US Foreign Policy
Commentary

A Terminal Case? Iraqi Natural Gas Development

in Program

By Miles Watkins – Much attention has been paid to the Iraqi government’s auctioning of petroleum extraction rights over the last year. Worth $9 trillion, Iraq’s oil reserves are the fourth largest in the world and even at weak current levels of extraction, generate over half of the country’s GDP ($70 billion). And with the expectation of increased pumping capacity, Iraq could have revenues near those of Saudi Arabia in the coming years.

Iraq’s expansive natural gas resources have received less attention. With natural gas worth $800 billion in proven reserves and estimates running as high as $1.3 trillion, Iraq’s gas is a significant asset. It has potential to become an economic boon and a key source of foreign investment, if the state can overcome serious infrastructure problems. Iraq’s current capacity for gas extraction is extremely limited, and of what is extracted, about 60% is flared off since it cannot be captured and stored. In addition, the country’s decades-old natural gas pipelines are inadequate and require major renovations and expansion.

Iraq would greatly benefit from these gas resources if it could harness them. Through utilization, the state would improve its energy security. Currently, Iraq has to import natural gas, one of the main fuels in its electricity sector. Not only does this consume government funds, but it forces greater reliance on gas-rich Iran, which is problematic due to sanctions and the possibility of further disruptions, if international tensions with Iran continue to rise.

In addition to energy self-sufficiency, there are other benefits that natural gas infrastructure would yield. The practice of flaring unused gas contributes substantially to greenhouse gas emissions and air pollution; this could be solved through adequate natural gas transportation or storage equipment. In the political sphere, natural gas would help improve Iraq’s international ties; both Egypt and Turkey have shown great interest in importing Iraqi gas for consumption and re-export to Europe, weakening Russia’s near-monopoly on gas. Thus, if Iraq is able to utilize its natural gas, it stands to reap rewards domestically, in the greater Middle East, and with Europe.

Unfortunately, the state has experienced significant difficulty in developing its gas capacity. In 2008, the government drafted an agreement with Shell to extract natural gas in Basra Province, where 70% of Iraq’s gas is estimated to lie. This would represent a major investment by the company, including $5 billion in infrastructure spending. However, after two years the deal is not finalized; the political backlash in Iraq against a potential monopoly for Shell has slowed the process to a standstill. Iraq has also experienced problems in selling development rights for its “non-associated” natural gas fields, those which are not tied to petroleum. Officials had planned to release the largest three fields during Iraq’s hydrocarbon auctions, which began last year to bring in foreign firms to extract oil and gas; however, none were sold. The three have been slated for a new round of auctions, and despite Baghdad’s optimism, they have been postponed several times, most recently to September 1, due to debates over revenues and security.

The future legal framework of the natural gas industry, in the form of the Iraqi Hydrocarbon Law, remains uncertain as well. The law would dictate the petroleum and gas management responsibilities of multinational corporations. It would also decide to what degree local, provincial, and federal levels of government in Iraq hold the purse strings to the immense public funds generated. This factor has fanned regional and ethno-sectarian flames, as officials in every office vie to enhance their budgetary and thus, political power. This has stalled the finalization of rules and regulations, which deters investment by otherwise-interested corporations.

Despite this bleak picture, these issues are more of a roadblock than an insurmountable blast wall. Natural gas extraction will likely lag behind that of oil, but as petroleum production grows, so will interest in natural gas. Further, as potential profits rise, finding a compromise on the Hydrocarbon Law will come to be in the interest of all involved. The main impediment to the gas sector seems to be squabbling over rates of return and revenue rights, rather than any deep-seated problems, such as engineering challenges or political unwillingness.

Even if hydrocarbon infrastructure were to grow, there are some who fear the effects of revenues on governance. Citing rentier theory, they question Iraq’s capacity to funnel public profits into useful projects and suggest that the state might become bloated or corrupt. However, Iraq is undergoing reconstruction and needs ample funds to update its public goods and services. Even if a portion is squandered, the potential improvements should not be overlooked; a wealthy country with an inefficient public sector is better for its citizens than a state starved for cash.

It stands to reason that Iraq will soon be developing its natural gas resources and that it will benefit from these in many ways. The state will be given leverage to improve the lives of its citizens and the country’s standing abroad. The future of Iraqi natural gas, driven by infrastructure growth, is far from a pipe dream; it is a reality waiting to happen. And success in September’s gas field auctions would be a strong first step towards a safer and stronger Iraq.

Photo Credit: Tod Baker, April 2005: http://www.flickr.com/photos/todbaker/9148692/in/set-72157600556051954/


Miles Watkins was an intern in the Regional Voices Program at the Stimson Center

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