Iraq, among all other Middle Eastern oil suppliers, with its vast untapped reserves and potential, stands as a promising crude oil supplier, but only on condition that major security issues are resolved. Even with proven oil and gas reserves ranking as the fifth and thirteenth largest in the world respectively, and as the third largest global oil exporter, according to the IEA, Iraq’s energy policy requires substantial progress in the face of low oil prices and major security problems to take advantage of its potential. Therefore, Iraq’s crude oil could become a crucial supply source for the incrementally increasing Asian energy demand in the decades to follow.
Global energy demand is forecast to increase by 47 percent in the period up to 2040 and rise to 399 million barrels of oil equivalent (mboe) per day, according to the OPEC’s world oil outlook. This major growth will be propelled particularly by developing countries, mainly by China and India due to their unprecedented scale of industrialization, high population growth and rapid expansion of the middle class.
Despite the fast growth of renewable energy, the world’s primary energy demand will still be dominated by fossil fuels, which are projected to account for 78 percent by 2040. Oil will still constitute one-fourth of this global energy use. Energy Information Administration (EIA) anticipates that growing demand for crude oil in Asia will be met by conventional oil reserves of Middle Eastern countries.
The complexity and capital intensity of extracting crude oil in the deep-water oilfields of Brazil, the unsettled question of the future prospects of Canadian tar sands, the complications in replicating the U.S. shale boom in other parts of the world, and finally, sanctions imposed on Russia, which have limited their ability to reach out to the capital markets and upgrade to cutting edge technologies, combined with current low oil prices have all put further strains on the industry’s prospective future. As a consequence, Iraq’s future prospects appear promising.
From a technical point of view, oil in Iraq lies close to the surface and therefore is easier to extract and costs less than tar sands, tight oil or offshore production. Additionally, since oil in Iraq is proven to be sweet and lighter than that in many parts of the world, the refining process is much cheaper. Nevertheless, extracting and exporting crude oil from Iraq carries both opportunities and risks, which requires a constructive strategy implemented by the central government to exploit their crude.
Since oil constitutes more than 80 percent of Iraq’s energy mix while almost 95 percent of government revenue comes from oil sources, its hydrocarbon reserves doubtlessly form the cornerstone of Iraq’s economy. At the end of 2015, Iraq reached an export capacity of 5.9 million barrels per day (mbpd) of which 5.2 mbpd were exported through oil tankers from the Persian Gulf and the remaining 0.7 mbpd were exported to the oil market by pipeline through Turkey. Although Iraq’s oil exports and production have increased by almost 40 percent in the last five years and while the country continues to have ambitious plans to increase this amount, potentially to 8 mbpd according to the Ministry of Oil, progress has been uneven and requires major steps to be taken to reach its target level in the years ahead.
To bring Iraq’s crude oil production to the growing Asian market, an immediate upgrade and overhaul of Iraq’s crippled infrastructure is needed to bolster production levels. A dearth of water supplies, insufficiency of storage facilities and pumping capacity stand as serious impediments for Iraq’s progression in this area. Internal pipelines that are needed to bring the oil to Iraq’s export terminals are also insufficient and this has also hampered its export volume.
Iraq’s untapped reserves cannot be utilized unless the problems with water treatment facilities, storage capacity, as well as internal pipeline security are resolved. These major obstacles especially have caused further deterioration, but, on top of these, there is the collapse of oil prices and constant IS attacks on Iraq’s vital infrastructure to be addressed. Violence and sabotage still remain the biggest disincentives for international investors although the number of incidents has decreased in recent years. Other than these hurdles, the building up of human resources to meet the industry’s needs as well as improvements to regulatory, legal as well as institutional capacity would further strengthen the future outlook for Iraq’s oil industry.
Prospects for full implementation of these policies depends very heavily on the Iraqi government and there is no doubt that success in mitigating the shortcomings above would make a substantial difference for the future outlook of Iraq’s oil industry, economy and more generally for its people. To become a powerhouse of the regional and global energy system and be considered a potential oil supply source for the Asian market, Iraq should act swiftly to increase the volume of production and exports while ensuring that the resulting revenues are well managed and spent.