Thursday, November 29, 2012

October 2012 Saw A Rise in Overall Iraq Oil Exports, But A Drop In Southern Production


For the last four months, Iraq has seen record highs in petroleum exports. Still, the figures for October 2012 missed government targets, and southern Iraq, the workhorse of the country’s energy industry, actually saw a drop in output. The growth that month was actually due to the return of Kurdish oil to Iraq’s foreign sales, and production from some of the smaller and older fields.

October saw another modest improvement in Iraq’s oil sector. There was a 26,000 barrel a day average increase in exports, which reached 2.624 million barrels a day overall. That was up from September’s 2.598 million barrels. That was the highest amount since the 1990s, but didn’t meet the Oil Ministry’s goals. It wanted to reach 2.8 million barrels for the month, and was expecting a large boost from the southern fields. Instead, exports through the southern pipeline in Basra were actually down to 2.172 million barrels a day from 2.178 million the previous month. That was due to a drop in production in the south from 3.235 million barrels in September to 3.035 million in October. All of the major fields there, Rumaila, West Qurna 1, Zubayr, and Halfaya, witnessed declines. That compared to the northern pipeline from Kirkuk to Turkey going from 420,000 barrels a day in September to around 452,000 barrels in October. Total exports for October were 81.3 million barrels, up from 77.8 million in September. The source then of October’s rise was not the south, but the north as the Kurdistan Regional Government (KRG) began exporting once again after it came to a new agreement with Baghdad in September. The Kurds had shut down their exports through the northern pipeline for several months over a payment dispute with the central government. With that seemingly resolved for at least the short term, the Kurds exported 146,000 barrels a day in October. That was up from 113,000 barrels a day the month before. There was also a jump in output from the Kirkuk and Ahdab fields. At the same time, bad weather shut down the southern pipeline for several days in the middle of October. Despite that temporary setback, Iraq has seen four straight months of expansion in its petroleum industry. Exports have not been steady with a dip in February and a second one from May to June. Still, the country has now far surpassed last year’s average of 2.16 million barrels a day in exports with 2.405 million for the first ten months of 2012.


Iraq Oil Exports And Profits 2011-2012
Month
Avg.
Exports
(Mil/
Bar/
Day)
Avg. Price Per Barrel
Revenue (Bil)
Jan. 11
2.16
$90.78
$6.082
Feb.
2.20
$98.44
$6.064
Mar.
2.15
$107.13
$7.167
Apr.
2.14
$114.26
$7.342
May
2.22
$108
$7.45
Jun.
2.27
$105.17
$7.173
Jul.
2.16
$108.79
$7.311
Aug.
2.18
$104.91
$7.124
Sep.
2.10
$104.89
$6.619
Oct.
2.08
$104.04
$6.742
Nov.
2.13
$106.59
$6.833
Dec.
2.14
$106.18
$7.061
2011 Avg.
2.16
$105.00
$6.913
Jan. 12
2.10
$109.08
$7.123
Feb.
2.01
$112.92
$6.595
Mar.
2.31
$117.99
$8.472
Apr.
2.50
$116.79
$8.795
May
2.45
$103.03
$7.831
Jun.
2.40
$90.09
$6.487
Jul.
2.51
$97.14
$7.577
Aug.
2.56
$106.22
$8.445
Sep.
2.59
$107
$8.371
Oct.
2.62
$105.51
$8.578

Oil Exports Through Basra 2012
January 1.711 mil/bar/day
February 1.639 mil/bar/day
March 1.917 mil/bar/day
April 2.115 mil/bar/day
May 2.086 mil/bar/day
June 2.085 mil/bar/day
July 2.216 mil/bar/day
August 2.252 mil/bar/day
September 2.178 mil/bar/day
October 2.172 mil/bar/day

Oil Exports Through Kirkuk 2012
January 395,000 bar/day
February 375,000 bar/day
March 400,000 bar/day
April 393,000 bar/day
May 366,000 bar/day
June 318,000 bar/day
July 294,000 bar/day
August 313,000 bar/day
September 420,00 bar/day
October 452,000 bar/day

The boost in production helped with a decline in prices in Iraqi crude. The average price for an Iraqi barrel of crude went from $107 in September to $105.51 in October. The nation was still able to earn $8.578 billion in October compared to $8.371 billion in September, because of the return of Kurdish oil. October’s revenue was the second highest of the year, only being behind April’s $8.795 billion. For two months this year, June and July, prices dropped below $100 a barrel. Tensions in the Middle East however, have kept the valuations above that mark for 18 of the last 20 months, and Iraq has been the beneficiary. It has also been able to increase its output without having any major affect upon international prices.

