This paper will attempt discussing and contributing to the ongoing debate on the recent oil production policy, advocated or pursued by the Iraqi Government and some oil experts in the post Saddam era, i.e., in the aftermath of the American and Allied Invasion of the country in 2003. Some historical background on the position and role of the oil wealth and Oil Industry in the Iraqi economy will be indicated. The rentier state and the effects of the so called Dutch Disease are briefly discussed in the context of the peculiarities of this Industry. Some divergent views, official and unofficial, are examined critically to help us formulate a standpoint on the “right” or rational oil production policy in light of the characteristics, size and potentials of this Industry, if sustainable development is conceded as a basic national goal. This standpoint is given in a more generalized framework of analysis. The overall assessment will be illustrated in a global and abstract model. The legal, institutional and socio-political hurdles are mentioned wherever relevant. Some general conclusions are drawn to serve researchers and decision makers and a few basic recommendations are offered.
Introduction: This paper aims at highlighting a discussion on the most efficient oil policies to be pursued by any Iraqi Government, which may endeavour to uphold its mandatory duties to protect and promote the present and future economic and social welfare of the Iraqi people.
As a prelude to our discussion, it should be useful to indicate, very briefly, the basic features of the Iraqi economy in its historical context, as a primary producing underdeveloped economy, though endowed with vast oil resources. This would inevitably lead to discussing the well-known dilemma of duality and rentierism, and its impacts and implications for the developmental outcomes in the last few decades. The problems of the Dutch Disease imbalances, caused by the predominance of the oil sector are discussed, as if they were a curse rather than a blessing for the development take-off of the economy.
Government oil policies took various turns, ever since the inception of the oil extraction Foreign Companies in Iraq in 1927 and onwards, and then through many subsequent phases. The research will focus mainly on the post 2003 stage; i.e., the recent declared or practiced oil policies of the present post Saddam Governments.
Though there are some peculiar characteristics of the oil extraction industry which should be taken into full consideration, yet in terms of management policies there are, basically, few different modes of thinking and declared policies that seemed to have been advocated by the present Government and some oil experts.
Two overriding considerations seem to influence those different approaches whenever the expansion of crude oil production is deemed as the most needed target. The first is related to finance; i.e., the required heavy investment for that purpose, basically because the oil production industry is capital intensive by nature. The second is the type of technology most suited for the purpose. So it seems that the call for the provision of the highest vintage technology affects, perhaps rightly so, some of those who advocate the call for the intensive involvement of the high Tech. foreign International Oil Companies, (IOCs), in the extraction of crude oil in Iraq. This paper will discuss and assess these policy modes and advocacies, in order to determine the “best” choice available, in terms of economic efficiency, on one hand, and with regards to the desire to overcome duality and rentier interlocks in the economy, so as to help the economy, on the other, to sail off towards the shore of sustainable development, hence after.
Apart from the introduction, this paper is organized in ten sections; in the first, a brief background of the peculiarities of the Iraqi Economy is given. While in the second section, some discussion on the problems of duality and rentierism is offered. In the third section, the major features, potentials and various phases of policy management and development of the Iraqi Oil Extraction Industry are, briefly, discussed. Some divergent views about the present oil policies, as advocated or pursued by the Iraqi Ministry of Oil, (MoO), and some oil experts are discussed and assessed in the fourth section. In the fifth section, the rationale for the “right” oil production policies is explored. In light of the peculiarities of the Iraqi Oil Industry and the conditions of World demand and supply of crude oil, an attempt is made to illustrate the specifications of a possible “best” available option of a strategy for the management policy in the sixth section. The seventh section, will consider the challenges facing the Iraqi oil production and disposition policies, given the present legal, institutional and political hurdles. In the concluding remarks section, the implications and impacts are summarized here in light of the advocacy of a desired goal for “sustainable” development strategy. A few basic recommendations are also offered. In the last section, a list of works sited and some references is given.
1. Historical Background and Major Economic Characteristics of the Iraqi Economy; oil as a main source for Development:
Iraq, or Mesopotamia, (the land between the Two Rivers), as named in ancient times, was founded in its present boundaries in the Middle East in 1918, after the defeat of the Ottoman Caliphate/Empire, (Turkey, today), at the end of the First World War. The British occupied Iraq which was part of that vast Islamic Caliphate. (Martin, 2010) A monarchy was installed in the country in 1921, and the new borders of this new Kingdom were demarcated with its neighbors; Iran from the East, Turkey from the North, Syria and Jordan from the west, Saudi Arabia and Kuwait from the south and south west. The physical features of the country can be summed up as being mostly vast plain valley with two great Rivers cutting cross from the high altitudes in the North to the expansive lower plains, ending in the South at Shat al-Arab; the great River which the two Rivers, Euphrates and Tigress, formed by merging together. The present total area of land in Iraq is around 438,000 Square Km. with an estimated number of population of around 30 million persons in 2010; mostly Arabs in authenticity. These physical features convey the presence of fertile and vast lands where some comparative advantages in agricultural activities could, invariably, be reaped. The socio-economic structure of the country and people was predominately of tribal and pre industrial nature. Yet, in terms of culture and values, the country was once called the cradle of all civilizations, since this land gave birth to the earliest and foremost civilizations ever founded on earth. Though great strides were made in the socio-economic and educational life of the Iraqi society and people since the inception of the modern State in 1921, yet the country is still classified within the underdeveloped group of countries in the world. Apart from its agricultural endowment, the country was and still endowed with vast oil wealth, as well. (Al-adhadh, 2007a)
Crude Oil, though known and partially used, as construction material, in the earliest civilizations of Mesopotamia, thousands of years ago, yet it was discovered in commercial quantities in 1886. After some struggle with the Ottoman Authority which was still ruling Iraq, before World War I, the British Petroleum, (BP), and lesser partners established the Iraqi Petroleum Company, IPC, during the early twenties of the last century, when Iraq, came, then, under British Rule, this time. (Al-adhadh, 2007a).
From 1927 onwards, Crude Oil started flowing and, largely, exported by the IPC. Vast oil reserves were discovered, and the IPC obtained concessions to explore and produce crude oil in almost the entire area of Iraq for 75 years. Yet, oil production, since then and up to June1972, when the IPC was nationalized, i.e., over a period of almost half a century, had never been maximized or produced up to capacity levels. The Government was paid by the IPC, in return, up until the early 1950s, a modest amount, ranging from 400 thousand to 2.2 Million British Pounds, as royalties, in addition to some payment in kind; i. e., some crude oil to be refined for local uses. Also, IPC failed to explore over 99.5 per cent of the Concessional land areas, granted to it, almost free. Some sort of profit sharing agreement with the IPC was, however, reached by the Iraqi Government, around the year 1954, and the hitherto increased revenues were effectively used by that Government to launch an extensive development drive in the whole country; constructing and setting up basic infrastructures, e.g., dams, roads, extension of railways net, electricity and telephone nets, etc. (Al-adhadh, 2007b)
But, the surpluses generated by the received revenues from the crude oil exports were insufficient to provide investment to develop the non-oil sectors, or activities, like agriculture and industry, especially downstream manufacturing industries, based on oil inputs and energies, like petrochemicals, oil refineries and other oil derivatives, etc. IPC failed to raise the level of oil production, and declined to extend the oil extraction industry to the downstream oil activities. Hence, for over fifty years the oil extraction in Iraq remained as an external sector, giving meager surpluses, incompatible with the great potentials of oil reserves in the country. (Kachachi, 2002) In fact, the government acted as a rentier, using the oil export revenues to enhance power and privileges to the few, on one hand, and to spend extensively, on the other, for expanding its public administration, social and personal services with little motivation to generate growth in the non-oil sectors, like manufacturing industry and agriculture.
In fact, over half a century, the IPC had added only 36 billion barrels, (bn/b), to the proven reserves, compared with 75 bn/b added by the newly founded Iraqi National Oil Company, (INOC), within a few years only after the nationalization of the IPC in 1972! This ICP reluctance to expand and reinvest in the downstream industries had always been a source of stress in the relations between the Iraqi governments, regardless of changes in their regimes, and the IPC. This state of affairs led the new Republican Regime, under Brigadier Qassim, which came to power after toppling down the Monarchy system in 1958, to pass in 1961 the Law Number 80, which nationalized over 99 per cent of the land that was conceded to the IPC. (Al-adhadh, 2007c)
After the elapse of another period of political turmoil, the Baath Party, after its first failed coup d’état in 1963, came back to power through another coup d’état in 1968; then, it nationalized the IPC itself in 1972. This development was supposed to lead now to drastic increases in surpluses from oil exports; enough to unleash great developmental leaps for all economic activities in the economy, especially, industry. This supposition was vindicated because the country then had a well equipped National Oil Company, (NIOC), in charge of vast oil reserves, estimated to be around 115 Bn/b, with the lowest unit cost of production in the world, and easy accessibility to international transport of oil, through pipelines, sea shipments, and trucks. But, alas, the Baath Regime, under Saddam Hussein, engaged the country in very destructive and long wars; with Iran on the eastern borders, (1980-1988), invaded Kuwait on the southern borders, (1990), entered long duel with Syria on the western borders, ( 1979-2001), and provoked a long and severe international economic blockade and various embargoes on the war-torn economy of the country, (1990-2003); i.e., till its downfall through the American and allied invasion of the country in April 2003.
