A brief history of Iraqi oil- and its future
The Hashemite kingdom of Iraq was created by the British in 1920 as a consolation price for the Emir Feisal whose Bedouin troops had started the “Arab revolt” in the Hijaz with Colonel TE Lawrence, known to history as Lawrence of Arabia.
While the Arab revolt was a sideshow compared to the British army’s successful campaigns against the Turks in Mesopotamia and Palestine, it resulted in Churchill’s decision to create two new kingdoms for the Hashemites, Jordan and Iraq, after imperial French troops ejected Emir Feisal from Damascus. British oil interests necessitated that Iraq include the three Ottoman provinces of Baghdad, Basra and Mosul. Oil, ethnic civil war and bloody struggles for power have defined Iraq politics since its birth.
The Iraq Petroleum Company (IPC) was a British dominated international cartel until the military coup that led to the murder of the last Hashemite King Feisal II and the end of British influence in Baghdad in July 1958. The Baathists later nationalised the IPC in 1972 and opened up Iraq to French and Soviet oilinterests. Oil wealth enabled Saddam Hussein to launch his invasions of Iraq and Kuwait, build the world’s fifth largest army, repress revolts by the Kurds and subvert the UN oil for food programme Saddam Hussein used oil as a political weapon and instrument of his totalitarian dictatorship from the moment the Baath seized power. Shell, Petro China, Lukoil, Total, ENI Repsol, Tatneft operated Iraq oilfields until post Desert Storm UN sanctions. Iraq under Saddam was a victim of Dr Stiglitz’s concept of the oil curse.
Iraq’s proven oil reserves have been estimated at 120 billion barrels and the Noori Al Maliki government is determined to double production to six million barrels a day (MBD) in the next decade. While tensions in Nigeria/ Libya and North Sea outages have limited oil supply, the longer term trend is an oil glut once Iraqi exports flood global markets. If Saudi Arabia will not engineer a price cut, Iraq could well cause a collapse in global oil prices. Iraqi oilfields are legendary. The West Qarna and Majnoon oilfields are estimated to hold 12 billion barrels each. Iraq’s western desert is a largely unexplored and could increase its reserves even beyond Saudi levels. Iraq is known as “Klondike in the shatt at Arab” in the world’s oil boardroom for very good reason.
Iraq’s oil production resurgence will also be facilitated by the decision of US megabanks Citigroup and J.P Morgan to enter the local banking market. It is now evident that America’s largest banking conglomerates can no longer ignore operating in the Arab world’s second largest oil exporter with the fifth largest proven oil reserves on the planet. International bank often “follow the flag” and both Citi and JP Morgan have historically been lead banks for Big Oil. As Basra becomes an oil hub, Iraq builds pipelines and storage terminals in its $1 trillion planned infrastructure program, trade/project finance will be a windfall for international banks. Even though bombs continue to explode in Baghdad, Kirkuk and Mosul investors continue to buy Iraq’s sovereign eurobond on the belief that the geopolitical risk premium has fallen since the largest oil companies and banks have scaled up their business even as crude oil production expanded by 24 per cent in 2012, the fastest in any major Opec nation.
This does not mean that Iraq’s geopolitical risk premium will be permanently lower. The Nouri Al Maliki coalition is mired in a protracted dispute over oil sales with the Kurdish regional government in Erbil. The spill over from the Syrian Civil War has escalated. The Baghdad government’s tacit alliance with Iran and the Assad Regime could make it the target of Syrian rebel revenge attack.
Relations between Turkey and Iraq also have the potential to escalate into full blown war. Iraq also owes $11 billion in Kuwaiti reparations and has set aside five per cent of its oil revenues to repay its debts.