Center for Strategic Communication

Iraqi FlagAt 141 billion barrels, the Republic of Iraq holds the fifth largest total proven oil reserves and the third largest proven conventional oil reserves in the world. It is also likely that Iraq’s oil position has nowhere to go but up. Due to continuous conflict over the past four decades, only 30-40% of the country has been properly explored.

It is also important to understand that producing this oil is cheap—really cheap. At $5 a barrel to extract, Iraq possesses the cheapest to produce oil on the planet. Compare this to the $65 a barrel for American shale oil and it becomes clear how much of an advantage Iraq has in the sector. Iraq could represent the last great frontier of easily produced conventional oil.

With large reserves of easily accessible oil, Baghdad has laid out ambitious plans to increase oil production four-fold, aiming to reach 13.5 million barrels per day (bpd) by 2017. This would be enough to surpass Saudi Arabia, the United States, and Russia as the world’s largest oil supplier.

However, Iraq is plagued by a multitude of factors that it must overcome if even a fraction of this optimistic outlook is to be realized. Beyond addressing overall security concerns, Iraq’s challenges can be divided into three main categories: People, Water, and Iraqi Kurdistan.

On the human front, Iraq has a problem keeping petroleum engineers. When the U.S.-led coalition toppled Saddam Hussein’s regime in 2003, the power structure that had held latent ethno-religious tensions in check was shattered. Sectarian violence erupted and one of the first groups targeted was the middle-class, composed largely of petroleum engineers and technocrats. This led to a “petroleum exodus,” a wholesale evacuation of the people who knew how to run Iraq’s vast and complex oil industry.

The first step in rebuilding Iraq’s oil production capacity is to entice its oil professional expatriates to return home. The oil industry is not simply a straightforward process of pulling black gold from the desert; it is only as good as the men and women who fill its ranks.

Water InjectionOn the technical side, water remains a major hurdle. Many of Iraq’s largest oil fields are dependent on large volumes of water—approximately 1.5 barrels of water for every barrel of oil—in order to increase, or even maintain, production. Water is injected into wells as oil is extracted; this keeps pressure high, stabilizing extraction pace and maintaining the long-term health of the reservoir. The IEA estimates that Iraq’s water requirements will jump from 1.6 million bpd in 2011 to 12 million bpd by 2020.

However, Iraq is over 40% desert and already has trouble meeting its fresh-water needs. Thus, diverting groundwater from agriculture or human consumption would be difficult, if not impossible. Instead, Iraq hopes to use salt water from the Persian Gulf, located in the south-eastern-most corner of the country.

Water MapThe wells most requiring this water are also located in the south, but are still over 100km away from the coast. In order to transport this seawater, the Iraqi government has devised the Common Seawater Supply Project (CSSP) that will carry water from the Persian Gulf. However, the project has been continuously delayed due to bureaucratic inefficiencies.

The IEA estimates that even if Iraq pushes this project hard, it is unlikely that the CSSP would be operational before 2017, well after it is needed to facilitate rosy state oil forecasts.

Then there is Iraqi Kurdistan, a semi-autonomous region with a population of five million. With an estimated 45 billion barrels in reserves, Iraqi Kurdistan accounts for just under one third of total Iraqi reserves.

The problem lies in jurisdiction. The Kurdish Regional Government (KRG) was granted an “unprecedented degree” of self-governance in the 2005 Iraqi constitution. Due to chronic neglect from Saddam Hussein’s regime, however, the region’s oil wasn’t discovered until after 2006. Since discovery, Baghdad and the KRG have disagreed over jurisdiction of the oil under Kurdish territory and continue to spar over disputed territories, which are now quite rich in oil deposits.

Iraqi Kurdistan IEAAfter disagreement over revenue sharing, the KRG shut off oil to the Iraqi national pipeline system and organized the construction of a pipeline to Turkey in order to bypass Baghdad. They hope it will begin exporting 300,000 bpd by the end of the year, 1 million bpd by 2015, and 2 million bpd by 2019; in the meantime, they have been exporting 30,000 bpd to Turkey by truck.

Most telling is that Baghdad has excluded Kurdish reserves and production potential from its own forecasts, signaling concern over the future of the relationship. Talks between the KRG and Baghdad are ongoing, but the future is still uncertain.

So why does all this matter to the rest of us?

The OECD predicts that unless significant supply increases are realized, the price of oil could rise to between $150 and $270 a barrel by 2020. With future oil demand estimates topping 100 million bpd within the next few decades, Iraq may be the single best chance of maintaining price stability. In order to do so, however, it will need to entice its oil diaspora to return, streamline the building of the CSSP, and work toward bettering relations with Iraqi Kurdistan. It is a tall order, but the future of the oil market may depend on it.

Rory Johnston is a Master of Global Affairs (MGA) candidate at the University of Toronto’s Munk School of Global Affairs with a focus on energy markets and security.