost-conscious. Actually, this was manifested in increasing complaints that began to surface on IOCs tendency for “gold-plating” and inflating costs unreasonably. The signed contracts have elaborated decision making, accounting and auditing protocols and procedures to theoretically provide control on cost matters. However, the ministry and the contracted state Regional Oil Companies (ROCs) suffer from serious human resource and skill capacity gaps, which must be addressed by a variety of measures. It is worth mentioning in this regard that the contracts provide a provision to establish a Training, Technology and Scholarship Fund-TTSF, which generates annual income of $62.2 million during the duration of the contracts that must be used to bridge these gaps.

As part of the learning process the Ministry has introduced, in the model contract for bid round four, a modality to counter gold-plating and cost inflating. This modality applies to the four concluding contracts of the exploration blocks, and for any future contracts. However, if previous contracts are renegotiated then this modality should be on the table.

In conclusion, considering other fiscal conditions of the service contracts I believe Iraq has managed to get good deals. As mentioned above, re-negotiating these contracts might eradicate and compromise Iraqi interests. That would be a high political price for the ministry and the government to accept.

RT: Sudan and South Sudan are two parts of the world who fought each other for so long that by the time the UN peace process took effect, Sudan was one of the poorest nations in the world. Despite a long ceasefire, oil revenues remain a source of tension, but some political progress was made recently. Do you think that Iraqi politicians will ever finalise a proper oil law for Iraq accepted by all Iraqis (unlike Article 111 of the Iraqi constitution) and do you think the absence of such a law creates the risk of more conflict in Iraq?

AMJ- Let us leave the Sudan analogy, though I was working in Sudan when the peace agreement was signed, and focus our attention to the Iraqi Federal Oil and Gas Law-FOGL, which is a very complex and tenacious issue for many reasons.First, there are many versions of FOGL: four pre July 2011 and two post that date. The differences between these versions are very substantive in terms of content, coherence, functionality and implication. But when people refer to FOGL they do not state which version, what issues and why.

Secondly, all these versions were formulated in February 2007 in draft form. But between that date and today, many serious developments took place rendering that formulation obsolete, overtaken by the crisis and dysfunction within Iraq.  As it is known, the ministry of oil signed 19 service contracts, while the KRG signed 48 production sharing contracts, covering most of Iraq’s highly prized fields and many of the exploration blocks (in RKG). Provisions of these concluded contracts deviate seriously from those envisaged in 2007. Therefore, would these contracts be revised to be streamlined with the 2007 FOGL, or would that version have to be radically redrafted to accommodate the concluded contracts, assuming mutual recognition of these contracts by both governments- the federal and KR? In this regard there are formidable legal, constitutional and political hurdles making it almost impossible to adopt, let alone implement the FOGL of 2007 (in any version.)

Third, the text of FOGL implies the enactment of many other laws, and thus creating some sort of “organic linkage” between these laws: Revenue sharing law, INOC law, MoO Law, Revenue Commission Law, Oil Fund/Future Fund law. Such linkage implies “all-or-nothing,” and thus makes it unfeasible to promulgate any of them. Therefore, such formulation was absolutely unnecessary, legally and constitutionally impermissible, and structurally incorrect and inconsistent.

Fourth, the text of FOGL is full of ambiguities pertaining to authorities, functions, procedures the and modus operandi of many entities mentioned in the law, particularly those related to the federal oil and gas council and jurisdictions. Adding more serious ambiguities to those of the Constitution (as already admitted by many within the executive, legislative and judicial branches of government and professional community) would render FOGL dysfunctional. The law is supposed to address the ambiguities of the constitution, not to create even more. But the leading politicians interpret the constitution differently and they seem to perceive FOGL as a component of the “political horse-trading” instead of a“legal” instrument. Therefore, unless the ambiguities of the constitution are resolved the chances of passing a functional FOGL are highly unlikely.

RT: You were a senior economist in Iraq with the MoO and INOC and chief expert with Ministry of Trade and the Council of Ministers until July 1988 when you left to the US as Visiting Fellow at Fletcher School of Law (of Tufts and Harvard universities). At the time, the Iran-Iraq war had already cost Iraq dearly in terms of life lost and economic damage. Two years later, when you left Iraq, Saddam’s invasion of Kuwait led to the worst sanctions imposed on any nation in history. All of these developments seriously damaged Iraq’s energy sector- as well as almost everything else in Iraq. However, some have suggested that after 2003, the Iraqi government should have kept control of the oil sector and that foreign involvement was too large. These people argue that Iraq could have rebuilt its energy sector without so much foreign help. Is this idea a fantasy, or do you think Iraq had a chance to rebuild the energy sector by itself?

AMJ- I personally do not think it was or is feasible for Iraq to “rebuild the energy sector by itself,” as you put it.  I will deal first with the involvement of the IOCs and then discuss the issue of “control over the oil sector.”  The Ministry of Oil concluded between 2004 and 2008 some 40 memorandums of cooperation- MoCs with many IOCs to provide support in three major activities: joint technical studies, training and development, and technical consultancy. IOCs covered all costs related to these MoCs.

