The death of Iranian commander Qasim Suleimani on January 3rd in an American drone strike has roiled Iran and Iraq. It has also jeopardized the future of Iraq’s oil production growth.
Heightened security risks in the wake of Suleimani’s death could persuade the international oil companies active in Iraq — like Exxon Mobil or BP — that investing in infrastructure projects that are key to Iraq’s oil production ambitions isn’t worth it. Iraq’s fiscal terms were already viewed as notoriously tough inside the oil industry, and routine maintenance at the country’s aging oil fields is only getting harder. Now, greater odds that Iran will lash out through its powerful militia proxies in Iraq to stoke unrest could be the last straw.
On top of that, the prospect of a withdrawal of US troops raises the stakes. Iraq’s parliament voted shortly after the drone strike to expel US troops, calling the attack a violation of their sovereignty since it happened on Iraqi soil. A withdrawal remains highly questionable, since many Sunni and Kurdish members of parliament didn’t participate in the vote and US president Donald Trump has threatened sanctions if Iraq follows through. Still, it means that Iranian counter-measures might enjoy greater impunity. It also increases the odds of a resurgence of Islamic State militants in areas where oil drilling or refining is done.
None of this is to oil companies’ liking. As they survey an imperilled Iraq, they might step back from crucial investments in infrastructure like the Common Seawater Supply Project (CSSP), a multi-billion dollar scheme to extract more crude oil from aging fields by pumping seawater into them. Experts say the CSSP is vital to Iraq’s plans to lift oil production above the current 4.5 million barrels per day. But now oil companies might be asking themselves: is it worth it?
According to Paul Stevens at Chatham House, “It is now very unlikely that the crucial ‘common seawater supply project’ being run by Exxon – essential for expanding production capacity – will go ahead in the near future.”
Looking to Iraq
In the wake of Suleimani’s death, analysts raised and then quickly dismissed the possibility that Iran might close the Strait of Hormuz, a pivotal chokepoint for the passage of oil tankers, or perhaps intensify its proxy campaigns in Yemen or Lebanon. Those options risk inviting a military response from the US or allies like Saudi Arabia or Israel, although many believe Iran could still carry out attacks against individual oil products tankers in the Strait of Hormuz, echoing tactics that foreign intelligence say it undertook last year.
Instead, all eyes have turned to Iraq. For Tehran, provocation in Iraq is the most feasible way to intensify a proxy campaign against the US. Iran’s foreign minister said it had “concluded” its retaliation against the US after firing missiles at a US airbase in Iraq, but experts are unconvinced, saying indirect counter-measures are likely. “Iraq is the most cost-effective strategy to expand control and continue its ‘shadow war’ with the US given its intelligence footprint and political assets,” according to Ahmad Mehdi of the Oxford Institute for Energy Studies (OIES) earlier this week. “Tehran has every interest to whip up anti-US sentiment and further de-legitimise the protest movement in a bid to strengthen its hand.”
Iran doesn’t have to take any additional actions to damage Iraq’s future oil production. The mere prospect of them has already proved damaging, since it dampens investors’ enthusiasm.
“In the medium term, heightened security concerns might make it more difficult for Iraq to build production capacity,” the International Energy Agency (IEA) said this week, becoming the most influential of several groups saying much the same. Rystad Energy’s Matthew Fitzsimmons noted that “any spending plans in Iraq are likely to be under review given the current circumstances.” And Paul Stevens, in a commentary for Chatham House, wrote that “Iraq’s future production has already been damaged as international oil companies are withdrawing staff for safety reasons” — with worse to come.
No country wants to hear that foreign investors are losing interest. Iraq may be especially displeased. Its oil production of around 4.5 million barrels a day will soon hit a ceiling of around 5 million barrels a day, with more growth achievable only by installing big-budget infrastructure projects that center on pipeline capacity and water injection into oil fields to boost reservoir pressure.
There are some interim steps that Iraq could take, such as increasing the use of industrial water and water recycling, or expanding capacity at something called the Qarmat Ali Water Treatment facility, according to Ahmad Mehdi of OIES. But neither is a substitute for the big projects that Iraq really needs.
Several months before the January 3rd drone strike, the International Energy Agency (IEA) had already revised down its forecast for future Iraqi oil production, from 7.5 down to 6 million barrels per day by 2030. The heightened security risks and Iraq’s increased anti-American may well force the IEA to push that forecast down further.
“Iraq’s long-term supply outlook may need to be revised,” according to Mehdi.
How a stalled “megaproject” illustrates Iraq’s oil growth dilemma
How do you pipe millions of barrels of seawater a day across the arid plains of southern Iraq and down into massive underground oil reservoirs hundreds of miles away? It is a question for engineers that has fallen to bureaucrats and oil executives.
In 2009 Iraq hatched plans to build what would become known as the Common Seawater Supply Project (CSSP), a “megaproject” that aims to inject seawater into the country’s oil fields in order to force out more crude oil. At the time, Iraq had high hopes for its oil sector, seeking to raise production to 12 million barrels per day by 2018. At that level of output, Iraq would have nearly overtaken the US and Saudi Arabia’s as the world’s largest oil producer.
The delays began almost immediately. Awarded to Exxon Mobil in 2010, the following year Iraq suspended the project contract after Exxon signed an oil extraction deal with Iraq’s Kurdish rivals to the north. The contract then went to Iraq’s state-owned South Oil Company, which began studying where to lay pipelines and build water treatment facilities, but little has come of the plans. Exxon Mobil reportedly re-entered the project in 2015, but progress has remained scant. By late 2015, the time of a Wall Street Journal account of the CSSP’s history to date, the scheme was seven years behind schedule and expected to be finished by 2020 at the earliest. By all accounts, it still has not limped out of the planning stage.
Disputes over the commercial terms of the CSSP lie at the heart of it glacial progress. For international oil companies like Exxon Mobil or BP, which operates Iraq’s largest field, Rumaila, Iraq has long been a notoriously low-reward investment environment. Companies flocked to Iraq in the 2000s, eager to grab a piece of Iraq’s relatively untapped oil fields, and in exchange they accepted low “per-barrel remuneration fees.” But as the fields surrendered more of their crude, that thinking began to change, and oil companies have started pushing back. One company — Shell — already decamped in mid-2018, while others are reportedly jumpy.
Concerns over corruption have become more central. In July, OilPrice.com published lengthy comments from a “senior oil and gas industry” source who suggested that Exxon was worried it would need to strain just to do things legally. “A lot of what needs to happen in order to make this project [CSSP] progress properly will be in the hands of people who are less concerned about it working than about what they can personally pocket to allow it to occur,” the source said. Transparency International ranks Iraq 169th out of 180 countries in its index of perceived corruption.
Other reasons Iraq might struggle to hold onto its investors have little to do with Iraq itself. After the price crash of 2014, oil companies got lean. They brought costs down and honed their skills on the shale fields of the US. In doing so, they eroded Iraq’s comparative advantage, which is the inexpensive nature of its low-lying crude reserves. All the while, new drilling opportunities were opening up elsewhere. An expanding frontier of shale oil drilling opportunities in the US beckons investors with short life-cycle projects, while massive new discoveries in places like Guyana have satiated much demand for new oil sources. Now, investors are returning to places like Angola as it and other producers bow to a new era of lower oil prices by relaxing their fiscal terms.
As the world’s sixth largest crude oil producer by daily volume, Iraq retains great influence in the energy world. Increasingly, it may need to make do.