As foreign military forces withdraw from Iraq, a new army of foreigners is beginning to enter this beleaguered but resource-rich country armed not with combat skills and weapons, but with expertise in technology and skills honed in the international energy industry.
Invited and largely welcome, although viewed with some suspicion by a still divided Iraqi population desperate to benefit from what all sides know should be a sizable oil dividend, this new “army” has a lot of work to do. Indeed, the energy army has already partially deployed to Iraq, and personnel representing operating companies, services companies, accountants and lawyers have made their way to Baghdad and Kirkuk. But will companies from the north-east of Scotland be among them? We know of one at least.
Iraq has a substantial skills base and an exceptionally educated population; however, years of sanctions, authoritarian rule and more than 20 years of near-constant external and internal conflict have impacted on this and resulted in under-exploration and the dilapidation and destruction of existing infrastructure.
Of course, concerns over security and political stability continue, but despite this, as an investment destination, it is undoubtedly attractive, particularly for the energy industry, which has consistently operated in environments with corrupt, authoritarian and/or unstable administrations and separatist issues – and this just includes Opec member states.
Iraq has 115billion barrels in proven reserves (BP Statistical Review 2008) and a reserves-to-production ratio (RPR) of more than 100 years. Furthermore, oil is of a high quality and is easily extractable. To date, only 15 of Iraq’s 74 proven fields have been developed and it has ambitious plans to significantly increase its production levels in the next four years.
Entering this potentially lucrative market, however, is not without its difficulties, despite the fact that both the Central Iraqi Government in Baghdad and the Kurdish Regional Government (KRG) – which controls several oil-rich provinces in the north of the country – have opened their respective doors for foreign investment, albeit in very different ways.
The KRG has signed more than 20 contracts, although their legality is questionable, while the majority of international oil companies have been waiting to deal with the Central Iraqi Government.
Further differences appear in the types of contract on offer by the respective authorities, with the Central Iraqi Government opting for 20-year “technical service contracts” and the KRG preferring the “production-sharing agreement”. To further confuse matters, the Iraqi government requires operating companies to be pre-approved prior to even tendering for a contract, while the KRG does not.
Security in the traditional sense is, of course, an overarching concern for companies considering operating in Iraq, and many of the risks so prevalent during the official conflict remain, including improvised explosive devices and roadside bombs, demonstrations and protests, hijacking and even kidnapping, although the latter is now more likely to be for criminal and financial gain than by fundamentalist Islamists.
On the whole, the situation is improving and Iraq most certainly needs help to both recover and develop. There are ways and means to mitigate risk to personnel and operations, and to operate successfully, even in environments as challenging and potentially rewarding as Iraq.
Political risk is less easy to plan for and to protect against, and in a country where controversial energy legislation has yet to be passed into law – leaving questions over resource control unanswered – it is this threat and not bombs and guns that may sway the industry’s decision-makers.
The controversial issue of Iraq’s oil was tackled by the 2005 constitution. However, ambiguity and deliberately vague language resulted in little progress being made in this respect. In such circumstances, information is a company’s key to operating with safety. With recent election results indicating that the Central Iraqi Government may take a harder line on the KRG and its endeavours in the north, one thing is clear, and that is that there is much still to be done to stabilise this country politically and in terms of security, and also to kick-start a failing energy industry in need of help.
It is not all doom and gloom, and opportunities abound. Leaving the KRG-controlled area aside, the 35 companies pre-approved by the Iraqi government will all require service support at all levels as they tender for, and fulfil, their obligations, and these are not the only opportunities. The training of Iraq’s own energy personnel is also paramount to the success of the industry, and yet another potential revenue stream for north-east firms.
Previously senior Middle East intelligence analyst for security consultancy AKE, Claire Fleming is now the firm’s corporate relations manager based in Aberdeen