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2.4 Iraq’s invaluable natural resources: economic potential dissipates
and political independence falters
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The great potential of Iraq’s resources lost to mismanagement and corruption
Even with its land being vastly underexplored, Iraq currently holds the world’s third largest
oil reserves reaching 115 billion barrels. With approximately only 10 percent of Iraq’s land
explored until now, experts anticipate that the country’s proven oil and natural gas reserves
would multiply considerably and oil reserves are expected to exceed 200 billion barrels of
high-grade crude. The high quality of Iraq’s petroleum ensures reduced costs to produce
and refine, and thus attracts a great number of international oil companies and other
investors. The costs of oil extraction remain among the cheapest globally and are estimated
at USD1.50 per barrel.
Basra is of particular interest to national, regional and international players as well as to
extremists as the province holds 80 percent of Iraq’s oil reserves and is home to the
country’s only deep sea port and trade routes to the Gulf. Access to and control of Basra’s
oil and gas resources would provide parties with significant economic and strategic power.
Following discussions between Deputy Prime Minister Barham Saleh and UK Prime Minister
Gordon Brown, the Iraqi-owned and independent Basra Development Commission was set up
to promote measures for investment and economic development in southern Iraq.
Following Iraq’s invasion and occupation of Kuwait, the UN imposed economic sanctions
against the Iraqi regime with the subsequent Security Council Resolution 661 (1990)
prohibiting all countries from purchasing Iraqi oil and selling Iraq only food and medicines.
The Resolution further obliged Iraq to channel 30 percent of revenues generated from the
sale of Iraqi oil through the UNCC in order to compensate for damages and losses incurred
during Kuwait’s occupation. The obligation has now been reduced to five percent but with a
larger revenue base, corresponding to approximately USD 220 million on a monthly basis.
Despite this obligation through the UNCC, currently more than 90 percent of the Iraqi
government’s direct revenue depends upon oil exports.
Iraq’s missing oil
Iraq is indeed a wealthy country; annual government revenues exceed USD 40 billion.
According to the US State Department’s Iraq Weekly Status Report, oil exports generated
USD 41 billion in 2007, enough to fund the budget of the entire year. Nevertheless, Iraq’s
potential for economic primacy is currently lost to corruption and oil smuggling. Notably,
the Oil Ministry Inspector General revealed that Iraq lost USD 4.2 billion in revenues
through oil smuggling in 2005 alone. In May 2007, The New York Times publicised the
conclusions of a draft report prepared by the US Government Accountability Office with the
assistance of government energy analysts, reinforcing suspicions that corrupt officials,
smugglers and criminals control considerable parts of Iraq’s oil industry. In particular, it
was reported that since 2003 between 100,000 and 300,000 barrels a day, valued at USD5
million to USD15 million, were unaccounted for in Iraq. Officials fear that a large fraction
of the proceeds of smuggling refined oil products end up in the hands of insurgent groups.
In addition to this discrepancy, there are increasing concerns about how the central
government is spending its considerable oil revenues. Recently, The Washington Times
reported that the Iraqi government has invested billions of dollars generated from oil sales
in US Treasury securities instead of investing the earnings into vital reconstruction projects
that would help restore stability. Notably, in 2006, Iraq’s Oil Ministry spent a mere 3
percent of its USD3.5 billion capital budget whilst the entire government spent only 22
percent49. More recently, a report prepared by the US Government Accountability Office stated that only 4.4 percent of Iraq’s USD 10 billion budgeted for capital projects in 2007
had been spent in the first eight months. President’s Bush Administration disputed the
report, arguing that the spending was at about 24 percent.
Amid failings, corruption and budget mismanagement, the performance falls further and
further behind official goals, with Iraqis increasingly becoming frustrated and discouraged
by the Iraqi government and its international partners. Following five years of international
involvement and efforts, public disillusionment is rising dramatically as strategies fall short
of promises for prosperity and stability.
Dominance disputes and strategic shifts
Iraq is not a poor country: its richness in oil and natural gas resources presents the country
with an invaluable opportunity to (re)gain economic power and a large potential for
strategic and political primacy. Various actors at the different levels recognise this
immense opportunity and have sought to promote their economic and political interests.
The exploitation and management of Iraq’s oil has become a central element of the
political landscape.
Intense debates and negotiations over the provisions regarding the development of
petroleum resources have dominated Iraq’s political scene, especially since July 2007 when
the Iraqi cabinet endorsed the draft oil law. Iraq’s central and Kurdish region governments
have been at odds over the future of oil-rich Kirkuk and other disputed territories, as well
as over the validity of the oil deals the Kurds have already signed with foreign companies.
Notably, the Kurds made unilateral moves in their three-province region; since 2004 the
regional government has signed more than twenty deals to explore for and develop oil and
gas. Undoubtedly, Iraq’s oil and gas resources have become a source of contention,
further challenging stabilisation and reconstruction efforts in the country.