Hence, oil and even non-oil resources had been siphoned off for war efforts and security measures of a regime that was bent to sacrifice the whole future of the country and people to stay in power and to continue its totalitarian system. Besides, the Oil Extraction capacities and productivities were crippled throughout these wars. The Iraqi people of all generations had paid and are still paying heavy tolls in terms of their lives and undeniable rights to enjoy decent standards of living in a free and democratic society.
2. Renteir State and the Dutch Disease; implications and other interlocking factors, impeding Sustainable Development:
Economic theory, as exposed in a host of literatures on economic development, deal, sometimes intensively, with the concept of a “rentier” economy. In some studies this conceptual specification is approached in different terms; i.e., dual economy, primary producing economy, unbalanced economy, and so on. But what it means is that you have a case of an economy, endowed with one major primary resource, like raw materials, and/ or a natural resource, (crude oil, in our case), while other types of production activities, like agriculture, industry and services remain underdeveloped, due to lack of investment. Having said this, let us elaborate this concept and its economic connotations. (Stevens, 2003)
The state of a “rentier” economy can best be seen through a duality scenario. On one hand, you have an exhaustible natural resource, (oil & gas), which is a scarce resource, confronting an ever increasing and an inelastic demand in the international market, despite of all the talks and practices of alternative sources of energy. While, on the other hand, you have, largely, underdeveloped non-oil sectors, (activities such as agriculture, manufacturing, services, etc.), where the vast majority of the labour force is unproductively employed, and where it is hardly sufficient for the overwhelming majority of the people to eke out a good living for their families. So, rationality necessitates that oil revenues should be used to pull up the “unproductive” non-oil sectors. (Sousan and Bina, 2002)
The economic price of crude oil contains a large element of “rent” which reflects not only scarcity but also the “lost” opportunity cost whenever oil reserves were depleted without replacing it by an alternative source of income. Hence, unless present oil revenues are reinvested in the other non-crude oil sectors, the opportunity to find alternative sustainable sources of income might be lost; perhaps forever!!
A rentier state, as quoted by Beblawi and Luciani;
“is a term in political science and international relations theory used to classify those states which derive all or a substantial portion of their national revenues from the rent of indigenous resources to external clients. The term is most frequently applied to states rich in highly valued natural resources such as petroleum. However, it could also be applied to those nations which trade on their strategic resources (such as permitting the development of an important military base in their territory). Dependent as they are on this source of income, rentier states may generate rents externally by manipulating the global political and economic environment. Such manipulation may include monopolies, trading restrictions, and the solicitation of subsidies or aid in exchange for political influence”. (Beblawi and Liciani, 1987)
But, various other phenomena are associated with the rentier state, i.e., whenever rent, as income, predominates:
1. The economy will be heavily dependent on external rent, so that no other domestic sector can match it;
2. The export sector of the natural resource can engage a small proportion of the population, leaving the largest segments of it to find meager sources of living in a low productivity domestic sectors, like agriculture and services;
3. Most importantly, the State government becomes the principal recipient of the external rent with little motivation to find alternative source of income from other domestic activities, e. g., agriculture, local industries, etc.
4. Hence, the State becomes an authoritarian major employer, dispensing with revenue from the citizenry, and eventually denying or distorting democracy. (Kuru, 2002)
Such a situation would also cultivate a “rentier mentality”, as observed by H. Beblawi, (Beblawi, 1987).
Whereas, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector.
“The theory is that an increase in revenues from natural resources will deindustrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests. However, it is extremely difficult to definitively conclude that natural resource exploitation is the primary or sole cause of decreasing revenues in the manufacturing sector, since there are often many other factors at play in the very complex global economy. While it most often refers to natural resource discovery, it can also refer to any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment”. See, (Ross, 1999) and (Ebrahim-zadeh, 2003)
This term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959, culminating in the world’s biggest public-private partnership N.V. Nederlandse Gasunie between Esso (now ExxonMobil), Shell and the Dutch government in 1963. (The Economist, 1977)
Now, from our standpoint, the implications and other interlocking factors of a rentier economy that may impede sustainable development, as a desired national goal, can be summarized as follows:
a- As this state of renteisim may distort the structure of the economy, the implied redeeming features are focused in the fact that the external export sector, e.g., oil exports, would generate economic surpluses that should be rationally deployed to balance or at least reduce the distortion of this structure.
b- If the high exchange rate caused by the high export demand on the single tradable resource, oil in this case, makes other tradable commodities from the other non-oil sectors less competitive, then measures have to be taken to enhance not only productivities of the latter sectors, but also to adopt a strategy to promote non-oil exports through well planned monetary policies and investment portfolio in the manufacturing sector, for example, so as to increase its contribution to the trade balance of the economy.
c- One major implication of the Dutch Disease is that the excessive reliance on the export of one depleting natural resource could cause deindustrialization. In this case a possible solution which may be considered is to redirect the surpluses from the oil export sector to longer term capital investment in the tradable and partially untradeable sectors of the economy, instead of injecting them in the inflationary consumption activities.
d- Again, the pace of oil depletion and therefore the rate of oil exports would have to be geared to some paced rates of growth in the non-oil sectors, especially those in industrial and manufacturing activities or outputs. In this way, a balance could be established between the economy`s need for surpluses from the oil sector and the needed up-grading of the non-oil sector. Such a balance may lead to achieving the aspirations for an alternative and sustainable development which may replace the subsequent depletion of the oil resource.
e- Other observed phenomena, associated with both cases of the rentier state and the Dutch Disease, range from tendencies of Governments, not only to be authoritarian and undemocratic, but also wasteful spenders. Corruption and power struggle and even instabilities could occur. Hence, good governance, public accountability in a democratically elected Parliament may provide safeguards, provided that ethical politicians are found.
f- These considerations make it imperative that the determination of the crude oil production should be oriented and planned, so as to respond to external and internal demands in a well calculated, if not a programmed way, and in accordance to a given national goal, derived from a strategy for sustainable development.
- 3. Oil Extraction Industry in Iraq: Its Major Features, Potentials, and its various phases of Policy Management and Development:
As indicated in section 1 above, the Oil Extraction Industry in Iraq was, perhaps, one of the earliest to be developed outside the USA. Also, the struggles to obtain concessions to explore and exploit the oil reserves in Iraq had its own long story, but let us pinpoint the major features of this Industry, as it stands today and indicate its acknowledged potentials. Then, the various phases of the Policy Management of the Industry will be reviewed briefly in an historical perspective.
3.1- Major Features and Potentials of the Iraqi oil Extraction Industry:
Though crude oil started flowing in 1927, the concessions granted by the new Iraqi Government were extended gradually during the 1930s, not only to the IPC which was mainly an affiliation of British stakeholders with other partners; Shell, (Dutch), French Oil Company, Standard Oil and other lesser partners, but also to two other newly formed Companies of the same and other lesser Partners like Exxon and other American stakeholders; these were the Mosel, (MPC), and Basra, (BPC), Companies. Their setting-up was justified for administrative purposes, and because the initial oil exploration revealed that oil reserves were spread throughout the country; from Kirkuk, then Mosel, in the North to Basra and Zubair in the South, and various other locations. Such a distributional structure of oil fields necessitated, perhaps, various transportation systems and varying modes of management. Throughout the thirties, forties and early fifties of the last Century, the International Oil Companies, (IOCs), installed strategic pipelines to transport crude oil to the shores of the Mediterranean Sea in Syria, Lebanon and Haifa in Palestine, now Israel; (this line was suspended since 1948). Then, during the eighties of the last Century, another Pipeline was constructed from the North of Iraq, Kirkuk and Mosel to the Ports of Turkey on the Caspian Sea. Also, during the same period another Pipeline was installed to terminate on the shores of the Red Sea in Saudi Arabia. The extracted crude oil from oilfields in the Basra and other adjacent areas were shipped through Pipelines to the Khour Emaia Port and other lesser ports of the Fao in the North of the Arab Bay in the South of Iraq. Now, this wide net of Oil Pipelines, carrying crude oil from the North, Middle and South Parts of the Country to sea outlets in Turkey, Syria, Lebanon, the Arab Gulf in the South of Iraq and in Saudi Arabia constituted strategic, convenient and cost effective means of oil transportation to Europe and the rest of the world. Yet, political instabilities and regional wars sometimes interrupted the utilization of some of them, like the Pipelines passing through Palestine, Israel now, and those passing or crossing Syria and Saudi Arabia. Hence, trucks, though much more costly means of transportation were sometimes had to be used to transport crude oil to some neighbouring countries. (Al-Chalabi, 2009)
To give a brief preview of the volume and potentials of the oil wealth in Iraq, we are inclined to use the latest relevant data, largely derived from a research paper, prepared by Tariq Shafiq, an Ex Director of the Iraqi National Oil company, (INOC). (Shafiq, 2009)4 In terms of Oil resource, the total discovered oil fields, so far, amounted to 80 fields, yet only 17 of them are actually utilized, the rest are ready for drilling. As Shafiq pointed out that the ultimate proven oil reserves were estimated to be around 145 billion barrels, (bbls), while the actually produced crude oil up to early 2007 was only about 30.5 bbls. However, the total proven reserves, according to Shafiq, are 115 bbls, while the potential new oil was, conservatively estimated, to be around 215 bbls; some sources put it as high as ranging from 300 to over 400 bbls.
