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Bilal Wahab in an Exclusive Interview with MIRS: Corruption remains the Second Insurgency of Iraq

Dr. Bilal Wahab, a Wagner fellow at the Washington Institute for Near East Policy, talks to the MIRS
Oil and Natural Gas

2/12/2018 3:27:00 PM

 

MIRS- Dana Taib Menmy

In this interview with Dr. Bilal Wahab, a Wagner fellow at the Washington Institute for Near East Policy, talks to the MIRS about the future of energy lines across Middle East, and the issues of the oil and gas sectors in Iraqi and the Kurdistan Region.

He also focused on the energy contracts in Iraq and in the KRG, shedding light why Iraq does not have its own hydro carbon law.

He also explains, with accurate data, global issues like the hike of oil prices, and the struggle on energy across the Middle East.

 Dr. Bilal explains suspended oil issues between the KRG and Iraqi federal government, the real data of Iraq’s as well as the Kurdistan Region’s oil and gas assets, the role of the international and national think-tank’s in bringing transparency into the energy sector, the KRG’s total debts, and its capacity to pay back those debts.

Here is the full text of the interview: 

MIRS: What is the future of energy pipelines across the Middle East; particularly Iraqi ones with Iran, with regard to the conflicts in the area?

Bilal Wahab: Iran exerts a sizable influence on Iraq and its politics. However, the energy sector is where the two countries remain competitors for market share, export quotas within OPEC and international investment. Iran has been trying to make inroads into the Iraqi energy sector but to little avail so far. Iraq needs capital and technical capacity, for both of which there are more competitive international alternatives than Iranian firms. However, Iraq could benefit from diversifying its export routes, including pipeline extensions to Iran.

Technical assessments have been created for a pipeline that allows Iraq to import natural gas from Iran to feed power generators in Baghdad. Such a pipeline would be 300 km long whose construction could cost $600 million according to a study by Bayan Center, a Baghdad-based think tank. Iraq’s Ministry of Oil also signalled, with scant details, that it is considering building a new pipeline to Turkey to replace the inoperable part of Iraq-Turkey Pipeline (ITP) Iraq controls.

Separately, in summer of 2016, Iran and KRG officials reached agreements on technical details of an oil-exporting pipeline that would allow the KRG to open a second outlet for its oil in addition to its line to Ceyhan. The proposed oil pipeline could carry anywhere between 250,000 to 400,000 bpd that would facilitate an oil swap deal with Iran. Accordingly, the KRG would feed Iranian refineries close to the Iraqi border with crude oil, and Iran would deliver equivalents to buyers of KRG oil Iranian ports. In 2017, Iran seems to have entered similar negotiations, this time with the Iraqi oil ministry. Since th KRG lost control of Kirkuk oilfields to Iraqi authorities, the Iraqi government has been trucking some of Kirkuk’s oil to Iran.

Technical and financial considerations aside, Iran’s track record and reputation as partner in oil pipelines call for caution. Iran has a history of reneging on deals it shakes hands to. Even a signed deal or MOU with Iran may not amount to much. For example, as a study by the Oxford Institute for Energy Studies notes, in the past decade Iran has signed numerous memoranda of understanding and/or contracts with Bahrain, Kuwait, Oman, and Syria, UAE, and India. None of these have been implemented.

Since Iraq’s liberation from Saddam, however, single party rule has been replaced with decentralized but competitive centers of power, thriving in an environment of chaos exacerbated by gutted and weak state institutions.

MIRS: What are the problems and perils of Iraqi oil & gas sector? Why oil revenues could not bring peace and prosperity to the Iraqi people?

Bilal Wahab: It has become quite the cliché, although quite rightly, to say that Iraq suffers the resource curse. Indeed, the flow of oil revenues, while afforded the country a well-armed military and saved its people from starvation, subsequent governments have failed to invest oil revenues in a fashion that translates into a sustainable, modern economy. Corruption is rampant.

Iraq has no choice but to reform its oil-based economic system in a fashion that fosters the role of productive private sector. Rule of law, transparency and curbing corruption are a must.

Under the rule of Saddam Hussein, oil revenues funded his regime’s wars, brutal suppression of local dissent and the cooptation of the masses into tolerating dictatorship. Since Iraq’s liberation from Saddam, however, single party rule has been replaced with decentralized but competitive centers of power, thriving in an environment of chaos exacerbated by gutted and weak state institutions. Elections encouraged identity politics, which in turn encouraged myopic practices of patronage politics rather than long-term, strategic policies. As a result, civil wars, terrorism, corruption and mismanagement have squandered Iraq’s record high revenues from oil sales.

