New report on Iraqi oil outlook (page 1 of 3)

Iraq has proven oil reserves of around 112bn barrels, second only to Saudi Arabia. This figure is considerably understated as vast areas of the country remain unexplored.

Out of Iraq's 73 discovered fields, only 15 have been developed. Oil wells are sparsely scattered over the fields. Estimates show that there are only 2,000 wells drilled in Iraq, as compared to 1mn wells in Texas.

The majority of reserves lie in the north, at Kirkuk, with sizeable quantities at Rumalia in the south. Oil accounts for approximately three quarters of Iraq's GDP. Previously, Iraq reached its peak production of 3.5mn b/d in 1979 but has never been able to reach that level since.

Iraq also has been estimated to have reserves of 110 trillion cubic feet of natural gas, which is the world's tenth largest reserves. The main sources of natural gas are at Kirkuk, Ain Zalah, Butma, and Bai Hassan fields in the north, and the Rumailia complex and Zubair fields in the south.

The resumption of steady supply of oil from Iraq is the key ingredient for economic growth of the nation. The utilization of valuable oil and natural gas resources will provide the essential financial resources that will fuel reconstruction efforts in other key sectors.

An increase in production would provide for lost revenue, exploration and more importantly new infrastructure. Unfortunately, since the toppling of the former regime, pipelines have been under constant attack, cutting exports of crude oil and creating colossal supply shortages in a country with the world's second largest oil reserves.

The situation has improved slightly though in the last few months and Iraqi production and exporting is generally seen to be on the rise. Average production is closing in on the 2mn b/d mark as of the end of November 2003. Although problems will continue to hinder the oil sector, progress is expected to be made with the completion of various bids, projects and legislature.

Before the war, Iraq enjoyed a nameplate production capacity of around 2.6mn b/d of crude oil. Domestic consumption was estimated at 400,000 b/d, potentially leaving a large export capacity.

International sanctions have limited the full potential of Iraq to utilize its most valuable asset. The United Nations Oil for Food Program which was initiated in 1996 has however helped alleviate the situation partially.

According to a report published by the Council on Foreign Relations and the Baker Institute in December 2002, Iraq's was witnessing an annual production decline of 100,000 barrels per year. The report also estimated the cost to return Iraq to pre-1990 levels at around US$5bn plus US$3bn in recurring annual operating costs.

The massive repairs and reconstruction would take months, if not years to upgrade Iraq's oil sector. According to the Middle East Economic Survey (MEES), problems at Iraq's oil fields include among others: years of poor oil reservoir management; corrosion problems at various oil facilities; deterioration of water injection facilities, lack of spare parts, materials, equipment, damage to oil storage and pumping facilities.

There was initial optimism after the war as the worst-case scenario of damage to Iraqi oilfields from fighting during the war had not occurred. By the end of the war, figures showed only 9 oil well were set on fire by the retreating Iraqi forces, out of 1,800 wells in more than 500 oil fields in the southern region. The northern oil fields in Kirkuk and Mosul were not set afire.