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Energy Insights: Energy News: Should The West Save Iraq?

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Should The West Save Iraq?


Politics / Iraq War

By: Andrew_McKillop


Why Does Obama Hesitate?

Obama hesitated for some while before deciding not to bomb Syrian president Bashr el-Assad out of power. To be sure, Russia helped that decision in a big way. If el-Assad had been chased from power and given a show trial like Saddam Hussein before being killed, or not even given a show trial like Muammar Gaddafi before being killed, fundamentalist Islamic forces would have held sway in Syria.

In Libya, the bombing party was fast - and the fundamentalists took over. Slowly but surely. Libya now produces almost no oil at all, some weeks, and more at other times. Its last prime minister fled the country in March. Libya will likely become three states – Fezzan, Tripolitana, and Cyrenaica but squabbling over oil revenues will ensure constant low-level turf war fighting. With the Benghazi killing of US ambassador Stevens in 2012, the basic ungovernability of Libya hit the headlines.

Iraq probably seemed different, at first, to Obama aides arguing the president must act with military force to prevent “America's man”, prime minister Nouri el-Maliki, from being deposed or killed by the Riyadh-friendly, humanity-unfriendly djihadist hordes swarming like ravenous insects in Iraq. By June 19 however, US glove puppet media like the 'Wall Street Journal' carried articles shouting that el-Maliki must go and for the moment at least, US fighter jets will not be bombing and strafing in Iraq.

Under new and different management of Iraq – notably by Kurdistan and Iran – oil production can likely be maintained. Ergo, no need to bomb!

Conversely if anti-regime hordes were at the gates of Riyadh and the already fundamentalist Sunni, anti-democratic Wahabite Kingdom was menaced US fighter jets, A 10 Tank Busters and cruise missiles would have already been in action for days – and to hell with the collateral victims and the political blowback! In fact this political blowback is a major reason for the existence of firstly Al Qaeda in Iraq, then ISIS.

Following too many oil-driven western military attacks, occupation and oppression – dating from the 1920s - Shia and Sunni militants may hate each other but have one shared aim in life. Kill an American or an European. Drive them out. Western oil-driven interference in the region has added new enemies for reprisal attacks to the age-old vendetta system of Shia-Sunni conflict. This sectarian, clan, tribal and family fighting system exited long before oil, and will likely exist long after oil.

Iraq No, Oil Yes
 Obama and other western deciders are most surely and certainly influenced by the OECD's oil and energy watchdog agency the IEA. It's energy scenarios and forecasts for the next 21 years, to 2035, heavily feature long-term increases of oil supply from Iraq to help meet “soaring oil demand”. As I noted in other recent articles on this subject, the IEA uses thinly-disguised Peak Oil alarmism (alongside its Global Warming alarmism), and has singled out Iraq as a silver bullet solution on the oil supply side.

The IEA's own Factsheet for Oil Supply in Iraq, published 13 June, and real world data on Iraq allows and enables plenty of doubt on this claim by the IEA. These merely repeat the unrealistic oil-happy bragging of Nouri el-Maliki's shaky coalition government.

Apart from being predicated on a semblance of civil peace in Iraq, the IEA's Iraq scenarios are based on continued forecasts of world oil demand increasing by about 12 - 15 million barrels a day by 2035 (from the IEA's estimate for early 2014 of about 90 Mbd). If we believed IEA forecasts, world demand for oil imports, by 2035, will increase by about one-half of today's total export supply of all 12 OPEC countries (which is about 30 Mbd). Apparently no problem for the IEA, when it puts on its Global Warming-Low Carbon hat, it says world fossil energy use, including oil, must be capped by or before about 2040 and then reduced to nothing by “about the end of the century”. So we need Iraq oil now but not for all that long!

Despite Iraq's major success in raising oil output through 2011-2013, by about 25%, this growth was however already tailing off seriously by late 2013, and production on the eve of the ISIS invasion was around 3.1 Mbd enabling net oil exports of about 2.6 Mbd, of which only 1 Mbd went to the OECD group of countries.

The el-Maliki government's claims of future output are wide ranging, depending on spokesman, but some claims went as high as nearly 10 Mbd (the same as Saudi Arabia and Russia) “by about 2029”.

Inside OPEC, shown by statements by different oil ministers at OPEC conferences, Iraq's claims are not treated as a threat to oil prices – due to continued fast growth of Iraqi output being unlikely or very unlikely, and peak Iraqi output being likely, at most or at best to be one-half the 10 Mbd goal. Many oil analysts doubt if Iraq can achieve better than 4 – 4.5 Mbd by the early 2020's, under the best conditions of civil peace and continued high levels of investment in the oil sector. The potential for decline from today's output of about 3.3 Mbd also exists, especially if there is investor retreat.

The Trouble With Oil

 IEA claims, simply repeating the claims coming out of Baghdad, ignore or sideline other high potential and likely growths of national oil output, outside the Gulf region and Iraq. While the IEA cites US and Canadian shale oil production growth, and increasing oil output from Kazakhstan, it gives little attention to Azerbaijan's high potential for output growth and makes little reference to west and east African onshore and offshore oil and gas development. Shale oil production outside of North America is still treated, by the IEA, as either hypothetical or long-term. World NGL (natural gas liquids) output growth – which the IEA says is urgent and necessary due to depletion of “conventional first generation” oil – will certainly occur but it will certainly not feature Iraq as a major NGL producer.