But they only way out is through; that is, Iraq has no choice but to reform its oil-based economic system in a fashion that fosters the role of productive private sector. Rule of law, transparency and curbing corruption are a must. Iraq is getting help from the World Bank and IMF to reform its economy. The country has the ingredients to become a developed and prosperous country. Its politics stands in the way.

The Iraqi government currently shuts much of Kirkuk oil because it refuses to use KRG’s pipeline. The KRG, on the other hand, has been selling oil at significant discounts to oil traders to avoid cooperating with Iraq.

MIRS: Why until now Iraq did not have its own oil & gas law? Such a law would resolve disputes between Baghdad and Erbil on sharing oil revenues?

Bilal Wahab:As mentioned above, politics has trumped policy in Iraq. The Iraqi parliament did initial reading for a national hydrocarbons law in 2007. The draft law did a fine job codifying Constitutional articles about Iraq’s petroleum resources such as oil federalism and revenue sharing. However, disputes over delineating rights and responsibilities between the federal government in Baghdad and the Kurdistan regional government (KRG) in Erbil undercut the passage of the law. Although the KRG passed its own regional natural resources law, Iraq still lacks a national oil law and relies on old laws and regulations.

Since the parliament failed to pass the law in 2007, Iraqi and KRG oil policies and industries have been diverging. Disputes over rights and revenues continue to linger. In effect, balance of power between KRG and Baghdad superseded rule of law. Indeed many of the conflicts over oil and gas and the budget between the KRG and the federal government stem from the absence of such a law.

Politics trumps economics. That is, Baghdad’s reluctance to accept oil federalism and KRG’s attempts to take federalism to extremes resulted in economic losses for both sides. For example, the Iraqi government currently shuts much of Kirkuk oil because it refuses to use KRG’s pipeline. The KRG, on the other hand, has been selling oil at significant discounts to oil traders to avoid cooperating with Iraq.

I think the next parliament elected in May 2018 needs to prioritize the passage of an oil and gas law so the KRG can bail out its debt-stricken economy, allow Iraq’s energy sector to reach its full potential and maximize the economic gains from its breadwinning industry.

MIRS: What are the issues of energy contracts with the IOCs? What is or are best choices for Iraq as well as Kurdistan region in terms of types of energy contracts?

Bilal Wahab: By now, we realize that Iraq and the KRG have adopted the contracts that better fit their particular industries. In other words, technical service contracts (TSC) are rather appropriate for Iraq while production-sharing contracts (PSC) fit the profile of KRG’s nascent energy sector. Nonetheless, both sides are in need of revisions in a low oil price environment.

For the Iraqi government, contract renegotiations and revisions to the contract model are set government goals to better streamline the interests of the state and the oil firms. The fiscal structure of Iraq’s TSCs was beneficial to Iraq when oil prices were record high. Not anymore. Indeed, the Iraqi Oil Ministry is slated to roll out a new TSC contracts model by the end of February and adopt it for a new round of licensing later this year.

The KRG, on the other hand, suffers from accrued debts to IOCs and oil traders because of its uncontrolled public spending. The war against ISIS, post-referendum, loss of Kirkuk fields and continued geological challenges has exacerbated an already difficult situation.

MIRS: Do you expect oil prices would rise further after oil producers recently extended an agreement for curbing oil production and exporting?

Bilal Wahab: Oil producers value market stability, even if low, over price volatility. In the near term, oil prices are expected to rise but not to extremes. The OPEC deal holds thanks to the adherence of its members and the cooperation of Russia. Moreover, OPEC is weary of high oil prices, which will encourage shale oil to rebound and flood the market, and in effect push prices down again as we saw the in the last price cycle. OPEC seems to have found a price sweet spot whereby they can satisfy their budgets without triggering a disruptive boom in shale oil production.

MIRS: What are the prospects of an agreement Between the Iraqi federal government and the Kurdistan region on suspended oil issues?

Bilal Wahab: I would argue that the prospects are rather promising. The aftermath of the botched KRG referendum would force it to abandon using its oil for the goal of secession from Iraq. Economic goals are easier to achieve with oil than political ones. Moreover, Kurdish opposition parties who have been unable to hold the KRG energy sector into account may welcome oversight from Baghdad.

Baghdad, on the other hand, cannot simply discard the inroads that the KRG has made. In particular, the fastest route to export Kirkuk’s oil is through the KRG pipeline rather than building a new line to Turkey.