Iraq can expect to see more incremental increases in its exports for the next several months. The growth may not be consistent from month to month, but at the end of the year, Iraq will see a large overall boost from last year. This is because of new pipelines and two single point mooring points opening in the south, along with Kurdish oil production. At the same time, the country is behind the government’s targets, and may not reach its ambitious goals, because there are some large hurdles with its infrastructure it has to overcome. Still, with the unstable situation in the region, oil prices will remain high at least for the short term providing Iraq with an increasing amount of money to spend on its needs.

SOURCES

Associated Press, “Iraq’s Kurds pledge to raise oil exports in 2013,” 10/22/12
- “Iraq’s oil exports increase 1.1 percent in October,” 11/22/12

Kami, Aseel, “UPDATE 1-Oil exports from Iraq’s Kurdish region rise to 170,000 bpd,” Reuters, 10/4/12

Al-Khayat, Faleh, “Iraq’s oil output slumps by 200,000 b/d in October,” Platts, 11/28/12

Lawler, Alex, “Iraq’s south oil exports head for record in October,” Reuters, 10/19/12

Republic Of Iraq Ministry Of Oil, “Iraq Crude Oil Exports – October 2012,” 11/25/12

Reuters, “Bad weather halts Iraq southern oil exports,” 10/21/12

Special Inspector General for Iraq Reconstruction, “Quarterly report to the United States Congress,” 10/30/12

Wednesday, November 28, 2012

Premier Maliki’s Politicization Of Corruption Charges In Iraq


One after another, the heads of independent institutions and some of the largest banks in Iraq have been charged with corruption. The first was the director of the Trade Bank of Iraq in May 2011, followed by the commissioner of the Election Commission in April 2012, and then the head of the Central Bank of Iraq in October. The chief of the Integrity Commission claimed he was going to be accused of corruption as well before he resigned in September 2011. Corruption is a huge problem in Iraq, and it is continuously ranked as one of the worst in the world. Therefore it’s believable that there would be graft and theft at these organizations. However, the fact that Prime Minister Nouri al-Maliki and his State of Law list were directly involved in each case makes many believe that the premier is attempting to gain control of each one of these institutions. They also follow a Supreme Court ruling that the Integrity Commission, Election Commission, and Central Bank were all under the executive rather than legislative branch. Maliki has now gained leverage over most of them by appointing their temporary leaders. This all points to the prime minister manipulating corruption charges to centralize power in his hands.

The Trade Bank of Iraq was the first target on Maliki’s list. According to the Bank’s Director Hussein al-Azri, on June 2, 2011, Prime Minister Maliki paid him a visit. He asked that the bank to finance a $6 billion deal with a South Korean company to build power plants. Azri asked for a sovereign guarantee on the loan where the government would be responsible for the balance should the company default. Maliki said that one wasn’t needed. He then demanded that the department heads at the bank come to the meeting. A Maliki adviser then arranged a press conference where he said that the bank was under investigation for corruption, followed by security forces surrounding the building. Azri ended up fleeing, and eventually turned up in Lebanon where his family resides. In the aftermath, the integrity committee in parliament that looks into illegal government activities and the Finance Ministry issued a report saying that there were irregularities at the bank. One article said that Azri had given out $400 million in defaulted loans. Maliki stated that $500 million was missing from the bank. It later turned out that the investigation was never completed, and all the accusations against Azri came either from the prime minister or members of his State of Law list. Not only that, but the charges against Azri were made back in 2007, raising questions why it took four years for anyone to act upon them. The bank director ended up being sentenced to 15 years in prison in absentia in October 2012. In his place, Maliki named Hamida al-Jaff as the new head of the bank. The raid on the bank was immediately seen as political. A British adviser to the bank Sir Claude Hankes said that Maliki was behind the move. He told reporters that the government had attempted to manipulate the bank before, but had been rebuffed. Critics believed that the prime minister wanted control of the bank’s $14.9 billion in assets to fund development projects. In 2003, the Americans created the bank, which handles most major trade and financial deals. J.P. Morgan helped set it up, giving it ties with international financial markets. That was why it was the only bank in Iraq that could get credit from foreign institutions. Iraq does not provide sovereign guarantees, which makes it very difficult for Baghdad to finance large infrastructure projects outside of the energy field, which benefits from interest from foreign oil companies. Instead, the government has to rely upon foreign aid, private contractors, and cash payments to fund projects. With control of the Trade Bank, Maliki could use its billions to cover projects.

