Foreign oil companies face infrastructure constraints in Iraq

"Major infrastructure constraints" are one of the key factors at play for foreign companies going through the licensing rounds to develop oil fields in Iraq, according to Jonathan Wood, global issues analyst specialising in oil and gas at risk consultancy Control Risks.

A joint venture (JV) between Royal Dutch Shell and Malaysian oil and gas company Petronas was successful in its bid to develop a 12 billion barrel oil field in Iraq. Russian oil company Lukoil won the rights to develop a 12.9 billion barrel with Norwegian partner Statoil on December 11 and 12.

There has been little investment in Iraq's oil sector since the 1980s, and much of the infrastructure and industry remains in a state of disrepair due to conflict with Iran and the subsequent conflict with a US-led coalition in the 1990s, as well as a decade of UN sanctions.

"These companies will face constraints both in terms of pipelines and terminals to get oil out of the country but also the state of utilities and roads in the south of Iraq," says Wood.

The licensing rounds are an encouraging sign for foreign investors because it will lead to increased government revenue, which can then be spent on infrastructure, says Lucy Jones, Iraq analyst at Control Risks. "However, there is still no agreement in Iraq on a national oil law that would outline national regulations and give indications as to how profits will be divided. This has been a divisive debate and will continue to be so," she says.

The first licensing round took place in November, when Exxon Mobil, Royal Dutch Shell and Italian oil company Eni signed licensing deals with the Iraqi oil ministry. These deals aim to boost production from existing fields over the five to seven years.

After a failed invasion of Kuwait in 1990 and resulting trade embargos, Iraqi oil production fell from 3.5 million barrels per day (b/d) to around 300,000 b/d according to the US Department of Energy (DOE). By February 2002, Iraqi oil production had recovered to about 2.5 million b/d. The DOE says Iraq's sustainable production capacity is around 2.8–2.9 million b/d, with net export potential of around 2.3–2.5 million b/d.

With the development of these new oil fields, the Iraqi oil ministry is predicting Iraq's oil capacity could reach 12 million b/d within six years. Saudi Arabia, the world's largest oil exporter, has a capacity of 12.5 million b/d.