While energy outlook improves for Iraq, vulnerabilities remain

Country faces potential risk of double challenges at home and in wider region

Basra is the focal point of many of Iraq's challenges. Reuters

Smoke rises over Basra in southern Iraq.

Protesters in a hot, dry summer have burnt down government buildings and the Iranian consulate, while gas flares continue to symbolise the waste of abundant natural resources. As Iraq’s oil industry is on the up, the politics of this pivotal country are shifting again.

Iraq is a key petroleum player. Along with Saudi Arabia, Kuwait and the UAE, it is one of the four Opec countries able to increase production significantly to make up for losses from Venezuela’s ongoing economic collapse and sanctions on Iran. As well as bringing its spare capacity back into play, it also has ongoing development work which could see it top 5 million barrels per day of capacity by the end of this year.

Figures analysed by Iraq Oil Report showed a sharp rise in production, from 4.7 million bpd in July, to 4.81 million bpd in August, almost half a million barrels per day above its original target under the Opec/non-Opec deal of December 2016.

The production gain could realise extra revenues of more than $1 billion per month, compared to the total budgeted oil revenues for this year of $65bn. Meanwhile, with Iraqi crude currently selling for around $73 per barrel, versus the budgeted $46, the country is enjoying another $3bn monthly windfall from higher prices.

Yet Iraq is doubly vulnerable: from political turmoil at home, and being sucked into conflicts in the region. The Basra protests flared up in July amid shortages of gas and electricity after Iran cut supplies. The city, once termed “The Venice of the East”, has been plagued by water rendered undrinkable, again partly due to upstream blockages amid drought in Iran.

Some 85 per cent of Iraq’s oil output, outside the Kurdish region, comes from the Basra governorate. But the city sees little of this money. Demonstrators have targeted oilfields, trying to shut down access points, and demanded jobs for locals, but the industry is not a large employer and most of the roles it does offer are for skilled technicians. Protection money, payments to tribal leaders for services like trucking, and the $1 per barrel “petrodollar” budget allocated to oil-producing provinces, fail to filter through to ordinary people.

The dynamic is somewhat reminiscent of Nigeria’s delta region, where decades of oil production have left little local benefit, and attracted the wrath of gangs of young men who regularly halt output. The terrain in southern Iraq is less favourable to sabotage, its oilfields are well defended, but pipelines and export terminals are vulnerable to attacks or blockades. A continuing swell of unrest would further complicate the difficult tasks of raising Iraq’s oil output, capturing wasted gas, boosting electricity output and building water treatment plants.

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Popular anger against Tehran and its aligned parties has surged, even as many Iraqis blame Iran for instigating the protests. But Basra’s crisis is the outcome of long dysfunction of both the government in Baghdad and the provincial authorities. Incumbent parties have all lost electoral support, but no movement has emerged with a coherent alternative programme.

Manoeuvrings to form that government have continued since May’s elections, with a shifting logjam of parties, members of which periodically jump ship. The demonstrations have helped sink the chances of incumbent prime minister Haider Al Abadi, who despite his victories over ISIL and over the autonomous Kurdish authorities, has failed to bring development or much-needed infrastructure to the south.

Moqtada Al Sadr, whose alliance won the most seats in the election, has repeatedly declared his desire for a technocratic, non-sectarian government. The next government will have more money to play with, and will try short-term handouts to assuage popular anger.

But the authorities will have to make difficult, inherently political decisions, such as the allocation of oil revenues between Basra or the areas laid waste by ISIL. And even if capable, non-corrupt technocrats are found, they will remain beholden to the parties that back them.

Iraq’s struggles at home leave it vulnerable to the region’s wider political conflicts. In particular, it is an arena where Iran can seek to strike back at the intensifying US sanctions. As well as buying growing quantities of Iranian gas, Iraq is a key market for Iran’s non-energy products. It offers one route for transferring sanctioned quantities of oil under a new label.

But Iraq is, as discussed, one of the vital states for keeping a lid on oil prices as Iran’s exports drop, in effective cooperation with the three other leading Opec members. Tehran faces a conundrum here: it could further destabilise Iraq to keep its oil off the market and try to blunt sanctions. Shutting down Basra’s oil exports would be far easier and more deniable than its vague threats of closing the Strait of Hormuz.

Yet undermining the government in Baghdad would attract further anger and loss of influence, close Tehran’s own escape hatch, and risk the resurgence of its enemy, ISIL. Iraq is unlucky to be caught between rival powers, but its politicians have to solve their own problems. That begins with pouring fresh water on the flames in Basra.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis