Page last updated at 00:18 GMT, Thursday, 19 June 2008 01:18 UK

The challenge of exploiting Iraq's oil

By Marcus George
World Service reporter, BBC News

Iraq oil barrels
Iraq is said to have the world's largest untapped oil reserves

It's difficult to imagine today, but 50 years ago the Iraqi oil industry was directed from offices thousands of miles from Baghdad.

In the 1950s, number 214 Oxford Street, London, was the headquarters of the Iraq Petroleum Company.

For three decades, the IPC held a stranglehold over Iraqi oil - a monopoly only broken with nationalisation in the 1960s.

But once again, foreign oil companies are waiting for another opportunity to return to Iraq. With governments eager to see the rocketing price of crude oil kept under control, focus on Iraq is increasing.

Shortlist

So what's on offer?

According to some, Iraq has more unexploited reserves of oil than anywhere else in the world. It has 115 billion barrels of proven reserves, but industry estimates say potential oil fields could more than double that.

"Iraq is the one country that has so much proven and potential reserves - that puts it on a par with Saudi Arabia," says Tariq Shafiq, a veteran Iraqi oil engineer who started his career with the Iraq Petroleum Company.

Pumping it out of the ground is technically cheaper than anywhere else in the world, making it even more attractive to foreign oil companies, Mr Shafiq explained to the BBC World Service's Newshour programme.

A shortlist of 35 companies has been recently been approved by the Iraqi government to bid for oil contracts.

They are waiting for the Iraqi parliament to approve new laws governing the industry. After two years, there has been little progress.

Capital

So what are the obstacles?

Mr Shafiq led the team that drafted the law and he says his draft's emphasis on developing existing oil fields has been altered.

The reserves in the ground are the assets of the future generations and there's no need to mortgage them today
Tariq Shafiq,
Iraqi oil engineer

"Iraq today does not require a new exploration effort," he says.

"The reserves in the ground are the assets of the future generations and there's no need to mortgage them today."

At the current rate of production - more than two million barrels per day - Iraq does not need to look for new oil fields for more than 100 years.

So why spend capital on new exploration, he says.

Political wrangles

But that's only one issue.

Mr Shafiq claims several other elements of the draft, around the governance of the industry, have been watered down because of the political wrangles between regions and the federal government.

Oil refinery tower near Baghdad
Oil refineries are key to the Iraqi economy

It is these negotiations - over jurisdiction of the country's natural resources - that are causing the greatest concern in Baghdad.

OMV is an Austrian oil company that is already operating in Iraq.

It isn't alone. About 20 other companies have signed contracts too - with the Kurdish regional government, the authority for the autonomous Kurdish region in northern Iraq.

The regional government's head of the foreign relations, Falah Mustafa Bakir, says these contracts are based on law.

"We have independent legal opinion that confirms this fact. Whatever we have done is legal and constitutional," he says.

"We don't want to go back to the old-fashioned type of state-run oil industry. What we want is an efficient free-market approach."

The Iraqi government disputes this. In an interview with the BBC, the Iraqi oil minister, Dr Hussein Ali Shahristani, says the contracts have no standing.

"The companies that have signed these contracts have no right to work on Iraqi territory. They will pay the full consequences of their actions," he said."

"That oil is the property of the Iraqi people and it should be handed over to the Iraqi government."

Peace and security

The oil legislation also faces opposition from nationalists in the Iraqi parliament and oil workers' unions, who fear it could pave the way to foreign control.

"The law very clearly calls for production sharing contracts, something we have a lot of reservations about," says Hassan Juma'a, the president of Iraqi oil unions.

"If these contracts last for 30 or 40 years, it will give domination to the foreign companies. And their profits could be greater than those received by the Iraqi government."

Hussein Al Shahristani says they have nothing to fear.

"If Iraq needs help from international oil companies, they will be invited to co-operate with the Iraqi National Oil Company, on terms and conditions acceptable to Iraq, to generate the highest revenue for Iraq," he states.

"Iraq will always have control of its national wealth and oil is the most important Iraqi national wealth."

In the short term, the oil ministry will buy in technical expertise via six service agreements with foreign companies. These will boost daily production by half a million barrels by the end of the year.

And the money is available. It is estimated the government will receive $70bn in oil receipts this year alone. And there is more than $30bn sitting in its oil revenue accounts.

If Iraq does have the largest unexploited oil reserves in the world, it's still unclear if they will be a harbinger of peace and security or another cause of sectarian tensions.

Meanwhile, on the streets of Baghdad, people's thoughts are preoccupied with security and basic services, such as electricity and water.

Many wonder if Iraq's national wealth will ever improve life for them.


SEE ALSO
BBC uncovers lost Iraq billions
10 Jun 08 |  Middle East
Crunch year ahead for Iraq
28 Dec 07 |  Middle East
Country profile: Iraq
18 Jan 08 |  Country profiles

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