In terms of unit cost of production, it was and still the lowest in the world; the parallel cost in Russia and the USA is ten-folds higher. Thus, the Oil Industry in Iraq was and still, despite severe negligence, a very highly competitive Industry on World scale. (Lawrence, 2006)
Apart from oil, the various fields embrace proven Reserves of Gas Resources; Shafiq`s quoted estimates of those Reserves were around 3100 Billion Cubic Meters, (BCM); 20 per cent of which are free gas, 9 per cent cap gas, and 71 per cent associated gas. This paper will not discuss the economics of gas, since this requires a paper on its own merits. (Shafiq, 2009)
Iraq is endowed, therefore, with enormous Oil Resources, beside its gas reserves and potential gas output. This puts Iraq as a major contributor to world energy supply for many decades to come. Yet, its present oil production level is incompatible with its existing proven reserves of over 115 Bbls which can support a plateau of 10 Million Barrel per Day, (mb/d), without the need to use its new reserves. The highest level of Oil Exports was reached in the late 1970s; i.e., when just over 3.5 mb/d was realized, but due to Wars and strife with neighbouring countries, Iran, then Kuwait and Syria, the productive production and export capacities could not be exploited. In fact, oil production, exports and investment were all adversely affected, especially during the long international Blockade imposed on Iraq for 13 years, from 1991 to 2003. That was up and until the USA and Allied invasion of the country was waged in March of that year. Ever since, oil production and exports never reached its peak level which was realized during the late seventies. During the post invasion era, the oil production rarely exceeded 2.5 mb/d; exports oscillated around 1.5-1.8 mb/d. Hence Iraq was producing oil for more than two decades much below, not only its capacity, but also below its entitled share in the Oil Quotas of the Oil Producing and Exporting Countries, OPEC. (Shamkhi, 2010)
Looking at the position of Iraq, as a major oil producer, in a global context, we may note that while Iraq`s oil production, in terms of Billions of barrels, produced up to 1/1/2007, constituted a mere 3 per cent of the World oil production of the same time span, while its proven and potential reserves formed about 20 per cent of the entire World proven and potential reserves. This is with an additional comparative advantage, stemming from the fact that the level of its production is much below its peak level, compared to the positions of production to its peak in the vast majority of oil producing countries, including Saudi Arabia. (Shafiq, 2009) One may deduce that such characteristics of the Iraqi Oil industry are bound to make the Iraqi economy a possible or future dominant supplier which might come last in depleting its oil resources. (Shafiq, 2009)
In contrast, the Iraqi Government never reaped sufficient revenues from its oil exports to tackle backwardness in the various other sectors and activities of the economy. This was particularly true up to the fifties of the last Century. After the 1953 profit-sharing agreements with the IPC and other Associates, revenues increased and put to some useful developmental uses. Nevertheless, conflicts with the IOCs continued to strain oil production and exports, which led to their nationalization, as indicated earlier, in 1972. However, oil exports revenues started to rise drastically, especially after the 1973 October Arab-Israel War when oil prices per barrel rose to unprecedented records, i.e., from less than 3 US Dollars to over 12 US dollars during the second half of the seventies, reaching 30.5 US Dollars in 1980. Now, the impacts of those huge revenues, reaching over 8 Billion US Dollars in 1980 alone, led to huge inflationary spending, thus creating all the imbalances and distorted redistribution of income and wealth. The situation was eventually aggravated and entangled in a catastrophic war with Iran, the Eastern Neighbour of Iraq. But that devastating war continued for eight years, only to be followed by an irrational invasion to Kuwait, the Southern Neighbour. These wars led not only to thundering defeat, but also to the imposition of a long Blockade, culminated in the invasion thrust, carried out by the USA and its Allies in 2003. (Aladhadh, 2007a)
The impacts and consequences of those wars and of the economic policies pursued, particularly with regards to the oil production and disposition of its realized revenues, led to great sufferings to the Iraqis, especially the middle and lower classes, and caused severe damages to the infrastructures of the economy. Many industries, particularly the Oil Industry and its infrastructure were all crippled, and the country sank in a state of poverty and embitterment. Hence, the outcry came to advocate a policy of falling back on the Oil Industry in order to raise the highest revenues possible from oil exports, so as to be used for rebuilding the whole economy.
While it sounds rational to call for maximizing revenues from oil exports, the much deeper and longer-term question remains whether we have to choose between maximization of financial revenues from a depleting industry or to seek maximizing sustainable development that will secure viable economic life for the coming generations of the Iraqi people? This is the issue that we will attempt to discuss in subsequent sections. Now, it may be useful to review, briefly, the government oil policy in its historical context.
3.2– A Brief on the various Phases of Policy Management and Development:
After almost five centuries of subjugation to Ottoman Rule, the new Iraq, in the aftermath of the First World War, though came under new British Rule for just a few more decades, saw through its natural resources, basically Petroleum, as a blessing rather than a curse, since it would provide the financial surpluses needed, not only to exploit the potentials of its vast agricultural sector, but also to industrialize at very remarkable rates of growth. This idea was held by some people because they considered the country`s rapidly growing small and young population, and its emerging highly motivated elites as positive factors for enhancing growth. (Khadduri, 2009)
But the phases of the oil extraction policy management revealed the absence of various conducive factors for the proper and rational utilization of that new vast and yet depleting oil wealth, turning it from a blessing to a curse! There were, broadly speaking, four major phases of official or de facto oil production policy in Iraq, since the early inception of the Oil Extraction Industry in Iraq during the late twenties of the last century:
a- The early Concessionary Stage:
This stage started since the inception of the IPC, a totally controlled foreign Company, largely dominated by the British stakeholders, affiliated with other foreign international oil companies, founded during the twenties of the last Century. The effective management control and production policies were the entire privilege of those IOCS. So, the national Iraqi Government had no say on production and investment policies. Therefore, no national strategy could have been built to deploy oil exports revenues or surpluses for the development of the non-oil sectors. The Iraqi Government, during this phase, remained till the mid fifties of the last Century, a mere positive receiver of the oil royalties, no matter how meager they were, and endeavoured to use them for the laying down of some sort of defence, police and administration infrastructure and services throughout a country which was largely tribal and rural. We could, perhaps, generalize here by saying that the impact of oil revenues were not very dramatic, because of their modest size, on one hand, and because the rural agricultural sector remained dominant till the early sixties of the last Century, on the other. (Al-adhadh, 2007a)
b- The Profit- Sharing Stage:
This stage lasted from the mid fifties till the nationalization of the IPC, MPC and BPC in 1972- 1975. The profit- sharing principle was introduced in the aftermath of the failed nationalization attempt in Iran in 1951 by Dr. Musadaq who was then the Prime Minister of Iran. Whatever arguments that could be raised against the profit-sharing agreement with the IOCs in Iraq, it was, however, a good step forward since the share of the Government in the realized profits of the IOCs started to become substantial, i.e., exceeding the on-going ordinary budget of the Government by numerous folds. Though the Government had no access to the book-keeping accounts of the IPC and the other two Associates which used to inflate their cost of production, and, hitherto reduce their net profits, after deducting taxes and payments in kind, yet the Government net oil revenues were large enough to launch large construction programmes. The Government set-up the Council of Construction or Development Council to carry out large and highly feasible and much needed infrastructural projects; these were needed to support any proper take-off of the economy. Dams, roads, schools, hospitals, irrigation and land desalination and other projects were prerequisites not only for developmental growth, but also, to unite the Iraqi economy and to create really a throbbing national market. True, these were vital pre-industrialization development policies, but a large proportion of those oil export surpluses found their ways towards extravagant government spending and elite privileges, besides increasing expenditures on defence, police, security and administration services of the Government. While it was true that allocating new surpluses to infrastructural projects was justified, but not matching this with investment to expand the commodity sectors, especially agricultural outputs, led to the advent of creeping inflation, and to the shrinking of non-oil exports, especially the traditional agricultural goods, like crops, dates and animal stocks. The parity of the national currency, the Iraqi Dinar was linked to the British Pound; hence its exchange rate at the international market was very high, making Iraqi non-oil exports very expensive, and therefore less competitive. Here, there was a need to lay down some relevant monetary policies to free the Iraqi Dinar from the rigidity of its linkage to the exchange rate of the British Pound.
