Iraq’s Natural Resources and the Potential to Tackle the World Energy Challenges
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Foreign Office Minister Lord Howell spoke about Iraq’s natural resources and its potential to tackle the world’s energy challenges at the Iraq Petroleum Conference on 18 June.
Deputy Prime Minister, Ministers, Chairman and expert audience.
It gives me great pleasure to be here this morning to address such a distinguished range of guests at the Iraq Petroleum Conference. I would like to thank the CWC Group for the invitation to take part.
I remember well our discussions last year and am struck both by how much has changed in Iraq, although also by how many of the familiar challenges remain. Of course, there has been considerable progress as we have heard. To give one more example, oil production in BP’s massive Rumaila field has helped lift Iraq’s oil exports to 2.5 million barrels per day (mbd), overtaking Iran as the region’s second largest oil exporter. And incidentally, this has only been possible thanks to the success of a major project by Foster Wheeler UK to increase export capacity from the south, already up from 1.8 mbd to a potential 2.7 mbd, and on track for much higher levels by the end of next year.
I am particularly pleased to be speaking today about the role of Iraq in the global energy picture. How we should respond to changing global energy trends is the vital strategic question that we should be asking at this time and I am delighted to be given this opportunity to share my thoughts on the subject.
The Global Energy Challenge
The global energy challenge is familiar to us all. We must secure reliable and affordable energy in an increasingly volatile market, while simultaneously reducing the dangerous impact of climate change. Our success at the former is essential to drive our global economic recovery; our success at the latter will define the lives of future generations. Neither can be achieved in isolation.
The challenge begins with a familiar story of opposing market fundamentals. We all know that global oil demand, driven by the growing of markets in China and the East, will continue to expand for decades. In 2011 we survived political and other disruptions such as Libya, Fukushima and Syria, yet production is now above consumption. In the long term, there is less certainty.
The figures from the International Energy Agency illustrate this well: over the next 25 years, the global demand for oil is predicted to grow by an additional 20 million barrels per day above current demand, while field depletion will remove around 47 million barrels per day from the market supply. This means that by 2035, we will need to find at least 67 million new barrels per day to meet global demand. This is the equivalent of around 3 million barrels per day every year.
To put this in some context, when I became Secretary of State for Energy in 1979, conventional oil discoveries exceeded field depletion by almost 14 billion barrels and we were entering a boom in North Sea oil production. The challenges in the Middle East were no easier to reconcile back then, but the market was infinitely more forgiving. It is no understatement to suggest that the resource competition we face ahead is unlike anything that we have faced before, although even these predictions could be up-ended by events such as the shale gas and shale oil revolutions, and the discovery of vast new oil deposits such as Bakken in the US and dwarfing that, Russia’s Bazhenov.
And so our struggle for reliable and affordable energy takes us to ever more volatile and inhospitable environments. The technological leaps we have made - from developing unconventional oils to gas-to-liquid production, from the deep pre-salt fields of Brazil to arctic exploration in Siberia - these are testament to our ingenuity and endeavour. I believe that the progress we have seen in Iraq over the past decade is as important as these technological achievements.
Iraq has a vital role to play in meeting the global energy challenge, whatever form it takes. The natural wealth of Iraq is immense and its potential significant. It is the nation’s tragedy that historic mismanagement and political repression allowed so little of this wealth to reach its people in the past. Iraq’s challenge, our challenge, is to harness the vast oil lakes beneath Basra and Kirkuk, Baghdad and Erbil, and use them to drive development for the benefit of all Iraqis.
Success would be hugely beneficial, not just for the people of Iraq, but for the global energy market too. Iraq has demonstrated an ability and a desire to lead this process, and we should applaud their tenacity and determination. The ambitious targets and investment in domestic infrastructure speak volumes. And the year on year growth in production - as much as three million barrels per day last month, including 2.5 million in exports - demonstrates clearly the technical and innovative capacity the country has never lost.
And Iraq boasts not only enviable oil resources, but also substantial natural gas reserves. These must be harnessed for electricity generation first and foremost to unlock Iraq’s domestic economic potential. But gas will also grow to play a major part in Iraq’s exports in the long term. The joint venture between Shell and the South Gas Company shows that Iraq is already thinking in these terms. We should commend this foresight and welcome the contribution that Iraq can soon make to global energy security in gas, as well as in oil.
Role in the global market
So Iraq deserves to retake its position at the energy top table. Over the next twenty years, it could be that that we will see the country develop into one of the key global players in the energy market. This will bring with it great responsibility. And for this reason, Iraq should be asking itself some important questions about the road ahead.
Through investment in spare production capacity, Iraq has the potential to become a stabilising force in the market. I believe that Iraq could be the next swing producer, akin only to Saudi Arabia, and could grow to play a crucial role in steadying the spikes and troughs of the global energy market. Such a move would require significant investment, and a responsible hand at the wheel, but could provide the reliable engine that drives stable and prosperous development for generations to come.
