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It is very difficult with a market like Iraq to separate current issues, past progress and likely consequences. Since mid-2009 there has been significant achievement and progress, a sustained period of calm which now, sadly, is turning into what will probably be a very violent period as the actions and indecisions running up to the last election start to be resolved.
Let us take a quick look back at what has been achieved by the Iraqi Government:
Two licence rounds that were very much more transparent than most in Western countries;
Production has increased from about 2 million barrels of oil a day in 2009 to about 3 million today and is increasing rapidly;
14 IOC’s (International Oil Companies) and hundreds of service companies operating in Iraq;
$43 billion in foreign investment during 2010 with numbers showing about twice that expected in 2011.
The Central Bank of Iraq has a surplus of $50 billion
The contracts being awarded are massive, but it is not clear to me that many companies are making much in the way of profits in the country because the operating costs are so high. If companies cannot generate earnings commensurate with the risk, they will leave – especially with the price of oil rising quickly.
However despite the achievements there are significant problems, some of which have been highlighted already, but it is important to understand the likely out-turns of what is going on in this re-emerging economy. There are a few facts that, in my view, are driving what you are seeing in Iraq now; these are:
The Shiite-Sunni divide has been a fact in Iraq that has never gone away. Facts, so the expression goes, are stubborn things and 1,300 year-old facts are especially stubborn. The US must bear some of the blame for encouraging and playing a part in managing a coalition of Maliki and Allawi and excluding the Sadrists from this Government – it was understandable but silly and this is a large part why we are seeing this violence. For a fuller explanation it is worth visiting the website of historiae.org, a direct outlet for historical research on topical issues in world politics and reading their view of the role played by Christopher Hill, the US Ambassador in Iraq.
The US troop withdrawal was set in motion 3 years ago but it was the process which was more interesting than its outcome. Maliki was seen to be in favour of then against the withdrawal and then used it as an opportunity to set-up Allawi, for a fall. A critical element in the stability and growth of the country was turned into a political battlefield.
The US military pulling out does not mean that the US will have a reduced presence – the US Embassy will continue to have an astonishing 15,000 and 16,000 staff in Iraq and about 5,000 armed contractors guarding them. This will be the USA’s largest diplomatic presence in the world.
From an oil and gas industry perspective, Exxon-Mobil’s decision is interesting; this is a company which does analysis and assessment very well, they picked 6 of the most sensitive blocks that were possible to pick for their very public venture into Kurdistan. When Maliki started talking to the US Government about Exxon’s presence this turned from a commercial decision to a political / security one. It was a good call by Exxon and they may well get away with the decision – and probably flush out a couple of other big oil majors into moving into Kurdistan .
The announcement last week to pass the Oil Law (the same one that has been about to be passed for the last 5 years) without Allawi’s party being involved just shows how the politics has shifted from a Shiite / Sunni issue to a Sadrists plus one of the others issue; that is a development worth watching.
But all this has not stopped the investment in Iraq. In 2010 Iraq attracted almost $43 billion in foreign investments – the real surprise is not the magnitude or the destination but the nature of the investments made. The top sector is not Oil & Gas, whatever you are led to believe from the press; the top destinations are residential property (33%), transport (16%), electricity (14%), industry – mainly cement and steel (14%) and then – in 5th place – oil and gas with 13%. Turkey dominates the investments with just over 33%, followed by Italy (12%), France (10%) then South Korea and the USA with the United Kingdom at 9th place with just under 3%.
What Iraq really needs is a truly integrated Government focused on Iraqi interests: and this needs Maliki to dump a few of the overtly pro-Iranian figures from his coalition. Allawi needs to abandon the idea of a strategic policy council (this was dumped in late 2010 in all but Allawi’s mind) and the Sadrists need to be properly integrated into the Government in some way (if the Mahdi army is reformed it will not be good) and lastly some sort of long-term military deal with the United States needs to be sorted out.
But then …… which country does have a Government that puts national interest ahead of political survival.
For investors in Iraq there are going to be periods of investment and periods when you need to keep your head down. Iraq is a different market from most others in that investors will need to understand the political dynamics more fully than the other markets – the costs of making a mistake are too high.
Aberdeen energy businesses looking to develop business opportunities in Iraq are able to access free advice through a series of seminars run by Upper Quartile on behalf of Aberdeen City Council. The next seminar in the series will take place at Marischal College on Friday 27th January.