c- The Nationalization Stage:
As indicated earlier that the relationship between the Iraqi Government and the IOCs had remained strained over a period of nearly halve a century, regardless the type of Government who happened to be in power, i.e., either Monarchical or Republican. The reluctance of the IPC and the other IOCs to reinvest and extend oil production, led Qassim the new Republican Leader to nationalize all the concessional lands, outside the existing operating Oil Fields, under the IPC`s control, in 1961; taking away from those oil companies over 90 per cent of their concessional areas. After the rise of the Baath Regime, the working relations with the foreign oil companies did not improve, so in 1972, the new leadership decided to nationalize the IPC, and gradually nationalized the MPC and BPC as well. Then, the newly formed Iraqi National Oil Company was granted all the powers and logistical support to launch a drive to expand oil exploration and extraction; two other national companies were formed; the North Oil Company, and the South Oil Company. During the late seventies these National Oil Companies added some 75 bb/d to the proven reserves, (twice the number realized by the IPC over halve a century), and raised the number of oil fields, ready for drilling up to 72 fields, some of them were giants at World scale. Now, with the consequent huge rises in prices of oil per barrel, enormous amounts of revenues started to flow into the Government budget. Prior to the breakout of the Iraq-Iran War in 1980, the foreign hard currency reserves at the Iraq Central Bank exceeded 40 Billion US Dollars. Instead of drawing up a rational strategy to use those huge rent surpluses for well balanced development plans, aiming at finding an alternative to a depleting natural resource industry, and to take advantage of the other non-oil activities, particularly the manufacturing and agricultural sectors, the Baath Regime, under Saddam`s absolute rule, plunged the country into full scale bloody war with Iran that continued for eight harsh years. And, as soon as that war ceased, an irrational invasion of Kuwait was carried out. What followed was a long, sad and sordid story of waste and destruction, both in terms of material and human tolls. Hence the opportunities to break away from a State of renteisim and to move on to the dynamics of sustainable development was lost; hopefully, not for ever. This crippling situation continued till the toppling of the Saddam`s Regime by the US and Allies Invasion of the country in March-April 2003. In the aftermath of this invasion a new era was forming, various visions for oil production policies were proposed or entertained; these would be examined hereafter. (Al-adhadh, 2008)
d- The Post Saddam Stage:
During this present stage which extended for eight years so far, three major Governments were set up; one provisional, and the other two were permanent, and democratically elected, though three Prime Ministers alternated to head it, albeit through political and sectarian strife. The declared motto of the new political system, as declared and propagated by the Occupying American Forces and their Allies, was and still to promote and support the setting-up of Democracy in the country. Yet, the overall outcomes of the developmental efforts of those three Government, particularly of the last one, headed by Prime Minister Noori Al-Maliki which had already completed its first term of office for four years, and started its second term, could not be described as successful. Though, this is not the place to appraise the achievements of this Government, it suffices to indicate in few condensed points, its main failures, especially with respect to its practiced oil production policy.
1- The Government had no clear-cut vision for an effective and well considered national development strategy, particularly in the field of the Oil Extraction Industry. The composition of the Al-Maliki Government, was supposed to reflect a national unity Government, but due to internal strife and contradictory factional and sectarian mingling, (Muhassasa), it, virtually, became indecisive and trapped itself into compromises with opposing forces that would practically reduce it into an ineffective Government. To this adverse factor, one must add hidden external and foreign pressures, because such pressures, invariably, caused this Government to lose clear direction.
2- Another important factor that partially paralyzed the Government to carry out most of its reconstructions programme was and still, (to a lesser degree now), the organized terror; this destructive factor left untold damages in innocent lives and private and public properties, including oil pipelines and other oil installations.
3- Sectarian and ethnic groups and parties which formed the Government and Parliament were not, unfortunately, driven by a unifying national spirit to serve the country, but rather by vested sectarian and racist motives which cultivated nothing but immature and undemocratic behaviours. This factor encouraged and spread corruption, disloyalties, and sheer incapability to perform duties and public services.
4- Despite a certain degree of success in combating the destructive terror in Iraq, which must, in fairness, be attributed to the Maliki Government, during the last two years of its first term of office, the overall results of eight years of the post Saddam Governments were and still disappointing and even sorrowful. Unemployment rocketed to over 30 per cent of the total labour force. Some 24 per cent of the Iraqi families became below the poverty line. Hundreds of thousands of Iraqis lost their lives and fatally injured. This was apart from the few millions who were uprooted or driven out of their homes inside the country, or forced to flee the country! The infrastructures debilitated further, and public services deteriorated to fatal levels; i.e., health medication, education, electricity and water and many other public utilities and government services . Though the per capita GDP rose and the nominal rate of growth of the GDP, at current prices, increased, but this were due to increased Government spending and rise in imports bill, as a sequel to the high increases in oil revenues. Whereas the growth rates in the non-oil sectors, either did not rise, or declined, as in the agricultural sector. (AL-Saadi, 2009)
In fact, the Iraqi reserves of foreign currencies and gold and SDRs increased to high levels, and the accumulated amounts of the Iraqi funds at the Iraqi Fund of Development at the UN IAMB, rose to over 40 Billion USD, this did not reflect deliberate saving, by the Government, but just the lack of capacity to spend. This was despite the fact that the annual IAMB reports alluded several times that its editors cast doubts on the legality or the transparency of the way some of the funds paid by the IAMB to the Government to execute its annual programmes was spent! (IAMB, 2009)
5- As for the Government`s oil management policy, one more important point can be added here. While the Government supported and approved the infamous draft Law of Oil and Gas which, virtually, consented to granting oil extraction agreements under a system of Production Sharing Contracts, (PSCs), it was unable to pass it through the Parliament. So, it yielded, however, to foreign and internal pressures to replace it with the so called Technical Service Contracts, (TSCs), so as to dispense with the need to enact a new Law. The MoO was entrusted with the task to make deals with the IOCs, based on these TSCs, using old laws; (Saddam`s oil laws), so as to avoid going to Parliament for approval. Also, TSCs can be formulated for long-term duration; hence they would still have some of the important features of the PSCs, as promulgated by the shelved Oil and Gas Draft Law.
4. Some Divergent Policy Options, advocated, or pursued in the aftermath of the American and Allies Invasion of Iraq in 2003 to depose Saddam Hussein, the Iraqi Dictator:
4.1-The American and their Allies formed a Coalition Provisional Authority to run the country after the removal of Saddam`s Regime for a transitional period of one year. An American Governor or Administrator, (Paul Bremer), was appointed to rule through an appointed Governing Council, composed of Iraqi politicians who were assumed to represent, proportionately, the various ethnic and religious sects of the Iraqi society. While we will not, here, discuss the merits and demerits of this form of a provisional Government, it may be more relevant to our subject in this paper is to point out that this new Administrator formulated many policy blueprints and provisional laws which were, perfunctorily, approved by the so called Governing Council, calling for the privatization of the Iraqi Oil Industry. Though these blueprints were not adopted by the subsequent elected Iraqi Parliament, yet many politicians and activists in the post Saddam`s stage started advocating a policy for the complete privatization of the Oil Industry in Iraq. A strong opposition to this trend of thinking was also clearly declared. (Bremer, 2006) One prominent politician even called for dispersing all annual oil revenues directly to the people at large! (Chalabi, 2005)
The arguments against this policy option, if it were to be considered an option at all, are multifarious. First, a complete privatization of the Oil Industry in Iraq, given its weight and crucial role for the future development of the economy, would militate against economic efficiency to exploit this scarce national natural resource. If the oil fields are hired or sold out to competing bidders or buyers, then production costs will rise, transport and
investment would be thinned out, and become difficult to coordinate, needless to say, control. Second, the private sector in Iraq has neither the technical know-how nor the sufficient finances to engage in this sort of industrial activity. So, the only private sector would have to be the foreign oil companies which would own this vital industry. The Iraqis had experiences for over halve a century with the foreign oil companies that yielded highly unsatisfactory outcomes. Third, it had been shown that whenever a country had no sovereignty over its vital natural resources, no proper national strategy could be formulated. Fourth, the subsequent popularly approved Constitution stated clearly that Oil and Gas are the full property of the whole Iraqi people. So, what authority any Government or even Parliament would have to privatize this clearly public wealth? Fifth, the history of the upstream Oil Industry in Iraq showed that the National Oil Companies, particularly the INOC, had not only proved to be prudently efficient in running this industry, but also accountable. So why privatize this vital industry when you could formulate models to secure its efficiency and democratic accountability?