After the head of the Integrity Commission Judge Rahim al-Ogaili resigned it was revealed that he, and members of his staff were facing corruption charges as well. Judge Ogaili resigned from the main anti-corruption agency in September 2011 claiming that the government was preventing him from doing his work. Later, he told the Special Inspector General for Iraq Reconstruction that he was going to be charged with illegal activities before he left. His violations included providing statistics on the Commission’s work to the United States, a requirement for it to receive aid from Washington, and exaggerating the levels of corruption in the country in talks with the press. Judge Ogaili quit before he could be brought to court. Other members of the Commission faced similar accusations, forcing some to resign as a result. Prime Minister Maliki then named Izzat Tawfiq the acting commissioner. Since he is temporary, Tawfiq can be replaced anytime the premier wants. Maliki has opposed the Integrity Commission, and has continuously tried to block its investigations as a result. He has also demanded that all its major inquiries go through him. Now he might have that ability with Ogaili out of the way, and his man Tawfiq in office.

Maliki was less successful taking on the Election Commission. On April 12, 2012, the head commissioner Faraj al-Haydari was arrested, along with some of his staff. He was charged and found guilty of paying $130 to members of the State Property Commission to get public land. In October, an appeals court overturned his conviction. Haydari said that the charges stemmed back from 2008, and that State of Law parliamentarian Hannan al-Fatlawi was behind his detention. The commission head claimed that a court dismissed the case, and then Fatlawi went to another judge who eventually issued a warrant. Fatlawi was also the one that announced Haydari’s arrest, not the judiciary. Again, this case was seen as an attempt by Maliki to gain sway over an independent body. A member of the Board of Supreme Audit, which goes through the government’s books, said that acts of corruption at the Election Commission had been known for years, but no one acted upon them. The Board official told the International Crisis Group that he believed Maliki went after the commission for not going along with him during the 2010 elections. In that vote, Maliki’s State of Law came in second place, when the premier believed he would win. He then demanded a recount, but it did not change the results. The prime minister then allegedly accused the commission of helping the Iraqi National Movement win the balloting. Not only that, but lawmaker Fatlawi had gone after the commission before. Starting in May 2011, Fatlawi led an unsuccessful no confidence vote against Haydari for corruption, which was defeated in parliament in July. Then in September 2012, State of Law was blocked from expanding the number of commissioners from 9 to 15, which could have been used to put more of its followers on the staff. Iraq is due for two more rounds of elections, provincials in 2013 and parliamentary in 2014. If Maliki had been able to replace Haydari with his own election head or pack the commission with State of Law members that would give him great sway over the upcoming balloting. Those were leading causes for other parties to vote against Fatlawi’s no confidence vote in the summer of 2011, condemn Haydari’s arrest in the spring of 2012, and why Maliki was unsuccessful in expanding the number of commissioners this fall. These were all seen as crass moves by Maliki to take over the commission.

Today, the Central Bank of Iraq is caught up in the latest controversy involving the prime minister. At the end of October, arrest warrants were issued for the director of the Central Bank of Iraq Sinan al-Shabibi and members of his staff. A committee found evidence against them that had to deal with the sale of foreign currency. The premier then named the head of the Board of Supreme Audit Abdul Basit Turki the acting bank chief. The investigation into Shabibi started in August 2012 when a State of Law parliamentarian accused bank officials of laundering money. That led the Speaker of Parliament Osama Nujafi to call for a special committee to be formed. What that group found is under dispute. A State of Law member claimed that there was corruption involving dollar auctions the bank holds every week. Another lawmaker said he quit the committee, because others were going to form their own special group and release an anti-Shabibi report. Shabibi claimed that the government had been trying to get rid of him since 2009. He told the press that Baghdad wanted to use the Central Bank’s $63 billion reserves to fund development projects. The bank chief went on to say that was against the bank’s rules, and that he received threats and was intimidated as a result. Maliki and Shabibi have also argued over a wide range of issues such as revaluing the dinar and interest rates. In March, the prime minister ordered that all the bank’s policy decisions be sent to the cabinet for approval. The next month there were rumors that Maliki wanted Shabibi out to be replaced by one of the premier’s economic advisers. This was just like the Trade Bank of Iraq case. All the accusations against the Central Bank came from legislators belonging to Maliki’s list. With the long time director out of the way, Maliki could name his replacement that would then be beholden to him. Together, Baghdad would have over $70 billion to help finance projects. Whether this works out as well for Maliki as the Trade Bank is yet to be seen as Shabibi has said he will fight his charges, and no one has actually been arrested yet.

The prime minister’s intention to gain control of Iraq’s independent institutions was revealed in January 2011. That was when the Federal Supreme Court made a very controversial ruling that the Election and Integrity Commissions as well as the Central Bank of Iraq were all under the authority of the executive. This was despite explicit language in the constitution, which said that only parliament had that power. In February 2012, the Higher Judicial Council affirmed the court’s decision. Both happen to be under Chief Justice Medhat Mahmoud who is considered to be an ally of Maliki. Neither the commissions nor the bank were willing to go along with the courts. Now the premier has been able to name the heads of the Integrity Commission and Central Bank, while failing to do the same with the Election Commission. That was done by using corruption charges, which never go anywhere against important officials, unless someone more powerful is able to manipulate them. This appears to be the case here, as Maliki and his State of Law were behind all of the charges.

