The Real Reason Iraq's Oil Boom Has Stalled

Iraqi crude at Al Basra oil terminal in the Northern Arabian Gulf Photograph by Charles Crowell/Bloomberg

There’s an old saying among oil analysts that the last barrel of oil in the world will be produced in Iraq. It’s a mixed compliment that hints at the paradox of the country’s oil industry. On one hand, Iraq is home to a vast amount of relatively easy-to-extract oil: Its 137 billion barrels of proven reserves account for about 9 percent of the world’s oil. On the other, there always seems to be something getting in the way of producing it: war, government bureaucracy, sanctions, more war.

A decade after the U.S.-led invasion, Iraq is now producing about a million more barrels per day than it was on the eve of Operation Iraqi Freedom. That’s a 35 percent increase, close to record highs for the country.

Iraq’s oil resurgence is impressive, yet analysts are hesitant to call it a categorical win. If anything, the recovery has been slower than it should’ve been. “I’d give it a solid C,” says Michael Knights, a Lafer Fellow at the Washington Institute who spent much of the last decade in Iraq, working as a consultant to oil companies.

Much of the fault lies in mistakes made in the first year after the invasion, says Knights, most notably the de-Baathification and lack of security that led to an exodus of Iraq’s oil technocrats, many of whom were Sunnis who fled to places like Dubai and Jordan. That brain drain, rather than any physical damage to the oil fields, is the reason it has taken Iraqi oil production so long to recover. “One of the myths of 2003 was that the oil infrastructure was wrecked during the invasion,” says Knights, who saw first-hand the smashed up control rooms that were stripped down to bricks. “That was the easy stuff to replace,” he says.

The vast network of pipes and pumps across Iraq was largely undamaged during the invasion, even though coalition forces found it in a gross disrepair. “It was held together with bubblegum and sticky tape,”  says Knights.

After some initial fluctuation, oil production surpassed 2 million barrels a day by November 2003, 8 months into the war. That’s to the credit of Iraq’s skilled engineers who, by then, had spent a decade dealing with crippling sanctions that bled the industry of equipment and outside investment. Yet once security broke down and Iraq’s middle-class technocrats were targeted by Islamist militias, thousands of oil engineers fled. As a result, says Knights, “the only critical part of the whole oil infrastructure—the people—were gone. If we managed to keep more brains in the country, we could’ve achieved that ramp-up much faster than we’ve seen.”

Over the years, many of those Iraqi engineers ended up working for international companies as consultants and have slowly trickled back to the country. Although sporadic violence remains, security has improved enough that a slew of international oil companies are now vying for contracts to develop Iraq’s oil fields and build refineries. In October, the International Energy Agency predicted that Iraq’s oil production will double by 2020 (PDF). As upbeat as the EIA’s 2020 forecast is, it contains a ‘delayed case’ in which a handful of factors conspire to keep Iraq’s oil production from growing as quickly as it could. Some of those are already happening: Bureaucratic red tape is slowing down international investment, and exports are already behind schedule. So is a massive seawater treatment plant designed to pump water from the Persian Gulf into the oil fields of southern Iraq; without it, those fields lack the pressure necessary to extract the oil they contain.

Iraq’s crude retains a major advantage: It’s still super-cheap to extract. On average, it costs only about $5 to produce a barrel of oil in Iraq, compared to about $65 to produce a barrel of shale oil in the U.S., according to Tim Evans, an oil analyst at Citigroup. That makes Iraq’s oil the cheapest source of incremental barrels on the planet, says Evans. Yet skepticism remains. That’s simply a bet based on Iraq’s rocky past. No matter how cheap and easy it is to extract its oil, Iraq is still the last, great, unturned stone in the oil and gas industry.

Before it's here, it's on the Bloomberg Terminal.