4.2- The pressing needs to increase oil revenues for the reconstruction of the country which was facing destructive terror and bloodshed in the aftermath of the Invasion, led the Government and its Ministry of Oil, (MoO), to adopt a model for investment and management in the upstream oil industry, and that was, practically, similar to the Production Sharing Agreements, (PSAs), which was drafted, using foreign advices, in a proposed Law for the exploitation of Oil and Gas in the country. The first draft of February, 2007 was so vague and contrarian, so that a second draft in July of that year was submitted to the Committee of the Council of Ministers, (COM). But, basically, most of the flaws of the first draft were still retained. Though this is not the place to study, critically, this draft Law; we and many other researchers had already did this, (see in the references an excellent review done by Ahmed Jiyad, as well as by others, including this author). However, the two versions of that draft Law were strenuously opposed, and the July Version had not been enacted by the Parliament so far; it was shelved since its submission to Parliament in 2007. (Jiyad, 2008) The arguments against this form of model to promote investment in order to expand oil production, and to manage the policy of oil production for many decades to come, can be summarized here:
1. Such PSAs or PSCs are known to be implemented in highly risky oil exploration in remote and environmentally adverse areas in countries which had neither the required funds to carry out the exploration, nor the technical know-how. The situation in Iraq is totally different. First, Iraq`s national oil companies not only possessed the basic technical know-how, but had already proved their worth in achieving huge increases in the oil reserves in Iraq within just a few years after their formation during the seventies of the last century. Second, the problem in Iraq was not where to find oil but to pump it out; there were 80 huge oil fields with over 115 Billion Barrels waiting to be drilled and lifted at the lowest costs possible. So no high risks are involved at all. Only 17 producing oil fields were actually exploited, the rest need to be drilled and rehabilitated for smooth flowing of the crude oil. (Mackey, 2007), and, (Greg, 2005)
2. The needed investment to rehabilitate and drill some of the already discovered fields and to rehabilitate a few deficient producing ones could be made available from the ordinary budget of the Government, if they were around 5-6 Billion Dollars annually for almost a decade. There may be a need to borrow money, if the expansion plan goes beyond raising the output of crude oil to more than say 4 mb/d. But the question arises, what is the right or needed level of oil output? The answer would have to be based on an envisaged Development Plan and its strategic goals. Also, this would have to be considered in light of the available absorptive capacity of the economy, so as to avoid vicious inflation and wasteful use of the resources through retaining excessive and redundant oil production capacities.
3. Perhaps, one sound aspect of the argument for engaging IOCs in the upstream oil Industry is the suggested need to obtain the highest vintage of technology, so as to upgrade and rehabilitate the debilitated oil wells, and to apply the best available technology so that not only unit cost of production remain lowest, but also to train and upgrade the skills of the Iraqi workers and managers. For this purpose you do not need PSAs or PSCs; Production Sharing Contracts. There are several other contracting models, based on acquiring technical services from major IOCs in return for well defined and feasible fees, ranging from Service Contracts, or Technical Service Contracts, Long Term Technical Service Contracts, LTSCs and the Risk Bearing Technical Services Contracts, RTSCs, to Buy Back Contracts, or to just commercial Borrowing. (Uday, 2007)
4. Furthermore, if sustainable development is sought, and rationality dictates that it should be, then it matters most for the Government to secure its complete sovereignty over its oil resources and over its decisions to determine output levels and disposition of oil and gas. Without this sovereignty, the Government can never implement a strategic plan, aiming at achieving sustainable development, assuming it to be a national goal, in view of the eventual depletion of the natural oil and gas resources. (Al-adhadh, 2008). Sustainable development does not just mean making a gesture for the rights of the future generation, but it is a quantitatively measured approach to build-up alternative industries and other non-oil activities to replace the depleting Extraction Oil Industry, and to preserve productive capacities in a democratically institutionalized society.
4.3- Under the onslaught of these opposing arguments, the Government and the MoO abandoned the PSCs option, and started another one in 2009, through calling some IOCs to attend two rounds of bidding to offer technical services in return for fees. This may sound rational and, therefore, acceptable, but on closer scrutiny, a few major flaws are deducted in light of the partially revealed Technical Contracts Models, proposed for signing with the few of the IOCs which had actually participated and won the contracts in the aforementioned bidding rounds:
- 1. There were two bidding rounds; the first was organized in June, 2009, and the second in December of the same year. No detailed exposition of the feasibility of the contracts, granted to the winners in those two rounds will be attempted here for two reasons. Firstly because this will go beyond the scope of this paper, and secondly because the details of the actually signed Technical Contracts were not revealed, though talked about sporadically. Nevertheless, some basic commentaries can be given with respect to what we call major flaws in some of the known terms of the Contracts, won by some major IOCs which participated in the two auctions or rounds of biddings:
- 2. The total number of Contracts, (from the type of the RTSCs), awarded in these two bidding rounds was 10, ( this number went up to 20 Contracts), and some of the winners were well known in the international oil market, like the British Petroleum Company, BP, and the Chinese National Petroleum Company, CNPC, EXXON Mobil, and some others. The Remuneration Fees, RF, was counted in terms of the extra or incremental barrels of crude oil produced, and the total revenue of the contractor depended on the expected volume of extra production of the crude oil, given a baseline Production Plateau Target, PPT. This means that fees would be paid for every new barrel produced, starting from a threshold level of output; these fees would be shared by the Government as a partner, through its Iraqi Oil Company, as a counterpart, involved in the extraction operations of the oil field concerned, by a ratio of 25 per cent. The contracting ICOs would also pay 35 per cent out of the accrued fees, as taxes. Also, this means the RF may decline as the scale of extra, due to the R-factor. (Jiyad, 2008) The competition amongst the bidders in both rounds was so intensive as to cause the RF to be slashed to a fraction of a dollar per every incremental barrel of oil for some of the giant producing oil fields like Majnoon, Rumaila, Halfayia and others. This reflected the strategic importance for the contracting ICOs to secure crude oil supplies from Iraqi oil fields for a period that my extend to a quarter of a century.
3. The would-be IOCs contractors shall invest billions of dollars to rehabilitate and upgrade the rate of extraction ratio, through more advanced technology, whether in raising the productive capacities of the oil wells or in using 3 dimensional geological surveys. Some investments costs will be retrieved with interest plus 1% libor, to be charged throughout the life span of the projects on the fields. The estimated profits of the IOCs, after paying off bonuses and taxes, are estimated to be around 12 to 15 per cent over their investments.
- 4. Under these long-term Contracts, the contracting IOCs will give the Iraqi Oil Companies, (either the South or the North Oil Companies, or the Misan Oil Company), smaller role in the operational administration of the Oilfields, Joint Management Committees, JMCs will be setup, giving the contracting companies, practically, the controlling management weight, since they will form the majority in these Committees.
Though no further description of the details of the bidding outcomes will be pursued here, it may be sufficient for our purpose here is to unveil, as briefly as possible, some of the implications or flaws of this policy approach, as follows:
1- If we assume that the IOCs will invest some 50-60 billions of dollars over the first ten years of their operations, this will amount to 5-6 billion annually, but this annual amount is not beyond the financial ability of the Government. If, however, the partnership with technologically advanced IOCs is considered necessary, then the share of the government or the INOCs in investment could, at least, be raised up to 51 per cent., in order to secure the national sovereignty over all production and disposition decisions, as well as to ensure smooth and effective transfer of technology and know-how to the Iraqi manpower. It has been emphasized that if the Government seeks to implement a strategy for sustainable development it should possess sufficient supremacy over production and disposition decisions of the Oil Extraction Industry.
2- Since these Contracts which are called, misleadingly as Risk Technical Service Contracts, RTSCs, may last for quarter of a century; this would tend to make the IOCs mainly interested in retrieving their costs and reaping their profits. Hence, these self interests would invariably make them more interested in increasing oil production within their contract period, rather than just adhere to any possible Government directives to curtail production whenever market prices for oil were depressed, so as to reduce wasteful excessive idle capacities. This is especially so, because there are provisions in the contracts which allow the IOCs to retrieve parts of their investment cost in the form of barrels of oil instead of money.
3- Though IOCs in this form of contracting cannot add the oil reserves to their assets, as would be the case in PSAs, nevertheless, the long term investment and involvement of these companies in operating the Oil Extraction Sector in Iraq, would, virtually, make them partners rather than mere technical service contractors.
