Latent Potential of the Iraqi Energy Sector
The future of Iraq’s energy sector, much like its other sectors, is linked to a much-needed political and social transformation in Iraq that should address corruption, militias’ power, and political violence in general.
Iraq is one of the most important countries in terms of oil reserves and production, but it has failed in increasing its output in the past two decades. It is estimated that Iraq has 145 billion barrels of proven crude oil reserves, which is 17 percent of the Middle East’s total reserves and 8 percent of global reserves, making Iraqi reserves the fifth largest in the world. Iraq’s average output was roughly 4.4 million barrels per day (b/d) in 2013, and its production of oil grew only 300,000 b/d between 2013 and 2019. Despite optimistic statements by Iraq’s Oil Minister that the country would produce 8 million b/d by 2040, energy experts estimate that the country will only reach 5.74 million b/d.
This is not the first time that Iraq has fallen short of its ambitions of producing more oil. For instance, Iraq’s former oil minister announced that he would seek to increase Iraq’s oil exports to 10-12 million b/d in the future, a wildly unrealistic goal given Iraq’s endemic issues. One of the main reasons for Iraq’s inability to produce more oil is the lack of sufficient water for wells injection. Iraq will need an additional 3 million b/d of water injection into the reservoir at a time when the country already suffers from severe water shortages. This is, of course, combined with increased domestic consumption of oil which will affect Iraq’s level of exports.
Iraq’s natural gas reserves are also substantial, but ineptitude and negligence beset the development of natural gas production. It is estimated that Iraq possesses the world’s twelfth-largest natural gas reserves, with 132 trillion cubic feet. In 2019, Iraq produced 381.39 billion cubic feet, but consumed 702.76 billion cubic feet, creating a significant deficit and demand for imports. Natural gas production in Iraq is affected by flaring, the burning of associated gas from oil wells, and lacking the capacity to capture it. Iraq is one of the top seven countries in flaring associated gas; countries which together “produce 40% of the world’s oil each year, but account for roughly two-thirds (65%) of global gas flaring,” according to the World Bank. In fact, in 2017 Iraq flared nearly 629 billion cubic feet, making it only second to Russia. The rise in Iraqi oil production has corresponded with an increase in flaring uncaptured associated gas. Furthermore, the lack of investment in capturing associated gas or extracting natural gas has translated into growing imports of the commodity to operate power generators. This comes at a tremendous cost to Iraq. According to the country’s oil minister, Iraq pays $8 per British thermal unit (BTU) for Iranian natural gas, while producing it domestically could cost between $1.5 and $2 per BTU.
Besides Iraq’s large reserves of oil and gas, it is also endowed with tremendous potential for producing renewable energy. More than half of Iraq could rely on solar power, particularly the west and the south of the country which receive high solar radiation. As the electricity demand increases in tandem with the increase in population, solar power provides an advantage because of its cost-effectiveness and self-sufficiency. Iraq’s aim was to produce 2.24 GW of electricity generation from renewable energy in 2025, and that goal has increased to 7.5 GW by 2023. However, Iraq must overcome hurdles for future plans to succeed. Without a coherent solar policy and accompanying legal framework, Iraq will find it difficult to attract foreign investment in solar development, as investors will have to navigate through an intricate bureaucracy and overcome administrative obstacles. Moreover, successive governments have focused mostly on solar production without paying equal attention to distribution, transportation, and the collection of fees. As such, the government needs to rebuild its electricity infrastructure in order to gain the greatest value from its clean energy projects. In this sense, it is noteworthy that Iraq, according to its current Prime Minister, has spent more than $62 billion on electricity since 2003 without full restoration of the grid.
An Inhospitable Investment Environment
Iraq’s political divisions, social tensions, and widespread corruption have hampered the further development of the energy sector. The American invasion of Iraq in 2003 did remove a dictator after a decade of international sanctions that harmed the economy. That invasion, however, also led to persistent conflict that severely damaged Iraq’s business infrastructure. For foreign companies to invest in Iraq, they must find a stable investment environment that gives certainty. Iraq must also be a lucrative and durable market for these companies, meaning that Iraq must honor its financial agreements. Finally, Iraq’s infrastructure must be made available for exploration and investment. Unfortunately, Iraq lacks all of these factors, which has translated into a dearth of foreign investment. In fact, Iraq’s investment atmosphere has deteriorated; Shell, for example, sold its entire share in the West Qurna field, Exxon Mobile Corp also sold its 32.7 percent stake in the same field to Iraq Petroleum Company, and BP is looking to sell its assets because the investment environment in the country is unsuitable for large investments. Looking ahead, it is inconceivable that the energy sector in Iraq will witness a substantial change in the foreseeable future, despite ventures by some smaller companies.
Hopes were raised in Iraq after the government signed a deal that would supposedly reverse disinterest in Iraq’s energy sector, but the country’s chaotic political reality quickly stalled its implementation. The Iraqi government and French oil giant Total signed a deal to build four large energy projects in southern Iraq. Under the $27 billion contract, the French company would also build a $2 billion processing plant for gas produced in three fields. Other parts of the deal include the construction of a large 1 GW solar plant, a mechanism for injecting seawater into oil fields to boost production, and new developments designed to capture flared gas. Under the terms of the deal, Iraq received a multitude of benefits; it would increase its oil production, by far the country’s main source of revenue, and also boost natural gas production and solar energy capture. Consequently, according to Iraq’s oil minister, the deal is one of the most important infrastructure projects for Iraq in the past two decades. In spite of these clear benefits, domestic politics have once again interfered with the deal’s implementation. The two sides have been mired in disputes for months over concerns that a new Iraqi government formed after the country’s latest elections would scrap the deal. The converse fear – that a political deadlock would prevent the formation of any government, creating a hostile atmosphere for foreign investment – also raises concerns.
The future of Iraq’s energy sector, much like its other sectors, is linked to a much-needed political and social transformation in Iraq that should address corruption, militias’ power, and political violence in general. The development of Iraq’s energy sector is intrinsically linked to other structural factors that will take years or even decades to fully address. Unfortunately, the Iraqi politicians have not changed their conduct to suit the needs of the Iraqi people, and it is unlikely that Iraq’s untapped natural sources will begin to influence the global energy market as long as current negative conditions persist.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.