[You must be registered and logged in to see this link.]
Let us take a quick look back at what has been achieved by the Iraqi Government:
Two licence rounds that were very much more transparent than most in Western countries;
Production has increased from about 2 million barrels of oil a day in 2009 to about 3 million today and is increasing rapidly;
14 IOC’s (International Oil Companies) and hundreds of service companies operating in Iraq;
$43 billion in foreign investment during 2010 with numbers showing about twice that expected in 2011.
The Central Bank of Iraq has a surplus of $50 billion
The contracts being awarded are massive, but it is not clear to me that many companies are making much in the way of profits in the country because the operating costs are so high. If companies cannot generate earnings commensurate with the risk, they will leave – especially with the price of oil rising quickly.
However despite the achievements there are significant problems, some of which have been highlighted already, but it is important to understand the likely out-turns of what is going on in this re-emerging economy. There are a few facts that, in my view, are driving what you are seeing in Iraq now; these are:
The Shiite-Sunni divide has been a fact in Iraq that has never gone away. Facts, so the expression goes, are stubborn things and 1,300 year-old facts are especially stubborn. The US must bear some of the blame for encouraging and playing a part in managing a coalition of Maliki and Allawi and excluding the Sadrists from this Government – it was understandable but silly and this is a large part why we are seeing this violence. For a fuller explanation it is worth visiting the website of historiae.org, a direct outlet for historical research on topical issues in world politics and reading their view of the role played by Christopher Hill, the US Ambassador in Iraq.
The US troop withdrawal was set in motion 3 years ago but it was the process which was more interesting than its outcome. Maliki was seen to be in favour of then against the withdrawal and then used it as an opportunity to set-up Allawi, for a fall. A critical element in the stability and growth of the country was turned into a political battlefield.
The US military pulling out does not mean that the US will have a reduced presence – the US Embassy will continue to have an astonishing 15,000 and 16,000 staff in Iraq and about 5,000 armed contractors guarding them. This will be the USA’s largest diplomatic presence in the world.
From an oil and gas industry perspective, Exxon-Mobil’s decision is interesting; this is a company which does analysis and assessment very well, they picked 6 of the most sensitive blocks that were possible to pick for their very public venture into Kurdistan. When Maliki started talking to the US Government about Exxon’s presence this turned from a commercial decision to a political / security one. It was a good call by Exxon and they may well get away with the decision – and probably flush out a couple of other big oil majors into moving into Kurdistan .
The announcement last week to pass the Oil Law (the same one that has been about to be passed for the last 5 years) without Allawi’s party being involved just shows how the politics has shifted from a Shiite / Sunni issue to a Sadrists plus one of the others issue; that is a development worth watching.
But all this has not stopped the investment in Iraq. In 2010 Iraq attracted almost $43 billion in foreign investments – the real surprise is not the magnitude or the destination but the nature of the investments made. The top sector is not Oil & Gas, whatever you are led to believe from the press; the top destinations are residential property (33%), transport (16%), electricity (14%), industry – mainly cement and steel (14%) and then – in 5th place – oil and gas with 13%. Turkey dominates the investments with just over 33%, followed by Italy (12%), France (10%) then South Korea and the USA with the United Kingdom at 9th place with just under 3%.
What Iraq really needs is a truly integrated Government focused on Iraqi interests: and this needs Maliki to dump a few of the overtly pro-Iranian figures from his coalition. Allawi needs to abandon the idea of a strategic policy council (this was dumped in late 2010 in all but Allawi’s mind) and the Sadrists need to be properly integrated into the Government in some way (if the Mahdi army is reformed it will not be good) and lastly some sort of long-term military deal with the United States needs to be sorted out.
But then …… which country does have a Government that puts national interest ahead of political survival.
For investors in Iraq there are going to be periods of investment and periods when you need to keep your head down. Iraq is a different market from most others in that investors will need to understand the political dynamics more fully than the other markets – the costs of making a mistake are too high.
Aberdeen energy businesses looking to develop business opportunities in Iraq are able to access free advice through a series of seminars run by Upper Quartile on behalf of Aberdeen City Council. The next seminar in the series will take place at Marischal College on Friday 27th January.
[You must be registered and logged in to see this link.]