4- Furthermore, the legality of those RTSCs is questionable, since the MoO acted without a legal authority, since no law was passed to legalize the contracts. And, the Legislative Council, Parliament, had not approved them. Some authoritative lawyers considered these deals constitutionally illegal. (Jiyad, 2009)
5- The probable long-term domination of the IOCs over some 85 per cent of the production of discovered and producing Oil Fields, (some of them are giants in terms of the volume of their potential reserves), would weaken and marginalize the national oil companies, particularly the INOC which is supposed to be re-incorporated by a Parliamentary statue. This will contravene with the national goal of sustainable development. (Chalabi, 2008)
6- The MoO declares that it aims, through awarding these contracts, at raising the oil production level from 2.2 mb/d to 12 mb/d, so as to maximize revenues from oil exports. The question however arises whether maximizing financial revenues, (rent), is equivalent to maximizing sustainable development? Deeper analysis could reveal that these two policies are not equivalent, but could be made consistent with other targets. Excessive reliance on rents from oil exports will attract all the bangs of the Dutch Disease; and may indulge the economy in a state of resource waste due to limited absorptive capacities, on one hand, and idle oil exports capacity, on the other. (Al-adhadh, 2008)
7- The actual practices of the contracted IOCs, after one year on the start of their operations on the oilfields they won in Iraq, revealed, as exposed by the MoO`s Consultant, Hamza Al-Jawahiri in a series of essays, that these Companies do not yield to any scrutiny, neither to the determination of their investment costs, nor to applying any standards to most of their operations and obligations, like transferring know-how to Iraqi counterparts, or preventing damages to the environment and the welfare of the surrounding countryside. (Al-Jawahir, 2011).
5. What is the rationale for the “right” Oil Production Policies, if sustainable Development is advocated as a desired National Goal?
The foregoing discussions expounded the intricacies of the developmental options confronting the decision makers of the oil production policy in Iraq, given the characteristics of the Industry, and the socio-political circumstances surrounding the country. In view of the preceding factual and analytical exposition, the question can still be posed, what is the rationale, then, for a “right” policy to be pursued? The rationale stems from some basic economic principles, on one hand, and can be contemplated in light of a specified national goal, on the other. The fundamental economic principle here is that of economic efficiency, while the guiding national goal is based on how to overcome the rentier state. One of the most important policies to realize this could be through deploying the surpluses, generated by the exports of a scarce but depleting natural resource, crude oil in our case, without falling in the trap of the Dutch disease, in order to achieve sustainable development. Sustainability here means that the economy should continue its economic viability, so as to be transformed gradually less and less dependent on the generated rent from oil exports. This, also, means that alternative economic and human resources are found in a paced pattern with a booming but, gradually, depleting oil production industry or sector.
There are a few guiding prerequisites for approaching this assumed rationality. First, there must be some national consensus about the economic and socio-political prospects of the economy. If, sustainable development is accepted as a national goal, then, the concomitant policy must be geared towards achieving that goal. This prerequisite necessitates the setting up of a sort of centralized planning apparatus which should guide and draw-up a national strategy, with sufficient decentralized tools to implement that strategy. Second, this requires that the Government should be the guiding central directive planner which must have complete supremacy or sovereignty over all basic decisions on how to produce when to produce and how to allocate or dispose of the outputs of the natural resource, oil and gas in this case. Third, another prerequisite is for the Government to draw-up a directive development plan, where the production of crude oil is exported for as much as the surpluses are needed, on one hand, and redirecting, gradually, on the other, increasing amounts of the produced crude oil to respond to domestic demands. This would mean integrating the upstream oil industry with the planned downstream activities, i.e., the non-oil activities, especially those energy based industries in manufacturing, transport, services and the agricultural activities. In order to avoid the negative impacts of a possible Dutch Disease phenomenon, some relevant monetary and long-term investment policies have to be formulated. Extravagant spending and inflationary consumption trends should be resisted. National saving and long-term investment portfolios have to be encouraged without hurting basic services and the welfare of the people. Let us now turn to examine, briefly, how this rational policy works under the vagaries of changes in the international supply and demand for the crude oil, and in light of a national goal for sustainable development. (Ebrahim-Zadeh, 2003)
According to some tentative estimates made by the Iraqi oil expert, Walid Khadduri in a news paper interview, the expected oil exports revenues during the coming decade, if the targeted expansion in crude oil production, consequent to the awarded contracts to IOCs, would amount to an average of a hundred Billion Dollars, annually. Now, if these expectations were acceptable, then what are the expected bottlenecks? It is not enough to paint a rosy picture or a booming future to the Iraqi economy, on the basis of sheer estimates of oil exports revenues; the ramifications, effects and imbalances, all have to be considered as well. (Khadduri, 2010), see, also, (Khadduri, 2009), &, (Khadduri, 2004)
6. Given the Particularities of the Oil Extraction Industry and the Conditions of Supply and Demand for Crude Oil in the World Market, what are the best available Options of a Strategy for a Management Policy? :
6.1- Elements of a Rational Oil Management Policy:
To increase oil production by nearly 6 folds should have many ramifications and implications. First of all, if we assume that the contracted IOCs were able to expand the output of crude oil, during the next decade to 12 mb/d, the question would be; on what basis of forecasts of international demand and supply for crude oil these huge increases in production are estimated? There are some conflicting forecast studies on the trends of future international demands for crude oil; some predict stagnation, if not decline, in the World market for oil in view of the international financial crisis that loomed large in the USA economy since 2007. While other studies prorogated that some very substantial substitutes of energy sources were already gaining grounds in the international oil market; substance like Lithium is now claimed to be in the race to replace some 168 billion equivalent barrels of crude oil. (Daily Wealth on-line service, 2010) There are, however, many other known substitutes to oil, like nuclear energy and other traditional sources, but whatever the expected or forecast demand on crude oil might be; the MoO of Iraq do not seem to have based its targeted oil production level on any of those studies, nor on any quantitative studies of its own. It has based its expectations on the on-going traditional longer-term trend of rising international demand for crude oil, and that Iraqi’s Oil Industry has the potential to respond to it. Still, such option to expand oil production at this scale might be constrained by transport and storage capacities; the existing net of pipelines cannot handle more than 4 mb/d, so what measures were there to triple the volume capacity of this net during the coming years? (Shamkhi, 2010) It seems that the Iraqi Government and its MoO have not formulated a viable development plan, before venturing to tie so much investment in the oil sector. The dire need to increase revenues, without proper concomitant plans and measures to prevent bottlenecks and possible waste of resources, does not qualify as a rational oil production policy?
Moreover, Iraq is a founding member of OPEC which tries to regulate the Oil Supply in the international market, through a system of proportionate quotas, so as to maintain what it considers a reasonable economic market price for the crude oil. Production quotas are usually based on the productive capacities of the member countries. Though Iraq had been producing and eventually exporting much less than its quotas for more than two decades because of its involvement in regional wars and because of the international blockade imposed on it for 13 year. Though Iraq had been exempted from its quota, yet, if it now comes to export triple the amount of its quota, then this may provoke conflicts with OPEC. This is apart from the possibility that its increased oil supply may depress the price of oil in the international market. Iraq may even loose revenues due to exporting at lower prices. The Iraqi Minister of Oil waived off this problem, but, it remains a probable problem that has to be resolved, if a rational oil policy is sought after. (Shamkhi, 2010)
6.2- An Envisaged General Strategy Model:
In light of the diagnosed characteristics of the Iraqi economy, as a “renteir state economy”, endowed with rent generating natural resource, oil, and in view of the various discussions about the policy options of the Government and other sheds of opinions about oil management policies, we may present here below an overall global strategic model, to be read as a mere guideline or a road map for more detailed quantitative models which could help to maximize some sustainable development targets, and maintain consistencies in the dynamic interactions of all economic activities as well. The Model below is neither quantified nor solved due to lack of relevant time series data, and because of time constraint. The Model is presented here for illustrative purposes only, hoping that other researchers may try applying it.
Let us begin by giving the following notations and symbols:
GDP = Gross Domestic Product;
Pr = Population growth rate;
GDPr = Rate of growth of the GDP
GDP*= Gross Domestic Product, excluding the Oil Sector;
E0r = Growth rate of Exports of crude oil;
Er*= Growth rate of Exports, excluding crude oil;
∆M = percentage change in Imports;
Mc = Imports of Consumer goods;
Mk = Imports of capital goods;
Dd = Domestic Demand for crude oil;
Di = International Demand for crude oil;
Sio = International Oil Supply;
Pio = International prices for oil per barrel;
Sis = Competitive Substitutes for oil in the international market;
Xor = Rate of growth of crude oil production;
E* = Non-oil Exports;
Xr* = Rate of growth of the non-oil production;
Xo = Production of crude oil;
Eo = Oil Exports
M = Imports
- 1. GDPr > Pr, . 1 .…
- 2. Er* > Eor , . 2
- 3. Eo = f (Dd, Di, Sio, Poi, Sis), .3 . ….
- 4. ∆M = Mc↓+ Mk ↑ . 4
- 5. GDP – GDP* = ∆ ↓ .5
6. Max ∑E* – ∑M .6
- Max Eo, .7
8. Er* > Eor; . 8
9. Max Xo, …… .. . 9 …… Subject to: Xr* > xor
The Model, above, can be read in several ways, but basically the equations include equalities and inequalities, some can be solved either through simple mathematics for single equations, or in terms of Matrix algebra for mass data in square matrices, whenever data is highly disaggregated. The other maximization equations can be solved through linear or nonlinear programming, depending on the type of data at hand, and the time path of the Model. The main solutions that can be obtained from this simplified model are summarized as follows:
1. Strategic directive plans should reflect their strategic goals. The first basic goal is, perhaps, to transform the economy from its condition of a rentier state to a self sustained one. Hence, your first monitoring rule is to watch out whether the growth rate of the GDP is exceeding the rate of growth of the population or not? This is answered by equation, (1).
