ETERNAL VIGILANCE

The Virgin Oilfields of Iraq

http://msnbc.msn.com/id/5305462/site/newsweek

A large part of the country is still mainly unexplored. Of the more than 80 oilfields discovered, only 21 have been developed.

By Leonardo Maugeri

Newsweek - July 5, 2004 issue

When it comes to oil, Iraq is—believe it or not—largely virgin territory. Though much of the talk about rebuilding Iraqi fields focuses on bringing production back up to prewar levels of about 3 million barrels a day, Iraq is the only Middle Eastern oil power other than Saudi Arabia with huge reserves that are untapped, even unexplored. Indeed, Iraq has the potential to match the 10.5 million barrel-a-day capacity of Saudi Arabia, which is now the only producer capable of using its excess capacity to moderate world oil prices.

The underdevelopment of Iraqi fields stems from their peculiar history. In 1918, British War Secretary Maurice Hankey foresaw that oil would be as important to the next great war as coal was to the first, and that the only big fields within British reach were in Persia and Mesopotamia. That imperative shaped British postwar policy toward Mesopotamia, which led to the carving out of a new oil state under British patronage. While oil dictated the birth of modern Iraq, though, there was no rush to develop the resource. By 1929 jockeying among the great powers led to the creation of the Iraq Petroleum Corp., a Western consortium led by four of the "Seven Sisters" (the world's largest oil corporations): the British predecessors of Shell and BP, the American predecessor of Exxon Mobil, and the future Total of France. Just as they secured control of this prized supply, the Wall Street crash of 1929 scuttled demand. Huge new fields were discovered in the United States, and an unprecedented glut inspired the Seven Sisters to limit global production.

They put the brakes on Iraq. Development stalled, exploration was restrained and Iraq Petroleum acquired all remaining concessions in order to shut out competition. This freeze lasted until the early '50s, when rising demand and the temporary nationalization of Iran's oil convinced Iraq Petroleum to resume development. Yet already, a new stage of overproduction had begun. The Seven Sisters controlled all major Middle East oil concessions and secretly decided to restrain output, but not equally across the region. Politically stronger or more attractive countries—such as Iran, Kuwait or Saudi Arabia—were penalized less than Iraq. By 1960, Iraq Petroleum had developed only eight out of the 35 oilfields discovered in Iraq.

The day of reckoning came in 1961, when the nationalist government which had ousted a pro-Western monarchy in 1958 expropriated the Seven Sisters' undeveloped holdings—or 99.5 percent of the total. Yet the new leaders did little to develop the oil themselves. Political turmoil would prevent the national oil company, formed in 1964, from matching the huge gains in production made by other states in the Middle East.

Then came a brief golden age. Amid relative political calm and rising oil prices, Iraqi production rose from 1.5 million barrels per day in 1972 to 3.5 million in 1979. A major exploration campaign discovered many new fields. But the new era was snuffed out by the 1979 rise to power of Saddam Hussein, who diverted oil revenue from development toward imperial goals and left the vast majority of newly discovered fields untapped.

Some figures reveal just how untouched Iraq is: since oil production began at the dawn of the 20th century, only 2,300 wells have been drilled in Iraq, compared with about 1 million in Texas. A large part of the country—the western desert area—is still mainly unexplored. Iraq has never implemented advanced technologies—like 3-D seismic exploration techniques or deep and horizontal drilling—to find or tap new wells. Of more than 80 oilfields discovered in Iraq, only about 21 have been at least partially developed. And 70 percent of current capacity derives from just three old fields: Kirkuk, discovered in 1927, and North and South Rumailah, discovered in 1951 and 1962, respectively. Yet even at this early stage, Iraq's current proven oil reserves exceed 110 billion barrels—second only to Saudi Arabia's.

Given this picture of underdevelopment, it is realistic to assume that Iraq has far more oil reserves than documented so far—probably about 200 billion barrels more. These numbers make Iraq—together with a few others—the fulcrum of any future equilibrium in the global oil market.

The temptation for outsiders to grab a stake will be enormous, but it would be a tragic mistake. Their history has made Iraqis perhaps uniquely sensitive to oil as a symbol of national pride and autonomy. During the '70s Iraq financed oil development through its own production. This may prove too heavy a burden for Iraq now. But either way, how to fulfill the promise of its oil is a question that the country must be left to answer alone.

Maugeri is group senior vice president for corporate strategies at Eni, the Italian oil and gas company.

© 2004 Newsweek, Inc.