There is good news and bad news

The good news is that Iraq has lots of oil.  The bad news is that Iraq has lots of oil.  That was the main message out of today’s Middle East Institute discussion of “Iraq and the Politics of Oil,” moderated by Allen Keiswetter (who amiably noted that he served in the U.S. Interest Section in Baghdad when Saddam Hussein was the vice chairman of the Ba’ath party).

Iraqi embassy commercial counselor Naufel al-Hassan opened emphasizing the positive:  the main focus of American interest in Iraq is no longer military but economic.  Oil production, which supplies 95% of the government’s revenue and employs 100,000 Iraqis, is up to 2.7 million barrels per day.  Reserves are the third largest in the world, production costs are very low, Iraqi refining capacity is increasing (from 340 million barrels per day to 567 now) and there is lots of natural gas that is not yet exploited.  Iraq needs and wants increased international company investment and technology, which will require a hydrocarbon law that is already eight years in the making.

PFC Energy’s Raad al-Kadiri took a less optimistic view.  Oil is, as a Venezuelan oil minister once put it, “the devil’s excrement.”  One can even hypothesize that whenever Iraqi oil production hits 3 million barrels per day it means war, previously with neighbors but now perhaps internally.  Iraq is politically more polarized now than at any time since 2003.  The state is fragile.

This is raising difficult questions about federalism, with the Kurds wanting a confederal arrangement with Baghdad and the Sunnis now opting for regionalism out of frustration.  National reconciliation has not been achieved.  The government is dysfunctional, undermining investor confidence.  Chaos in Syria also makes international investors nervous. Iraq has the potential to produce 3-6 million barrels per day within a few years, but doing so seems more likely to exacerbate political tensions than resolve them.

Denise Natali, the Minerva Chair at the National Defense University’s Institute for National Strategic Studies focused on Baghdad/Erbil relations, which have deteriorated even as Kurdistan Region Government (KRG) relations with Turkey have improved.  Iraqi Prime Minister Maliki and KRG President Barzani differ on Syria.  Iraqi Arab nationalism and resentment of the Kurds is on the increase as Maliki seeks a rapprochement with his Sunni Arab opponents.  Nevertheless, no sustained armed conflict within Iraq is likely.  Baghdad and Erbil are likely to muddle through with temporary fixes and without passing an oil law.

The State Department’s senior advisor on Iraq Brett McGurk emphasized lessons learned from his experience in Iraq, especially on oil:

1. There is no substitute for sustained engagement.
2. We have to have relationships with all the stakeholders.
3. There is a real need for “prenegotiation,” that is informal negotiation before formal talks.
4. Patience is vital.

U.S. troop withdrawal (first from cities, then two years later from all of Iraq) made it easier to settle oil issues, not harder, because it removed an irritant that aroused Iraqi suspicions.  The failure of the 2009 bid round set the stage for a much more positive Iraqi popular and government attitude toward the international oil companies, which needed greater incentives to come into Iraq.  U.S. priorities now include helping to mend Baghdad/Erbil relations, helping with energy production and export, facilitating regional reconciliation (especially between Baghdad and Ankara) and promoting transparency and accountability in the oil sector and government operations.

Asking the first question, I got on my hobby horse and wondered whether we would do well to focus on the direction in which oil is exported if we are concerned about Iraq’s political orientation.  Most of its oil is currently exported through the Gulf and Hormuz.  It would be far better to tie Iraq more closely to the West by exports to the north and west.

This elicited, to my surprise, unanimous sounds of agreement from the panel.  I had thought they might tell me this was a pipe dream, given the parlous relations between Erbil and Baghdad.  Instead they agreed this was a key issue.  Even using existing pipelines, some of which need refurbishment, Iraq could export more than 600,000 barrels per day without going through the Gulf.  There are real possibilities for increasing this amount markedly, but the Iraqis are hesitating.

The other big issue in the Q and A was Kurdistan independence.  The panel differed, with Raad al-Kadiri indicating that he thinks the Kurds want it (though they have so far been willing to accept a confederal relationship with a weak government in Baghdad) and might do it if they could export their own oil without Baghdad approval.  But a lot still depends on Ankara’s attitude, which is vigorously opposed, as a Turkish embassy representative made clear. But the regional trend, especially considering what is going on in Syria, is downward, and the whole Middle East framework may be coming apart.  Acquiescence by Iraqis to the current political arrangements should not be mistaken for (permanent) acceptance.

Denise Natali thought independence was simply not in the cards and that the status quo won’t change much for the foreseeable future.  Naufel Al-Hassan hoped that the oil issues, and consequently tensions between Baghdad and Erbil, would be resolved soon.  Brett McGurk was not making any predictions.