Iraq Update: April 2010

Major Oil Contracts Signed

With eleven technical service contracts now signed under the first and second oil and gas licensing rounds, the Iraqi upstream sector looks much more promising than it did at this time last year. When the oil and gas majors that have signed these contracts bring their fields to the agreed-upon production targets &mdash targets which many analysts believe are ambitious &mdash Iraq will have increased its production by approximately 10.33 million barrels a day. This is equivalent to adding the total production of Saudi Arabia &mdash or more than three Shells &mdash and will make Iraq the largest producer in the world.

This immense increase raises several important issues. First is the question of whether global markets are prepared to absorb this production. Despite the dip in developed markets' consumption due to the economic crisis, demand forecasts from China, India, and other emerging markets are robust. But the question may put a particular strain on relations among OPEC nations. Iraq is an OPEC member but not presently subject to OPEC quotas, partly as a "catch-up" mechanism for its many unproductive war years. But as Iraq's production increases, OPEC's need to support prices may lead to a less amenable stance on Iraq's current unrestricted production.

Second, there is the pressing question of Iraq's capacity to support this production in the first place. Iraq's pipeline infrastructure is badly in need of refurbishment if it is to support exports beyond the current level of 2.1 million bpd. Its port network is ill-equipped to handle the massive influx of equipment and laborers that are necessary to increase production. At present, only the ports of Umm Qasr and Khor al-Zubeir, and a smaller port at Abu Floos, are receiving cargo. Berths are limited, and delivering shipments can take several days.

Finally, although technical service contracts have been signed there still is no comprehensive legislative and regulatory framework for the petroleum sector. This preserves an added element of political risk in the oil sector that will continue to give global oil majors pause just as it prevents Iraqi national oil institutions from unlocking the full revenue potential of Iraq's greatest resource.

Fairly Contested Elections, No Clear Front-Runner

On the political front, the March 7th elections were a generally positive indicator of Iraq's increasing stability and comfort with its democratic political institutions. An estimated 60% of the electorate turned out to vote for over 500 political parties and thousands of candidates. Despite a frustrating delay in the tabulation of results and scattered allegations of fraud, the election was fairly and vigorously contested, according to outside observers. Even the discontented have embraced democratic &mdash if not officially recognized &mdash means to voice their opinions, as followers of the Sadr movement have done in conducting their own referendum on who should be the next Prime Minister.

In a surprise performance, the Iraqi National Movement led by Iyad Allawi barely edged out Prime Minister Nouri al Maliki's State of Law Coalition, winning 91 seats to State of Law's 89. Neither is enough to form a government, which has raised the bargaining power of the next two largest voting blocs &mdash the Kurdistan Alliance, winning 47 seats and the Sadrist-dominated Iraqi National Alliance with 70 seats. Development and political progress will be slowed somewhat as the Iraqi judiciary hears several appeals on the vote results and the various blocs attempt to create a governing majority. In the long-term, these are positive signs, evincing a trend toward broad-based secular politics and recourse to state institutions to arbitrate conflicts.