2. Another goal is to encourage non-oil exports to grow at higher rates, (pace, not volumes or values), than those of the crude oil exports, hence equation (2), requires that the rate of growth of exports from the non-oil sectors should exceed or tend to exceed in pace those of the crude oil exports.
3. To determine the oil production level, optimally, rigorous demand models have to be deployed, taking into consideration all dominant factors, as shown in equation, (3).
4. Strategically, to avoid the effects of the Dutch Disease, your imports must be tipped towards the imports of capital goods rather than the imports of the consumer goods; equation, (4), shows us this outcome.
5. Similarly, you have to adopt monetary and physical policies to encourage the growth of the non-oil GDP, hence the useful indicator, given in equation, (5), where you can monitor whether the difference between the GDP, including oil exports, and the GDP without crude oil exports is dwindling or not, as shown in this equation; you can do this for a long time series data.
6. In equations (6) and (7), you may use a linear or nonlinear programming model to maximize the balance of trade, excluding crude oil exports altogether, as shown in the first of these two equations. Then you may attempt to maximize the crude oil exports to compare the results under the condition that this maximization is subject to assuming that the rate of growth in non-oil exports is greater than that of the crude oil exports.
7. You may maximize oil production, under various constraints, but if we are concerned with targeting sustainable development, then our strategy must take care to monitor whether the growth rates of the production in the non-oil sectors, including human capital products, should be encouraged to be higher than those for the production in the crude oil sector, as shown in equation, (8).
The foregoing discussion of the illustrative strategic model provides some guidelines for determining the optimal Oil Production, given the stated objectives. This should not be considered or decided upon independently from studying and assessing quantitatively the impacts on other equally important national targets like the growth of the non-oil sector, because the latter is supposed to be the alternative salvation sector after the depletion of crude oil within the coming years. For this purpose you do not only need maximization Models, but also consistency Models. The Iraqi MoO has not determined its oil production level on these bases, because neither a national development plan was at hand, prior to its deals with the ICOs, nor relevant quantitative studies along these lines were offered.
7. Challenges; institutional, legal and political Hurdles:
There are few certainties in the world, and the world demand for crude oil is one of them. Instead of certainties, the analyses and forecasts today are based on probabilities, to approximate outcomes of various random and non-random forces. Of course, changes happen as effects of struggles or conflicts of vested interests, on one hand, and as results of technological progress, on the other. Both types of causal factors of change affect the crude oil industry anywhere in the World. Yet, the oil extraction industry in Iraq is now the focus of several striving vested interests, (needles to consider the probable technological changes at present), more than in anywhere else in the world. This is, largely, due to the particularities and enormousity of Iraq`s oil reserves, compared to most of the other oil industries in the world. The scope of this paper does permit us to dwell on analyzing the socio- political struggle and the nature of any future technological changes that may affect the demand for crude oil as a main source of energy, but a few words can be said about some of the socio-political factors affecting the art of management policy of oil production inside Iraq.
In the aftermath of the Invasion of Iraq in 2003, among the various outcries and demands raised about the future of the Oil Industry in Iraq, was that of the Kurds who compose an ethnic sect, inhabiting the North of the country, where some oil fields are found. The Kurds had always called, and rightly so, for some sort of self rule; this was developed into a full demand for a system of federation with the rest of the country. Due to their national and ethnic particularity and size, (the Kurds make up some 13-14 per cent of the total population), they are entitled to this. But what happened was that they interpreted the Federal Constitution to mean that their Kurdish Regional Government, KRG, could manage alone the non-producing but discovered oil fields within the Kurdistan area, So they set-up their own Ministry of Oil, and passed their own Oil and Gas Law without any provisions to coordinate their oil policies with the Federal Government in Baghdad. Furthermore, they opted, without even proper consultation, with the Federal Government to conclude PSA contracts with second grade IOCs. Also, they laid claim on Kirkuk which is largely shared with the Kurds by non-Kurds; Arabs and Turkmens, and which contain some of the rich discovered and producing oilfields. Now they call Kirkuk and other adjacent areas in Mosal and Diala Districts or Muhafadhas, as disputed lands.
Space in this paper does not permit further discussion of this issue, but a few important points can be made as follows;
1. The Federal Constitution provides that all the Oil and other natural resources are the property of the whole Iraqi people, (Article No. 111). Also, the Article No 121 of the Constitution provides that the Federal Government will coordinate with the Federated Regional area and non- federated Provinces or Muhafadhas in formulating oil production policies. This Article led the Kurdish Regional Government, KRG, to interpret the Constitution as if it gave them the right to run their oil fields independently of the Federal Government. This issue led to the rise of a still continuing conflict. (Al-adhadh, 2007c)
2. The issue at stake is not who runs the oil extraction industry; it is about how efficiently the oil production policy can be managed? If the industry is segmented and practically privatized in certain parts of the country, and if production and disposition of output are decentralized, then not only economic efficiency could not be reaped, but also, investment, unit costs and the procurement of the highest vintage of oil technology cannot be efficiently secured for the benefits of all the Iraqis, including the Kurds in particular. Most importantly no national strategy and a plan for sustainable development to the benefits of all future generations can be achieved.
3. Apart from these socio-political problems, many other institutional and legal hurdles still need to be resolved. The Sheiat dominant parties, largely led by the Supreme Islamic Council, SIC, headed by Al-Hakeem, called for a similar federation to all the oil rich Provinces in the Middle and South of Iraq. This led to further intensification of the socio-political struggle to split up the whole Oil Extraction Industry.
More details on these and other issues, affecting the rationality of the oil production policy in Iraq may be found in our Article in Arabic where some vindicated refutation to these claims are made. (Al-adhadh, 2007e)
8. Concluding Remarks:
Some very important implications and impacts can, perhaps, be deduced directly from the preceding discussions, followed up with a few basic recommendations:
A. Implications and Impacts:
1. The fact that the oil extraction industry is capital and technology intensive by nature, and hinges on a depleting natural resource, in addition to being a major source of income, (mostly rent). And, since the land where the oilfields are found are usually public ownership, as it is the case in Iraq, then it is imperative that the state or any representative body must manage or overlook the management of this vital industry. Privatizing it, in a country where the private sector is weak, would be wasteful and highly defeating, particularly if sustainable development is sought.
2. The discussions revealed that the Government of Iraq, through its Ministry of Oil, MoO, has not opted, so far, for the “right” or suitable management policy. The first and foremost element for effective management policy, in this respect, is to possess sovereignty over the natural resource, oil in our case. Because the surpluses, generated from the high rent of this industry are, perhaps, the most important source for the development of the economy, it is vital for the Government to have the final say on the decisions of production and disposition of the final output of crude oil. Contracting its best and most promising oilfields to IOCs, under the disguise of technical service contracts, for a period that exceeds 20 years, would hardly leave any true independent management choices for the Government over the decisions of production and disposition of the final output. To overcome this great flaw, the Government must exert efforts to revise, at least, the time-span of these contracts.
3. The MoO is carrying out its contracting deals with the IOCs without solid legal tools. So far, the much debated Oil and Gas Law has not been approved by Parliament. The signing of the contracts which was carried out by the MoO is based on Old Laws, not provided for in the New Constitution. Moreover, not seeking the approval of the Parliament, as the highest legislative authority in the land, according to this Constitution, make these contracts invalid legally. (Jiyad, 2009)
4. The discussions revealed, also, that the MoO struck huge contracts with foreign companies to expand oil production to 12 mb/d during the next decade without basing itself on any development plan, specifying clear targets and timeframe for projects in the non-oil sector which could be financed, for, at least, over the next decade by the expected high revenues of oil exports.
5. Similarly, the MoO, has not deployed any quantitative studies or models to determine not only the output ceiling of crude oil over the next one or two decades. This may necessitate the delineation of the targeted downstream linkages which must be installed between the Oil Extraction Sector and the other Non- Oil sectors of the economy.
6. Linkages have to be extended to the concomitant fiscal and monetary policies as well.
7. This author has demonstrated a global and aggregate Model to show how a strategy for the management policy in the Oil sector could be made more efficient and fruitful. But, it must be emphasized that the Central role of the Government should be carried out in a democratically institutionalized societal economy, where the private and, perhaps, the mixed sectors would play the main role in implementing the investment programmes. The Government and its public sector may concentrate on building up the much needed infrastructure in the economy.
8. This paper discussed various other issues on the history of this vital industry in Iraq which can be of some use for other researchers and interested people and institutions.
B. A Few Basic Recommendations:
1. The Government, through the MoO, must endeavour to modify some of the basic terms of the awarded contracts; first, to reduce the contracts periods to five year, extendable to another five years only if this is proved to be economically, technically and financially feasible. Second, to raise the Government stake to 51% of the total investment, in order to secure its sovereignty over all strategic decisions, as done by the present Chinese Government with all ICOs, regardless the sizes of their capital investments.
