Shubber, K. (2009), "Iraq and the new oil frontier", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 2 No. 3. https://doi.org/10.1108/imefm.2009.35202caa.001
Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited
Iraq and the new oil frontier
Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 2, Issue 3
Several significant factors combine at present to make Iraq a special country, requiring much attention from governments and businesses around the globe. The country’s oil wealth is clearly one of these factors, twinned with the new opportunities being presented to the oil majors, as well as to smaller firms in the hydrocarbon industry. A further related issue is the devastated infrastructure of this mainly Arab nation, thereby requiring a great deal of construction and development, with resulting opportunities to businesses worldwide.
In the league table of national oil reserves, Iraq is believed to be in second place after Saudi Arabia, and could climb to first position if the Western desert (bordering Syria and Jordan) is properly explored. Also, the country has a genuine potential to increase its production capacity much beyond the current 2.4 million barrels of oil produced daily, helping in the process to ease the widely-expected energy shortfall foreseen in future years.
The opportunities in Iraq are real and significant, due to the need for additional exploration activities, the requirement to develop newly discovered oil fields, the neglect meted out at functioning oil wells over past decades, and the country’s huge potential as a supplier of natural gas.
Clearly, therefore, this is a major scenario where we are reminded again of the close interdependence of nations, globalisation of business activities, and how the West and Muslim world need each other. Fruitful business cooperation necessitates much concomitant understanding of cultures, constructive dialogue and tolerance from all sides.
A prime consideration in this regard is the financial straits facing the country, in the aftermath of the fall in oil prices. After nudging towards the $150 mark in July 2008, prices fell steadily to reach a low of just under $33 per barrel in February 2009, a decrease of some 78 per cent. This wreaked havoc with Iraq’s budget, as oil revenues represent over 90 per cent of the country’s exports and State revenues alike.
While other Arab oil-exporting nations in the Gulf could withstand such a precipitous fall in prices, due to their vast reserves of cash and other assets, Iraq’s situation is different. Almost two and half decades of external wars, internal strife and internationally-imposed sanctions, have ravaged the country and brought to the surface a glaring and urgent need for reconstruction, economic revival and poverty alleviation. In consequence, the resultant budget deficit spawned new thinking, leading to a more liberal and practical approach to tackle the financial shortfall and deal with acute economic challenges.
All this has had far-reaching repercussions extending beyond the Mid-Eastern nation’s borders. For one thing, Europe is in a desperate need to diversify its sources of natural gas, in order to reduce its dependence on Russia, which has proved itself willing to utilise the “gas-supply” card to attain strategic and political ends. The Austrian OMV and MOL of Hungary have agreed to develop two large natural-gas fields in the semi-autonomous Kurdistan region in the north of Iraq. The intention is to feed the pan-European Nabucco pipeline, which is currently at the centre of Europe’s energy policy.
Construction of the Nabucco pipeline is yet to start, and the plan is to pump natural gas from central Asian nations to Western and Central Europe. As the project currently lacks firm suppliers, the deal with Kurdistan is critical for the success or failure of the Nabucco project.
Remaining within the context of the international hydrocarbon industry, Western oil companies are eying in Iraq a lucrative opportunity not seen since the break-up of the Soviet Union around two decades ago. That earth-moving event made it possible to revive the Russian oil sector, as well as attain major discoveries in the emerging central Asian region.
In view of the likely future shortage of black gold, Western oil companies, such as Shell, BP and ExxonMobil recognise hat Iraq now provides the “new oil frontier”, so as to enhance their currently declining reserves. This is particularly poignant when we remember that the vast majority of existing oil reserves fall under the control of state-owned national oil companies in the oil exporting nations.
This does not imply that Western oil firms are oblivious to the risks of doing business in Iraq, after being sealed off from that country some 40 years ago. The security situation remains fragile, basic services still need to be improved, and Iraq’s nascent political, legal and social institutions have to be made much stronger. All that said, however, the country is too important – and the potential gains too promising – to be missed.