Iraq: Shining a Spotlight on the Energy Sector



INSIGHT


  • THE IRAQI OIL INDUSTRY NEEDS SIGNIFICANT INVESTMENT TO RESTRUCTURE AND RECOVER. OIL PRODUCTION IS GRADUALLY INCREASING.

  • PIPELINE NETWORKS CAN BRING MAJOR EFFICIENCY GAINS. THEY ALSO INCREASE ENERGY EXPORTS.

  • RENEWABLE ENERGY HAS GREAT POTENTIAL. SOLAR ENERGY CAN CONTRIBUTE TO DECENTRALIZED ENERGY SOLUTIONS.



1. Restoring the full energy capacity of Iraq’s energy sector.


Iraqi oil supplies have been severely disrupted and only slowly is oil production beginning to recover. The general trend is such that foreign investment is needed to drive up production rates. Rebuilding oil infrastructure and restoring oil wells takes many years and is a guaranteed expense. 

In addition, the decline in oil prices has led to falling oil revenues in Iraq. This is worrying, as oil production rates in Iraq are still slow to recover. Nonetheless, significant progress has been made and Iraq is closer to achieving its goal of a balanced budget. Moreover, increasing oil exports from Iraq will reduce, or at least affect, oil exports from other countries in the Gulf region. The world market share of neighboring countries such as Iran, the United Arab Emirates, and Saudi Arabia would likely decline if Iraq continues to increase its oil production. This will certainly influence OPEC’s decision-making. This is especially true at times like these. Currently, there is a glut in the oil markets. The amount of oil available is only slowly decreasing. This has contributed to a drop in prices. The price drop was particularly sharp in Q1 2020. Since then, the price of oil has slowly recovered. This can help all oil exporters.

Most of these countries are currently producing oil at a lower price than they actually need to maintain production and cover expenditures. This further contributes to Iraq’s fiscal difficulties, albeit to a lesser extent than in neighboring Saudi Arabia. Indeed, Saudi Arabia has not become less dependent on oil exports. Although the country is attempting to shift its hydrocarbon revenues to other sectors of the economy, its dependence on primary fossil fuel production is undermining its long-term economic prospects. While diversification attempts are underway, Saudi Arabia needs more revenue to continue its transformation.. The same is true for Iraq. This argument is somewhat invalidated by the fact that Iraq is a sweet oil producer, which puts less cost pressure on the downstream and refining businesses. Iraq would still need higher oil prices to maintain government revenues and increase investment. Until CAPEX can be covered by investment and credit lines, Iraq’s oil supply will not benefit from economies of scale and will fall short of its true potential. 


2. Development of energy infrastructure for the distribution of oil and gas


To rebuild the oil infrastructure to the point where Iraq can finance infrastructure projects will require higher oil prices. This will require significant financing, which in turn will require foreign investment in Iraq’s oil and gas sector. A significant portion of this financing will go to the upstream sector. But to achieve a holistic oil and gas infrastructure operation, investments in the midstream sector will also need to be made.

Some of the downstream can either be done offshore or the oil can be processed near Al Başrah. There is also the possibility of Kuwait supporting the reconstruction of downstream oil operations in the southern part of Iraq. The midstream is particularly important for efficiency gains. These parts of the energy infrastructure include the development of a pipeline network. This would require not only CAPEX but also significant OPEX in the long run. Pipeline infrastructure is particularly useful for the natural gas business. 

It has been suggested that a gas pipeline should be built from Iraq through Syria. Natural gas would then flow through the eastern Mediterranean and reach southeastern Europe. The plans were made at a time when South Stream had not yet been completed. Such a pipeline would compete with South Stream for market share in the European gas sector. At the present time, it would be much less profitable.

We would like to make a few important points about the natural gas business. Most natural gas pipelines on the Eurasian continent run from east to west, as is the case in Europe. The alternative is that they run from west to east, as is the case in the eastern half of the Eurasian continent. We see this in the Sino-Russian energy trade. The proposed pipeline from Iraq to Syria would run from east to west. Not only would this put Iraq in competition with other pipeline projects further north that also run east to west, but it would also undermine Turkey’s position as one of the region’s major natural gas hubs. We are only talking about gas distribution at the moment. Gas production is another matter. In the case of gas production, there are more pipelines that follow the degree of length (north-south) rather than the degree of width (east-west).

This would reduce energy concerns in Europe. The European market is highly dependent on oil imports. Many parts of the world, especially East Asia, depend on oil exports through the Strait of Hormuz. The Strait of Hormuz can be blocked very easily. Therefore, several wealthy oil and gas importers compete for the same supply. This supply comes through a tiny opening at the tip of the Arabian Peninsula and is vulnerable to supply chain disruptions.

It is also possible to develop oil and gas trade with Turkey, which has experienced considerable economic growth in recent years. Logistics costs would also be significantly lower, which will greatly benefit oil producers.


3. Adding renewables to the energy mix


Solar energy should be particularly important to Iraq’s energy sector. Solar energy can be readily deployed in the region. It can be an ideal solution for supplying energy to local communities and can form the basis for a decentralized energy system. Solar energy is available pretty much all year round and makes particular sense in the form of rooftop solar installations. In the case of Iraq, solar energy can also serve as baseload energy for the power grid. 

The use of biomass could make sense in the south of the country due to the high availability of water and solar radiation. Considering that there are abundant hydrocarbon energy sources, this may not be the best approach. Iraq is blessed with hydrocarbon reserves that actually have a much higher EROI (energy-return-on-energy-invested). Iraq faces greater technical and infrastructure challenges in its energy industry, while energy availability is less of an issue. 


4. Conclusion


Iraq has a good chance of once again becoming one of the world’s leading energy exporters. Its central location in the Middle East gives it the chance to make the most of trade via the Persian Gulf. Another option would be to trade via a pipeline network spanning Iraq and Syria. 

Renewable energy is expected to make rapid progress in Iraq and make a significant contribution to the electricity mix. This will allow more oil and gas to be exported abroad. Solar energy can meet a significant share of the electricity needs of Iraq’s power sector.


Many thanks for the shared interest in the energy world!



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