Iraq – promise tempered by risk

Since the coalition invasion of 2003, Iraq has been in a constant state of warfare and insurgency, which although the latter has lessened nowadays, there is little sign of a cessation anytime soon. Nonetheless, the US administration under president Obama is committed to pulling US forces out of Iraq at the end of 2011. Whether Obama, given the benefit of hindsight, would have decided on that particular deadline now with neighbouring Syria on the brink of civil war, Turkey conducting military operations in the Kurdish regions and possibly, worse of all, the spectre of a showdown with Iran, is debatable. The US and other nations may well need substantial military forces in the region again before too long. In terms of global energy reserves, Iraq’s potential is enormous with proven oil reserves of around 144bn barrels and proven natural gas reserves of 110tnft3.

However, with so much of the country yet to be explored it is anyone’s guess as to how much energy reserves are really there. It is highly likely that, over time, Iraq could become an energy-exporting powerhouse, possibly even ranking with Saudi Arabia. In the meantime, aside from insurgency and civil unrest, there are other major challenges to overcome such as corruption. As rated by Transparency International in 2011, Iraq stands at joint number 175 in the world with Haiti and just above Sudan. There are only 182 nations in the index with the top nation being New Zealand. If international companies are to work in the transparent manner to which they are required there is much work to do in Iraq to boost its transparency rating.

Since the sanctions in the 1990s, Iraq’s infrastructure has suffered and for any nation to prosper, the infrastructure must be in place as well as sufficient, preferably domestically-generated electrical power. Iraq has not been able to generate enough of its own electricity for years and has even had to resort to power imports from Iran. Self-sufficiency for electricity is vital and a major move towards that end was achieved recently when the Iraqi government approved a long-awaited US$17bn deal with Royal Dutch Shell and the Mitsubishi Corp to harness the 874mft3d of natural gas that is flared off from Iraq’s southern oil fields in Rumaila, Zubair and West Qurna 1 and use it to generate power. Under the terms of the agreement, Shell with 44% and Mitsubishi with 5% will form a joint venture called the Basrah Gas Company (BGC). Iraq’s South Gas Company will hold the remaining 51%. “Capturing this gas will create a reliable supply of energy for Iraq while at the same time reducing greenhouse-gas emissions”, said Shell’s CEO, Peter Voser in a statement. “This also sends a positive signal about the investment climate in the country.”

For an in-country snapshot we talked to engineering and development consultancy, Mott MacDonald, which has been working in Iraq for over 50 years. Charles Ellinas, Mott MacDonald’s managing director oil, gas and petrochemicals, is ideally placed to comment on the oil and gas climate in Iraq. “In the last eight years we have delivered more than 1,000 projects in diverse fields ranging from water, sanitation, buildings, power and oil and gas,” said Ellinas. “Mott MacDonald’s commitment to the country has just been recognised by British Expertise winning the Emerging Market Award at its annual award ceremony in London,” Ellinas said.

Ellinas explained that, “One of the most recent projects involves the creation of a common seawater supply facility to support oil production. The challenge here is to deliver up to 10-12mbpd of seawater to the oilfields and we have been assisting ExxonMobil with the preparatory works.” Ellinas also said that Mott MacDonald had been working with Shell on the gas flaring project through which, “Iraq can create an important and reliable supply of domestic energy, reduce greenhouse gas emissions and eventually export surplus production to generate revenue.”

The Mott MacDonald director is cautiously confident about the future. “Iraq is poised to become one of the top three oil exporting countries in the world in the next decade or so.” Although, “There is no doubt that in such a strategically-important country, the challenges for companies operating in the oil and gas sectors are huge,” said Ellinas. “I think that a range of combined factors are all contributing to improve the oil and gas industry in Iraq. On one hand there is the international oil companies’ determination to make the most out of their investments, also fuelled by the high oil price. On the other hand the Iraqi government is conscious that improving living conditions and creating wealth can only be accomplished by realising the potential of the oil and gas sector to create a stable source of GDP.”

For the investment scenario in Iraq, Ellinas considers that there are hopeful signs tempered by needs for the future, “I am happy to say that the major international oil companies are now committing major investment to the development of the oil and gas sector,” said Ellinas who pointed out that, “There is also a need for increased investment in other areas such as infrastructures and social services, which will be instrumental in improving Iraqi’s living standards and ultimately build the base for a long-term stability.”

With the Iraq experience that it has Mott MacDonald is looking forward to the future and “We are committed to the establishment of a long-term presence in Iraq by training and nurturing local talent,” said Ellinas. “Our office, in fact, is mainly staffed with Iraqi professionals. We are aware that staffing will be one of the challenges lying ahead. Our aim is to transfer knowledge and help Iraqi professional engineers and managers gain international expertise. For the wider business environment, in addition to the contractors required to construct oil and gas facilities, there will be major opportunities for companies that can design and build power stations, water facilities, buildings, highways and ports and also provide social development including education and health, ” said Ellinas.

Opportunities abound but there are risks. As if Iraq didn’t have enough problems of its own, there are possibly negative external influences coming to a head, especially with the situation with Iran, which could pose considerable threats to the country’s recovery timetable.