As we know the three-largest world oil producers (Russia, Saudi Arabia, USA) include two non-OPEC producers and their total combined output is close to 33% of world total oil demand. Only the OPEC member Saudi Arabia could likely cut oil output by any major amount – but past real world experience, in the 1986-2000 period shows that Saudi Arabia soon abandons “price defending output cuts”.

In other words reduced production by the world's three-largest oil producers is unlikely.

Several other large oil producers, including Iran and Venezuela, could increase oil output depending on investment conditions but this totally ignores the demand side, which the IEA stubbornly refuses to admit has dramatically changed in less than a decade.   Since 2005, the 30-member developed nation OECD group has cut its oil consumption from about 50 Mbd to 44.5 Mbd in 2014. This cut is more than twice the total oil consumption of Germany and around 15% more than the total oil consumption of Japan, which imports nearly 100% of its oil and is the world's third-largest economy.

The IEA still pretends this is a “temporary cut due to adverse economic conditions”, but nobody else has to believe this is the real or only cause. The IEA does not look at world energy prices for coal, gas, oil and electricity and does not single out oil as especially overpriced – which it is. Being overpriced, the decline of oil energy demand should not really be a surprise!

IEA member state energy policies, coordinated by the Agency and seeking to “drive oil out of the energy mix” have been on the books and in the works for over 35 years.

The most-recent peak year for the share of oil in world energy supply was in the early 1980s – over 30 years ago – and has been declining ever since. Why should this 30-year trend not continue?

The IEA avoids explaining the uber-simple energy economics which helps oil decline, rather fast, while coal energy, for example advances rather fast. Present world coal prices, including shipping and transport charges, are well below $175 per ton pricing this energy at about $35 per barrel of oil equivalent. Oil as we know, has a  minimum price tag of around $100 a barrel. Due to the Iraq crisis it could or might edge up to $115.

The Peak Oil Narrative

 IEA energy forecasts are for the least ambivalent about world gas. Although world gas has stalled as a growing supplier of world energy, this is nothing to do with resource and reserve bases of world gas, both conventional and unconventional ranging from deep offshore gas and shale gas to coalbed methane reserves. The Islamic tyrannies of the Gulf region have no stranglehold on world gas despite Qatar owning as much as one-third of world proven conventional gas reserves. According to BP among others, resource discoveries since 2009 are roughly equivalent to 150 years of present world gas consumption. Potentials for NGL production from “new gas reserves” are high.

To be sure this implies high gas prices to pay for exploration and development, and pipeline or LNG transportation – but the gas is there – and in the cases of Europe and Asia gas prices are already high.

Conversely, the IEA's narrative concerning Iraq oil is scarcely-disguised Peak Oil alarmism. Outside of Saudi Arabia and other GCC suppliers Kuwait, UAE and Oman, only Iraq is seen as able to maintain long-term annual growths of oil output. In reality and however, Iraq as of early 2014 has in fact only been able to dial back to late-1980's oil production rates. At a current 3.1 Mbd this is still far behind its output in the 1976-1978 period of nearly 4 Mbd.

Concerning crude oil, not NGLs and unconventional crude (which total less than 90 000 barrels a day or 0.09 Mbd), Iraq's production in first quarter 2014 grew to slightly exceed its production in 1989. That is not exactly a breakthrough.

Obama is Right to Hesitate
 Despite popular belief that Iraq is home to large reserves of easily produced light sweet crude, the reality is that Iraq's lightest crudes are at 35 degrees API. These are defined as medium-heavy crude. Much of Iraq's oil reserves and output is of crudes at 22 degrees API – categorized as very heavy crudes. These are highly contaminated by sulphur and heavy toxic metals.

At least a half of Iraq's claimed total oil reserves of 143 billion barrels are heavy and very heavy oils, in the exact same way as Saudi Arabia's claimed total reserve of about 260 billion barrels feature heavy and dirty crudes.

Iraq's future growth of output, excluding the country's NGLs and unconventional oil output, which is tiny, therefore depends on massive investment in heavy crude extraction and processing. This is totally unrelated to existing and future world oil demand. To be sure heavy crude extraction and processing for pipeline transport is no problem, in technical terms. But in the real world of today, as the IEA notes and details, much of the rise in world oil output over the past few years has come from the US and concerns very light, zero sulphur shale oil, not needing any special processing at all and able to be used “as is” in lower-cost refinery operating systems.

Put another way, only because oil is overpriced, heavy oil extraction and processing is economically feasible and profitable. The IEA admits that at least until the end of the 2020's,  America’s “light tight” oil and Brazil’s deepwater production of light crude will continue to grow. As recently as 2010, the IEA made no references to these two sources of light low-sulphur crudes!

By the early 2020s, we can take an easy bet, other sources of similar light low sulphur crudes – this time including NGLs in quantity – will become available, for example Africa onshore and offshore.

Obama can therefore take it easy, play golf and hesitate another day before bombing Iraq. The IEA sold him and other western political deciders a pup, mixing and mingling Peak Oil fears with its climate change fears – which we can repeat is stated by the IEA to mean “all fossil fuels must be abandoned” - , and cobbled Iraq as the silver bullet solution to “sure and certain” oil supply shortage by the 2020's.

The shameful Bush doctrine, that Obama has slavishly and mindlessly continued like a robot, was to “tweak” oil production in victim countries through massive bombing, military invasion and occupation in outright-illegal wars. Today's Iraq provides yet more proof this doesn't work. In the short run, Iraq's oil production and exports will certainly decline, if not by much. Whether this causes any major and sustained uptick of oil prices is unlikely – but for the details you will have to ask Goldman Sachs!

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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