MoCs had helped in the formulation of the Technical Support Contracts-TSCs, which were envisaged for implementation by the IOCs during two years 2008 and 2009. The focus of the TSCs was firstly to address the production decline of the major oilfields (Rumaila north and south, Zubair, West Qurna 1, Missan fields and Kirkuk), and then increase it by 400-500 thousand barrels per day-kdb. The Iraqi side pays for both the investment requirements and the IOC fees incurred to achieve that target.

The negotiation of the TSCs lasted from the last quarter of 2007 to mid-2008 without conclusion due to key differences on major issues. MoO then reduced the duration of the TSCs from two to one year since (at the time) they would overlap with the timing of the first bid round. IOCs refused the one year’ period as being too short for such contracts. Accordingly, MoO abandoned the whole idea to focus on the preparations for the bidding round.

Many within Iraqi petroleum industry proposed a gradual increase in production capacity through these TSCs but with a longer period (say 5 years). So, even that modest increase of 400-500 kdb was envisaged to be realized through the involvement of the IOCs. Therefore, any substantive increase in the country’s production and export capacities requires IOC contribution in one form or the other: technical support contracts or the concluded long-term service contracts.  The problem is, therefore, not related to involvement of the IOCs but to the scale, pace and terms and conditions of such contracts, as was discussed in answering Q2.

Regarding the issue of “control over the oil sector,” I have to emphasise that IOCs under the service contracts have no legal claim to“sharing” or “entitlement”  on the produced petroleum or the reserves.
Also there is a need to differentiate between “operational” and “sovereign” controls on the upstream petroleum as stipulated in the concluded service contracts by the ministry of oil. Most on-field operational activities of the contracted field/ exploration block are managed by the Joint Management Committee- the JMC, where both the Iraqi side and the IOCs are represented and the decisions are taken by consensus. This implies equal control for both contracting parties.

Approval of awards for sub-contractors and supplies depend on their value. Some have to be approved by JMC and the ones with higher value have to be approved by the Iraqi ROC alone.
All development plans (initial and final) with their annual budgets and programmes have to be approved by the ROC and the ministry.

Finally, decisions on actual production levels remain a sovereign matter. However, since the service contracts are based on Take or Pay-ToP principle, IOCs would be compensated for any production curtailment, provided that such curtailment is applied pari passu to all producing fields and involved IOCs.

The above would indicate, theoretically, that Iraq has in fact effective control under these service contracts. However, the degree of effectiveness depends on the professional competence of the Iraqis on different levels of decision making from the related field to the ministry. Also, the existence of good governance modalities is critical in this regard.

RT: Nouri al-Maliki recently talked to delegates from the World Bank about the need to diversify Iraq’s economy and not become dependant on oil revenues. So far, there is a variety of economic activity in Iraq from new car and cement factories to strawberry farms. But this represents only a very small part Iraq’s economy, which exports very little except oil and gas. From your experience in the petroleum industry do you think Iraq can escape the “oil curse” of depending too much on petrodollars?

AMJ- This is a broad and complex question that needs lengthy and elaborated answer, but I will be very brief. Firstly, Structural oil dependency and its possible entrenchment. Oil has and probably will continue to occupy a critical role in all aspects of the Iraqi national economy. This is manifested in the contribution of the oil producing (upstream) sector in the main macroeconomic indicators such as gross domestic product (GDP), ordinary budget, investment budget, trade balance, export earnings, balance of payments and government revenues, among others.

However, previous economic plans up to the current one (2010-14) aimed at reducing dependency on oil by developing the contribution of other non-oil sectors have become such a feature of Iraqi politics as to become a cliché. The outcome has been disappointing and very marginal. This would indicate that development efforts for nearly six decades have failed not only to deliver sustainable development but have consequently made Iraq’s dependence on oil irreversible, unless serious re-thinking and concerted action is taken.

The economic degeneration which the country had gone through since the early 80s would only deepen the dependency even further, especially with the current drive to adopt the “big-push” option in the development of oil production, as mentioned above. Petroleum production is generally characterized with the existence of an economic rent, generated from international oil prices. A fundamental feature of economic rent is that it is generated exogenously from the outside world and accrued directly to the government, thus creating a condition of a renter State. Hence, economic rent has, and could generate, substantial and deep-rooted impacts on the State and its economic, social and political performance and behavior. In economic and developmental terminologies and discourse, economic rent is usually associated with three known concepts/ theses and their interrelationships which have, over the years, been the focus of debate and analysis, these are: absorptive capacity, Dutch disease and resource curse. The Iraqi economy suffers from all them, and what is needed are concerted well planned policies and clear strategies not empty rhetoric, or promises.