If left to technical experts, an economically win-win compromise is quite feasible to reach, including one that addresses export of northern fields and revenue sharing. We already see signs of common sense and good will in an agreement between North Oil Company and KRI’s KAR Group, whereby crude from is refined at Kalak facilities in the KRI. One could imagine such cooperation to extend to Khurmala dome, which is geologically linked to Kirkuk but is run by KAR.

Again, its Iraq’s complicated politics that stands in the way. The national elections and subsequent government formation would create opportunities for creating some good will between Baghdad and Erbil.

MIRS: What are the real data of Iraq’s as well as the Kurdistan Region’s, oil & gas proven assets?

Bilal Wahab: We are expecting refreshed and updated data from both the Iraqi and Kurdish governments. Iraq’s production has been rising, which means that reserves has been depleting. Iraq’s oil ministry said that the country’s reserves stand at153 billion barrels. OPEC, however, estimates Iraq crude reserves at 148 billion.

The KRG’s once touted 45 billion barrel in reserves proved to be a highly optimistic number. As exploration and production continued, geological challenges proved such numbers wrong. For example, in 2016 Genel Energy announced that it was cutting by half its reserves figures for Taq Taq from an original 683 million barrels. By now, more than half of Taq Taq’s reserves have been already produced. More drastically, in 2015 MOL downgraded reserves at Akri Bijeel from 800 million barrels to 4 million, a 95% decline. Such figures could continue to change should the KRG energy sector recover so that explorations in green fields continue.

The governments in Baghdad and Erbil suffer from diminished legitimacy. While Iraq, afraid of an angry public, is bracing for elections in May, the KRG has relied to replenish its credibility by asking Deloitte to audit its oil and gas sector.

MIRS: How could international and local think-tank’s influence authorities in bringing transparency into the energy sector?

Bilal Wahab: International actors do have an influence on governance in Iraq. There is also a realization among Iraq’s political elite that business as usual would perpetuate instability. ISIS had its roots in the failure of inclusive governance. Corruption remains the “second insurgency” of Iraq. High unemployment among Iraq’s youth creates fertile grounds for insurgencies, terrorist groups and militias to easily recruit fighters, feeding in turn into the vicious cycle of violence and instability.

In addition to Iraqi buy-in, external pressure and help are mounting as well. The IMF and the World Bank are engaging Iraq’s economic institutions with loans and technical assistance. Reforms in tariff and subsidies will help Iraq’s finances (electricity subsidies alone cost Iraq’s budget $11 billion 2017). With their help, moreover, Iraq’s neighbours and partners are meeting in Kuwait next week to raise funds for Iraq’s reconstruction.

The governments in Baghdad and Erbil suffer from diminished legitimacy. While Iraq, afraid of an angry public, is bracing for elections in May, the KRG has relied to replenish its credibility by asking Deloitte to audit its oil and gas sector.

The end of ISIS caliphate would pave way for more IOCs entering the Iraqi oil sector.

MIRS: What is the extant of KRG’s total debts, including to IOC’s and lenders? Can the KRG pay those debts back; if the KRG could not pay back its dues what will happen? What is the Iraqi Federal Government's role in resolving this issue?

Bilal Wahab: According to KRG sources, it owes about $20 billion to creditors that include KRI citizens and firms, Turkey, oil firms, and oil traders. A rough calculation shows that in 2016 only 67% of oil revenues on average flowed into KRG coffers, with the remainder earmarked for repaying IOCs and oil traders.

In addition to these debts, the KRG is months behind on dispensing public payroll salaries, which are not paid in full either. With the loss of revenues from Kirkuk fields since mid-October 2017 which halved KRG’s exports, KRG’s financial crisis has deepened. Despite violent protest by citizens, the KRG seems to prioritize paying IOCs to keep them onboard over public wages —the KRG paid $100 million to the IOC in December of 2017.

As mentioned above, there are technical avenues for Iraq and KRG to cooperate. The Iraqi energy industry is recovering—December 2017 witnessed record exports of 3.5 million barrels per day. The end of ISIS caliphate would pave way for more IOCs entering the Iraqi oil sector.

The KRG maintains some leverage, especially the pipeline to Ceyhan. By refusing to use it, the Iraqi government is losing revenue by shutting Kirkuk production in. Its gas project with Genel at Bina Bawi and Miran would greatly help increasing power generation. Before it sits to negotiate in earnest, the Iraqi government expects further concessions from the KRG, including surrendering all oil exports to SOMO. By so doing, the KRG would lose control over its independent oil exports, but could generate greater revenues compared to selling to traders. It could ask the Iraqi government to assume KRG’s debts, which, as sovereign, Iraq is in better tooled to handle. Such deals would be more likely in a post-election context.