x Abu Dhabi, UAESunday 23 July 2017

Iraq has the oil stores, but does it have the know-how?

In one dramatic press conference last week, Hussain al Shahristani, the Iraqi oil minister, unveiled almost as much new oil as the entire world uses in a year.

In one dramatic press conference, Hussain al Shahristani, the Iraqi oil minister, last week unveiled almost as much new oil as the entire world uses in a year.

By announcing that Iraq's proved reserves had jumped from 115 billion barrels to 143 billion, he effectively added two Algerias or four Norways to the oil world. But what is the real significance of this announcement? Everything and nothing.

Nothing, because oil in the ground is essentially useless. Neither markets nor OPEC will take account of these new reserves until Iraq backs up its impressive numbers with action. The contracts awarded to international oil companies such as Shell, BP, Malaysia's Petronas and the China National Petroleum Corporation (CNPC) add up to output of 12.5 million barrels per day within seven years, which would make Iraq the world's largest producer.

But seven years after the invasion, Iraq's output is still stagnant, and most analysts think Iraq will do well to get halfway towards its target. The well-documented security problems, although somewhat eased since the worst days of 2006 and 2007, have flared up again recently. The fields in the south, especially along the Iranian border, are littered with landmines and unexploded ordnance left over from previous wars.

Corruption, competing local and tribal authorities, and the continuing political vacuum are further obstacles. Some politicians are pledging reviews or even renegotiation of previously signed deals. If this happens, it is almost inconceivable that Iraq will secure such attractive agreements ever again. Dr Shahristani complained that "the Kurdish government did not supply us with the latest developments", a reminder that Baghdad's writ does not run in Erbil, and that a deal to export Kurdish oil and compensate the oil companies involved remains elusive.

And the sheer pace of the planned production build-up - faster than any executed in history - will run into many logistical hurdles. The oil-producing regions need new export pipelines and terminals, water injection facilities, workers' accommodation, roads, harbours, airports, power stations, telecommunications and a modern banking system.

But the announcement means everything: for long-term global oil supplies, and for Iraq's ability to equal or overtake fellow OPEC heavyweights.

As Phil Flynn, the PFG Best analyst, said: "Oh well, another setback for peak oil theorists." The increased reserves further undermine widespread claims that we are approaching geological limits to increasing oil production. With aspersions often cast on the reliability of OPEC's official reserves figures, Dr Shahristani was keen to point out: "These aren't random figures, rather they were the results of deep surveys carried out by the ministry's oil reservoir company and international companies which signed contracts with Iraq."

The new numbers are probably now the best attested of any major OPEC nation. By analogy, they also suggest that, when the oil reserves of Kuwait, Saudi Arabia and the UAE jumped sharply in the 1980s, these countries were correcting past conservatism and allowing for technological progress, more than exaggerating their hoard for political ends. Even Iraq's latest reserves figure is conservative, implying that barely a quarter of the oil under its territory is considered recoverable. Boosting this to an industry standard 40 per cent - and note that Saudi Arabia targets 70 per cent recovery from similar fields - would add as much reserves as the entire UAE.

Dr Shahristani's number covered only 66 fields, from a total of almost 100 discovered to date. Iraq has barely been explored since the 1960s, with the exception of a brief and successful campaign in the late 1970s, which uncovered, among others, the super-giant Majnoon field near the Iranian border. With this vast reserves cache, new exploration is not a priority, but when the time comes, modern seismic surveys and geological concepts should identify many new fields.

And including Kurdistan, where several big discoveries have been made recently, would further swell the total. For all the remaining challenges, progress on the ground is encouraging, with both BP and ExxonMobil pleased with the start they have made. ExxonMobil, renowned if not loved in the industry for its single-mindedness, has been assigned to lead a US$10 billion (Dh36.73bn) project to supply seawater for injection into the southern fields to maintain their pressure. And Al Habtoor Leighton, based in Dubai, won a bid to expand Basra's oil export capacity to handle the flood of new production.

In the longer term, higher reserves are important in underpinning Iraq's ability to sustain the increased planned production rates. The number is credible in itself, but its announcement was timed as an early shot across the bows of other OPEC members, particularly Iran. Having leapfrogged Iran in reserves, Iraq now hopes in the next few years to increase its production quota above that of the Islamic republic.

Iraq has now its last and best chance to become a true oil superpower. When and if it overtakes Iran, it could perhaps bid to challenge Saudi dominance. Beyond this, reserves in the ground must be transformed into oil in tankers, money in banks, and ultimately into national development - electricity, clean water, safe streets and healthy, well-educated children. As an Iraqi friend told me, Iraq only has natural resources if its people have the wisdom to use them.

Robin M Mills is an energy economist based in Dubai, and author of The Myth of the Oil Crisis