Secondly, challenges and scenarios. Iraq will face three challenges: first, installing the contracted (even if revised) upstream petroleum production and export capacity; second, how to utilize these capacities in most optimised way and third, how to address the spending, investing and saving (SIS) dilemma to allocate generated export revenues within a vision of sustainable development. Considering the above, Iraq is bound to face many possible situations pertaining to its energy and development outlook over the duration of the concluded contracts. Accordingly, Iraqi decision makers should start from now to explore all possible situations regarding the targeted oil production and export capacity with a clear vision, functional mission and relevant action on one side, and preparing the needed coping strategies accordingly on the other. Four possible development scenarios could face Iraq, and are envisaged under High/Low Incremental Production Capacity Utilization within High/Low Global Demand for Oil.

Honeymoon situation. This scenario occurs when global demand for oil is high enough to allow Iraq utilise most if not all its available incremental production capacity. Such a market fundamentals driven situation implies high oil prices leading to higher oil export revenues. Hypothetically, this is a win-win situation by default and assumes global demand for oil exceeds available supplies with no significant spare capacity available, so the OPEC quota becomes redundant and irrelevant. This situation also implies a fast/high depletion of Iraq’s oil reserves.

Delicate balance: this situation is similar to the previous one but Iraq would be unable to utilise most of its available incremental production capacity for a variety of reasons such as OPEC quota etc. This remains to be a negotiated win-win situation since idle capacity could be compensated by higher oil prices to maintain remunerative oil export revenues. But again, idle capacity has its cost as well. The balance, or the trade-off, is therefore delicate because this situation implies a lower resource depletion rate, which is in Iraq’s favour and with higher prices and a good level of exports this would cushion the cost of idle capacity. But if Iraq insists on a higher utilisation of its production capacity, this could increase supply and might reduce prices and thus revenues, with faster resource depletion.  

Risky endeavours: when global oil demand is low so is the oil price and spare capacity is at its peak. If Iraq uses more of its incremental capacity, it would push oil prices downwards. So what it gains through higher production, it loses through lower prices, therefore this is a risky situation since it could lead to lower oil export revenues coupled with a high depletion of oil reserves.Lower oil prices with fixed remuneration fees per produced barrel lead to further decline in net export revenues in addition to faster resource depletion. Hence this is risky situation, which Iraq should avoid.

Nightmare: this is the worst case scenario characterised by low global demand for oil, lower prices and lower utilisation of incremental production capacity, leading to lower oil export revenues. Though this situation leads to lower resource depletion, the idle capacity has its own cost due to contractual obligations for paying remuneration fees for the idle capacity during such a situation. Maintaining an idle capacity could be very costly indeed. And if the capital investments have not been fully recovered then the obligation for their payment would aggravate the situation even further. Furthermore, when oil production capacity has forward, backward and horizontal linkages, such as associated gas-based power generation and petrochemical industries, then idle capacity could have very serious ramifications beyond the upstream sub-sector. This results in deepening the fiscal crisis of the state due to lower revenues, higher payment obligations and contraction in economic activities on a macroeconomic level.          

Third, Coping strategies. Each of the above possible situations is very complex and highly vulnerable to exogenous factors. The implications of each situation for Iraq are far-reaching in all directions- positive and negative, depending on the actual timing of their occurrence, the duration and magnitude of each situation, and the factors and conditions that led to such situations etc. Their occurrence and recurrence are possible but unpredictable; the actual timing could be anticipated with accurate information and sound analysis; the duration is not possible to measure beforehand though. With a prudent monitoring system in place, some indications and predictions could be made, and the same applies to the magnitude of each possible situation. Historically, and as evidenced by data and analysis, one would be safe to suggest that while each situation is possible as part of the cyclical nature of economic activities worldwide, it is less likely that a specific situation will last for the duration of the 20 years covered by these oil deals. Thus, Iraq could very well face all or any combination of these four possible situations during the timeframe of these oil contracts.

Therefore, Iraqi decision makers should start from now serious professional dialogue on these possible situations; the needed feasible policies to protect from and mitigate their highly probable effects; and the required institutional and frameworks responsible for formulating, implementing and assessing the policies and strategies. This entails debating, formulation and adopting a set of strategies to deal with each of these four eventualities. Flexibility, adaptability and continuous revision should be among the features of such strategies. This is essential since the probability of facing any of these possible scenarios could be high and unpredictable.


Finally, what should be highlighted at this juncture is that a detailed formulation of the necessary strategies, institutions and frameworks is obviously beyond the mandate and jurisdiction of the ministry of oil. These matters point to broader macroeconomic and development policies, which have to be taken at the highest level of decision-making in the country. Iraqi decision maker should not be reactive or adopt a fire-fighting approach by handling a situation when occurs. Instead they should be proactive and preparatory with high degree of readiness to manage any possible situation. Issues pertaining to good and effective governance, transparency and accountability are very significant and thus a related mechanism should be in place. Bridging skill and capacity gaps is critical and must be addressed seriously and effectively. The question, though, is whether the political climate and set-up would be mature enough to create an enabling environment to formulate, manage and execute such needed strategies. Iraq’s cooperating partners (on bilateral and multilateral levels) could make significant contributions in assisting the country to chart through the complexities of these possible scenarios.