2. A Comprehensive organizational Study is genuinely needed now to restructure all the National Oil companies, so as to make them effective not only in the operations of oilfields, but also, in investment, management, exploration and marketing. This, of course, requires drafting and passing all relevant and needed Laws.
3. The Government and the MoO should spare no efforts to attract and mobilize all the scattered Iraqi expertise inside and outside the country. And, to play detrimental role to enhance skills and to strengthen all the research and evaluation studies departments at the MoO and at all national oil companies. Also, both the Parliament and the Ministerial Council should have some such supporting researchers.
4. To enhance democratic accountability, a Federal Oil Production and Disposition Council has to be setup, in order to safeguard harmonious policy relations with the Kurdistan Region, on one hand, and with other oil producing Provinces, Muhafadhas, on the other, so as to secure wider popular participation from all other Muhafadhas, and even from some vested interests in the Civic Organizations
5. The present impasse, created by the unilateral actions of the Kurdistan Regional Government, KRG, on oil management in their area, a clear and fair coordinative schemes, regulations and Federal Laws have to be innovated. Even, the Constitution which contains certain vague provision, relating to the Oil management powers of each the Federal Government and the Region and other oil producing Provinces, have to be rationally revised with one basic aim, and that is, to enable the whole economy to reap the highest benefits, using the most efficient national oil management policies.
Beblawi, H., (1990), “The Rentier State in the Arab World,” in Luciani, G., the Arab State, London, Routledge, p. 85.
Economist,” The Dutch Disease”, November 26, 1977, pp. 82-83.
Government of Iraq, (2006), “Aldistur Aliraqi” in Arabic, “The Iraqi Constitution”, and “Qanoon Alnaft wa Algas”, (2007), in Arabic, “The Oil and Gas Law”, received electronically from the Iraqi Government Web-Site , Feb. 2007.
Khadduri, Walid, an Interview, published in the Lebanese Al-Nahar Newspaper on 1st May, 2010, No. 24032.
Al-Adhadh, Kamil, (2007a), “Naftuna Reseeduna am Mismar Na’ashuna Alâkheer?” – Arabic; “Crude Oil, Is it our Bounty, or the Last Nail in our Coffin?” published Article, Al-zaman Newspaper and other media, on 10.02.2007.
Al-Adhadh, Kamil, (2007b), “Qiraah Awaliah fi Muswadat Qanon Alnafit wa Algas Fi Aliraq, 2007”, in Arabic; “A Preliminary Reading of the Oil and Gas Law in Iraq, 2007”, published Article in many Web-Sites and newspapers on different dates in 2007.
Al-Adhadh, Kamil, (2007c), “Limatha WA Kaif Yajib an Nurajea Qanoon Al Nafit WA Algas, Wa Mata?” in Arabic; “Why and How we must revise the Oil and Gas Law in Iraq, and When?”; published Article, Al-zaman Newspaper and other Media, on 26.03.2007.
Al-Adhadh, Kamil, (2007d), “Mulahathat Assasiah howl Miswadat Qanoon Almwarid Almaliah”; recently passed in Iraq; published Article, Alsabah Aljadeed, Iraqi Newspaper, on 4.08.2007.
Al-Adhadh, Kamil, (2008), “Optimization of Policies for the Management of the production of the Crude Oil Extraction Industry in Iraq”, delivered at the International Conference on the Oil and Gas Policies in Iraq, organized by: The French Institute for Research, in cooperation with the Iraqi Center for Researches, February, 2008.
Al-Ameer Fuad, (2007), “Mare Thalitheh: Mulahathat howl Miswadat Qanoon Alnafit WA Algas”, Arabic; “For the Third Time: Notes on the Draft Oil and Gas Law”; published Article, 2007, electronical received from the author, May, 2007.
Al-Challabi Issam, (2009), Issam Al-Chalabi, “Iraq’s Oil Export Outlets,” MEES 52, no.48 (30 November 2009).
Al-Jawahiri, Hamza, (2011), A series of Articles on the IOCs management performances in the various awarded oilfields in Iraq, published on various Web-Sites, Alhewar, Akhbaar & Al-Jadidah, during April & May of 2011.
Bremer, Paul, (2006), “My year in Iraq: the Struggle to Build a Future of Hope”, see Google, Website; and, see also, Baker and Hamilton Report, “Iraq Study Group: United States Institute of Peace, Dec. 2006.
Challabi Munir, (2008), “The Internal Struggle for the Iraqi Oil Law continues”, received electronically from the author, January, 2008.
Challabi Mnir, (2009), “Iraqi Oil: The influence of the 1st Bid Round on the Future of Iraq’s National Oil and Gas industries”, ZNet Petroluem World- Policy Forum, 2009.
Ebrahim-zadeh, Christine, “Dutch Disease: Too much wealth managed unwisely”, Finance and Development, IMF, Vol.40, No. 1, 2003.
Hazem Beblawi and Giacomo Liciani, ed., (1987), “The Rentier State”. 1987 Instituto Affari Internazeonali, Croo Helm Ltd, Provident House, Burrell Row, Beckonham, Kent, BR3 IAT.
Greg Muttitt, (2005), “Production Sharing Agreements, (PSAs), Platform, Series, 2005.” .See alsoTariq Shafiq, (2007), “Khafaya Qanoon Alnafit wa Algas”, in Arabic; “The Secrets of the Oil and Gas Law”, published Article, 2007.
Jiyad, Ahmed, (2008), “Key questions over the Oil and Gas Law
In Iraq”, International Journal of Contemporary Iraqi Studies Volume 2 Number 1
© 2008 Intellect Ltd.
Jiyad, (2009), “The legality of the Contracts is more questionable today than ever before”, an Article, received directly by e-mail from the Author in 2009.
Khadduri, Walid, (2007), “Perspectives on Oil and Politics”, Middle East Economic Survey, Vol. 36, 3 Sept 2007.
Khadduri, Walid, (2004),“The Iraqi Oil Industry: A Look Ahead, “Middle East Economic Survey, Vol. 47, No. 48, No. 29, 2004.
Kuru, Ahmet, (2002), “The Rentier State Model and Central Asian Studies: The Turkmen Case”, Alternatives: Turkish Journal for International Relations, Vol. No. 1, spring, 2002
Lawrence Kumins, (2006), “Iraq Oil: Reserves, Production, and Potential Revenues,” CRS Report for Congress, April, 2006
Mackey, Peg, (2007), Iraq “Oil Law Unworkable in Current State @ Reuters, May, 11, 2007.
Martin, Sicker, (2001), “The Islamic world in decline; from Treaty of Karlowitz to the disintegration of the Ottoman Empire”, 2001. British Library Catalouguing in Publication Data is available.
Sousan Badie and Cyrus Bina, (2002),”Oil and the Rentier State: Iran’s Capital Formation, 1960-1967? JEL: Oil, N5, Q4. (This paper was presented at the Middle East Association /Allied Social Science association Meeting, January, 4.2002, Atlanta, GA, USA).
Shafiq, Tariq, (2009), “Harnessing Iraq`s Oil Wealth”. Paper, delivered at the on Conference on; “Iraq Petroleum 2009, Opportunities and Investment”, 7-8 December, 2009.
. Uday A. Hussain, (2007),”Dirasseh Feniah Ektisadiah Lemashroa Qanoon Alnafit wa Algas”; “A Technical and Economic Study for the Oil and Gas Draft Law”, November, 2007.
Ross ML (1999), “The political economy of the resource curse”, World Polit 51(2): 297–322, 1999.
Stevens P., (2003), “Resource impact: curse or blessing?” A literature survey. J Energy Lit IX (1): 3–42, 2003. .
1. This work is cited by Kahtan Lutfi Ali, in his memoire, ‘Konto Muthafan fi Wizarat Al-Takhteet, “I was an employee at the Ministry of Planning’, published Book, 2008.
 The Declared Law of Nationalization, as proclaimed by the President of the Republic of Iraq, Ahmed Hassan Al-Bekir, in June, 1972
 Shafiq is presently Oil Expert, Consultant and Chair of the Fertile Oil Fields Development Company
*The Author, presently, is a free lance economic consultant. He holds; BSc. (Honours), Econ; MSc. Econometrics, Ph.D., Econometrics, all at the University of Wales, UK. A Post Graduate Diploma in National Accounts and Economic Statistics, at the Social Institute of Holland is also obtained. He held many technical research posts over a span of forty years in his field of specialization. He has recently retired from his last post as the UN-ESCWA Regional Adviser on National Accounts and Economic Statistics. He wrote numerous researches and articles and some books. A detailed, C.V. can be furnished, if requested.
This paper was published at: MEES; (Energy & geopolitical Risk), Volume 2, Nos. 7-8 July/August 2011, Page 36 on