Al Qaeda capitalising on Iraqis’ oil worries
In recent years, Al-Qaeda leaders Osama bin Laden and Ayman al-Zawahiri have been vocal
regarding the importance of preserving oil as a great economic power. Bin Laden has called
for Muslim societies to become more economically autonomous and to prevent foreign
powers from controlling this invaluable resource. With international actors seeking to
explore for and exploit Iraq’s oil, bin Laden and al-Zawahiri have called for attacks on oil
infrastructure. Interestingly, this indicates a shift in Al-Qaeda’s strategy and tactics
favouring “a more protracted attritional conflict characterized by disruptive attacks on
economic and critical energy production infrastructure”.
Regional and international players have also sought to promote their economic interests by
linking Iraq’s oil to the country’s external debt obligations. In particular, creditors, such as
China, have been eager to forgive Iraq’s debt owed to them in return for access to bids for
oil exploration contracts. Also, the four US and UK oil giants have been keen to return into
Iraq, from which they were excluded with the nationalization in 1972. Considering Iraq’s
underexplored land that is expected to yield large additional oil reserves, offering the
opportunity to foreign countries and investors to obtain major oil deals would worth
hundreds of billions of dollars in profits in the next decades.
Balancing foreign investment and resource sovereignty to rebuild Iraq’s economy
Iraq’s oil potential is immense with predictions referring to billions of dollars in profit for
the oil giants involved in the exploration for and exploitation of this resource. Key
provisions of the draft Iraq oil law allow international companies to enter this exceptionally
lucrative industry.
The Governor of the oil-rich Basra province, Mohammed al-Waili, has welcomed foreign
investments in oil and gas development. Furthermore, the independent Basra Development
Commission seeks to address constraints and make tangible improvements in investors’
opportunities as well as undertake action in pursuit of a vibrant private sector.
Conversely, there have been increased concerns over foreign interference and exploitation
of Iraq’s oil and natural gas resources. The draft oil law favours Production Sharing
Agreements (PSAs) - a favourite of international oil companies - guaranteeing companies to
control the extraction and development of Iraq’s oil for a 30-year period.
Members of Parliament, Iraq’s oil workers and civil society groups have opposed this
measure and called for specific arrangements to be made ensuring that the interests of the
Iraqi people are protected. Concerns were also expressed by six Nobel Peace Prize Laureates
who fear that the proposed law will lead to poor contract terms for the Iraqi people,
pointing out that “it is immoral and illegal to use war and invasion as mechanisms for
robbing a people of their vital natural resources”.
Notably, in January 2008 it was rumoured that highly confidential negotiations were being
held between Parliamentarians and representatives from American oil companies, with the
latter offering up to USD 5 million to members in exchange for their vote in favour of the
proposed oil law.
- Resource sovereignty
Opposition to foreign investment is an integral part of the broader debate on Iraq’s
resource sovereignty and economic and political independence. Iraqis are becoming
disillusioned with failed promises, economic hardships and what is increasingly perceived
as foreign interference through oil exploitation and imposing IMF regulations.
Crucially this has been capitalised by insurgent groups and Al-Qaeda leaders who repeatedly
urge Muslims to concentrate their campaigns against the “stolen oil”. With foreign
investment and Iraq’s resource sovereignty currently at odds, it is imperative that Iraqi
grievances on poverty and autonomy are properly addressed and a genuine economic
partnership between Iraqis and international actors is promoted.
“The oil law has an enormous far-reaching long-term effect, enshrining the idea that the oil
revenues of a country are to be shared equitably with all Iraqis. That is a very significant
development. Long term it is hugely important both to the economic revival of Iraq and to keep
the country together as one.”
General David Petraeus, 20 June 2007 |
- Foreign investment promoting economic growth
International leaders and organisations must help build the capacity of government
institutions and the necessary infrastructure in order to foster prosperity and economic
development in Iraq, which will benefit the Iraqis, their neighbours and beyond.
Foreign investment must be viewed as a security and development instrument transferring
know-how and promoting sustainable growth; the Iraqi government must develop a
regulatory framework setting standards requiring foreign companies to look for reliable
Iraqi partners, thus generating jobs and developing indigenous technical and professional
capacity. An economic partnership seeking to develop Iraq’s rich resources and guided by
the interests of the Iraqi people would crucially encourage closer cooperation and trust
between Iraqis and the developed world.
- Tackling corruption and building capacity
Public confidence in the Iraqi government is progressively being lost to corruption and
mismanagement of oil revenues. Iraqi government institutions both at provincial and
central government levels must work together as partners, with the support of the
international community, to reduce corruption in the oil sector, improve fuel availability
and counter attacks on oil infrastructure. Building capacity is vital for the Iraqi government
and its international partners to regain the trust and confidence.