It could also help guide OPEC to work more closely with consuming nations through international organisations, including the International Energy Forum, to the mutual benefit of producers and consumers. The divisions that beset OPEC and pit the so-called ‘doves’ against the ‘hawks’ are noteworthy. Iraq could help turn the organisation towards a new and more stabilising path that helps producers and consumers to stabilise supply and demand, whilst seeking to meet Asia’s voracious appetite for energy.
But let us not get ahead of ourselves. The oil beneath Iraq has existed for millennia. The country has long had the natural wealth to develop in all the glorious ways we predict today, yet through mismanagement, repression and political turmoil it has singularly failed to do so. The path to realising this potential will not be without difficulty. And this will be compounded by changing global energy trends, as demand shifts from the historic energy hubs in Europe and the West to the rapidly growing markets in the East.
Challenges in Iraq
Investment is vital. We must work to create an environment where profitable investment is encouraged and can flourish. Trust, confidence, a stable underlying political climate and, of course, physical security are the necessary conditions.
In this context, the results of the fourth oil and gas bidding round last month were disappointing, with only three of twelve blocks awarded. A combination of factors, including unattractive contract terms and geologically riskier acreage, led to a lukewarm response from 39 companies that paid the entrance fee to bid. Leaders need to take note of global energy developments. With growth in unconventional gas pushing down prices worldwide, gas production is less attractive than in the past. Some analysts estimated that the blocks on offer needed a $10-20 per barrel fee to be viable - up to ten times the $2 per barrel cost bravely accepted by BP for production in the Rumaila oil field in the first round.
And the current political disquiet in Iraq continues to reduce certainty in financial markets. Without stability, the capital that can drive Iraq’s development will stay away. Political leaders need to address this.
Unblocking the long-stalled Hydrocarbon Law would be a good start. I don’t believe any of us expect to see a solution in the near future. And though we can point to the record production of the last few months, and take heart from the growing domestic budget, it would be wrong to pretend that this is business as usual. Without a robust legal framework, business cannot operate with confidence. And lack of confidence will ultimately undermine attempts to drive lasting economic and political development in Iraq. The gains from a settled pattern between Erbil and Baghdad would be enormous - with a major stride to end political deadlock, and with Kurdistan ambitions, including a goal of 2 mbd from the region by 2019 - further reinforcing Iraq’s overall prominence in world oil.
Businesses also face a number of operational challenges in Iraq which increase the risk to working in the country. Progress must be made to improve the efficiency of imports, and tackle bureaucracy and regulation, if businesses are to be encouraged to invest.
The fragile security situation also undermines business operations. I speak to industry regularly about these challenges, and it seems to me that their impact is less on the major oil companies, who have experience operating in fragile environments, but rather more on smaller companies working along the supply chain, whose operations can be seriously impeded. And it is the smaller businesses that often provide the innovative leaps and unique skills that make our grandest ambitions achievable. If Iraq is to play a positive role tackling the global energy challenge, then these companies must be with us on the journey.
I know that tackling security is a key priority of the Iraqi Government - and for Prime Minister Al-Maliki personally - and the UK stands beside the government in its work to ensure a substantial and permanent improvement in security for all Iraqis.
The UK Government response is that we are providing support to Iraqi institutions and the rule of law under our Arab Partnership agenda, which should help counterbalance some of the dangers of over-centralisation of power. We are working with our Gulf allies to promote greater engagement in Iraq and encouraging the Iraqi government to play a constructive role in key regional issues like the Syria crisis and the Iran challenge. We see strong engagement by both the UK and our partners as essential to promote accountable, inclusive and transparent government, which is in turn essential for robust inward investment flows.
Opportunities in Iraq
Iraq is a country that brims with potential, in a region that brims with potential. Indeed, greater co-operation between Iraq and its neighbours - and across the region as a whole - would also help to secure success. We are already seeing some progress; the improved relations between Iraq and Kuwait, for instance, which we should welcome.
So I believe Iraq is approaching its richest seam. Yes, I see challenges. But I see opportunities too.
UK business is ideally positioned to capitalise on these opportunities. Looking around this room today, I see expertise from across the oil sector, from upstream investment analysts to scientists developing the next petrochemical breakthroughs. British industry has a lot to be proud of, especially in the energy field. Our expertise in project management and engineering; in design, manufacture and installation of advanced equipment; in geotechnical and reservoir management; in ground-breaking research and development; and in learning and skills training - all of these can and, I believe, will be essential components of the Iraqi energy story.
We know that Iraq will be part of our future, and we must make sure that British industry is part of theirs.
So it is clear, Ladies and Gentlemen, that a prosperous and secure Iraq will be indispensible for a stable and affordable oil market over the coming years. And success in this will help drive global economic recovery. We must work together to ensure we achieve this ambition; an ambition that is in all of our interest, from humble politicians to captains of industry. Technology and markets will be our friend. Political instability, violence and natural disasters, like the Japanese tsunami and all the Black Swan events, will be the foes to be overcome by innovation, ingenuity and well-regulated market forces, and above all, political wisdom and far-sightedness.
It is in our economic interest, for our businessmen and women; it is in the region’s interest, to promote stability and security; it is in our global interest, to drive economic recovery; and, most importantly, it is in Iraq’s interest, to capitalise on its rich natural resources and become the country that its people know it can be.