Iraq is the largest untapped major resource of hydrocarbons in the world, despite having been a founding member of OPEC. That is in large part due to the sustained period of turmoil it has been through; there was the war with Iran throughout the ’80s, followed by the Kuwait invasion and the imposition of international sanctions throughout the ’90s, followed by the US invasion and regime change in 2003. Iraq has suffered decades of war, sanctions and isolation from the international oil and gas industry, in terms of capital, technology and management.
Despite those challenges, the country has achieved much in recent years. It has gone from producing a couple of million barrels a day of oil to nearly 5m b/d currently, and it should double that—and more—potentially, if all goes to plan. There are still huge fields that are undeveloped, huge prospects that are unexplored.
Iraq is now officially the second-largest oil reserve holder in the Mideast next to Saudi Arabia, with 140b bl. And that very much underestimates the true potential.
Even under the most ambitious energy transition scenarios, oil and gas is going to play a prominent role for decades to come. So much of what the energy transition relies upon is made of oil, whether it’s the electric cars, the wind turbines, or the solar panels. Natural gas is also fundamental, as was recognised at the COP28 climate summit last year. It’s an important transition fuel, because gas replacing dirtier fuels like coal or liquid fuels in the case of the Middle East is how you quickly reduce emissions and then enable the addition of renewables. Because renewables are intermittent, you need to stabilise the baseload before you can add solar and wind.
Even as we look at an eventual transition away from fossil fuels, the fossil fuels we have in the Middle East and Iraq, in particular hydrocarbons, are going to be among the last in the market to go, because they are the lowest cost, and among the cleanest.
Iraq has some catching up to do, compared to the UAE and Saudi and others in the region.
Finally, we’re making important strides in adding renewable energy, in particular solar. Both Acwa Power and Masdar, the leading Saudi and UAE companies respectively in the solar space, are now active on the ground in Iraq.
More reforms are needed to consolidate this progress. For example, we need to reform how electricity is priced, how fees are collected and the charges, all the way into the upstream with the contract model.
Iraq’s first oil and gas bid rounds were based on a technical service contract model, under which the investor got the investment back, plus a fixed fee per barrel. However, that failed to align investors with the host government. That model gave the investor no incentive to reduce costs. And when oil prices went up, there was no incentive to put their best people and capital on the project, because they only got a fixed fee per barrel.
The positive is that those flaws are now widely recognised in Iraq. There was a revision of the contract model for the fifth bid round, that we bid on successfully, to turn it into more of a revenue sharing model, rather than a service fee. Now, you can bid on a percentage of revenues. And that has achieved better alignment. The outcome of the latest bid round is further proof of that progress.
This article forms part of our recent Energising Iraq report, produced in conjunction with Crescent Petroleum. Click here to download your free copy.
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