Many believe that Prime Minister Maliki is becoming an autocrat. Some of those accusations don’t appear to hold water. These four cases however, are more clear-cut. Maliki personally led the raid against the Trade Bank of Iraq, and legislators from State of Law made all the accusations against the Integrity and Election Commissions, and now the Central Bank of Iraq. Corruption is endemic in Iraq, but some of the charges have appeared minuscule at best like those against Election Commissioner Haydari and Judge Ogaili or have never become clear such as those against Central Bank head Shabibi. Not only that, but nothing is ever done against high officials like these over corruption, unless someone powerful wants action to be taken. That person is the premier who now at the least has gotten rid of officials who refused to follow his dictates. At the worst, he has gained de facto control over several independent institutions. This has all been possible by manipulating graft and theft charges to fulfill his political goals. This is a direct threat to Iraq’s developing political system. Without checks and balances, Iraq’s leaders like Maliki will be able to do what they like. The fact that he has attacked the commissions in charge of voting and fighting corruption are especially troubling, because he could now influence future elections and ensure that nothing is done about the rampant theft and graft within the government. This sets a dangerous precedent that the prime minister will use the courts and corruption to get rid of those that stand in his way. The Iraqi parliament has only been partially effective in blocking these moves, and could do a lot more. The problem is that the party bosses are unwilling to shake the boat, because they all benefit from the status quo. That means Maliki may be able to continue with these actions, concentrating more and more authority in his hands.

SOURCES

Agence France Presse, “Iraq ex-electoral chief says cleared of graft,” 10/16/12

AIN, “Mutleg: Arresting Haidiri, Timimi raises doubts over independence of judicial systems,” 4/14/12
- “Sadrist MP accuses SLC of working to postpone elections,” 4/17/12

AK News, “Head of elections’ commission arrested over corruption,” 4/13/12
- “UN Assistance Mission calls for due process in detention of electoral commission members,” 4/14/12

Alsumaria News, “Director of Trade Bank of Iraq, fled to Beirut on charges of corruption,” 6/4/11

Arango, Tim, “An Arrest Casts a Shadow Over Elections in Iraq,” New York Times, 4/16/12

Aswat al-Iraq, “Arrest of Haidari, attempt of vengeance, MP,” 4/14/12

Aziz, Raber, “Independent elections body mired by corruption allegations,” AK News, 4/9/11

Biedermann, Ferry, “Iraq’s biggest bank reaches telling milestone,” Financial Times, 5/18/09

Brosk, Raman, “Kurdish Blocs Coalition investigates MP’s relation to arrest of electoral commission members,” AK News, 4/15/12

Drummond, James, “Banks in Iraq move towards modernization,” Financial Times, 5/25/11

Dunlop, W.G., “Maliki’s ‘calculations’ plunge Iraq deeper into political tension,” Middle East Online, 4/14/12

Fletcher, Pascal, “Former top Iraq financier denounces bank power grab,” Reuters, 6/14/11

Harissi, Mohamad Ali, “Iraq political blocs accuse PM of dictatorship,” Agence France Presse, 4/14/12

Hatem, Oudai, “Iraq Lawmakers See a Power Grab In Maliki Ouster of Central Banker,” Al-Hayat, 10/18/12

Ibrahim, Haidar, “Lack of Political Consensus Hinders Assigning New Integrity Head,” AK News, 12/16/11

International Crisis Group, “Failing Oversight: Iraq’s Unchecked Government,” 9/26/11

Kami, Aseel, “Iraq Trade Bank recovers $400m,” Reuters, 11/15/11

Kami, Aseel and al-Ansary, Khalid, “UPDATE 1-Iraqi PM orders probe into state-run Trade Bank of Iraq,” Reuters, 6/2/11

Kami, Aseel and Ibrahim, Waleed, “Iraq seeks bank head’s arrest, denies witchhunt,” Reuters, 6/5/11

Najm, Hayder, “electoral commission inquiry not ‘political revenge’ mps say,” Niqash, 4/21/11

National Iraqi News Agency, “KA demands the release of Haydari, Tamimi considering their arrests “unnecessary, abusive,” 4/13/12
- “Sa’edi affirms that no personal reason for accusing the Governor of CBI,” 10/19/12

Peel, Michael, “Iraq issues arrest warrant for bank governor,” Financial Times, 10/18/12
- “Iraq leaders’ fairness queried in scandal,” Financial Times, 10/22/12

Rao, Prashant, “Iraqi PM in power grab by ousting bank chief, experts say,” Agence France Presse, 10/22/12

Razzouk, Nayla, “Iraq’s Maliki Replaces Trade Bank Chief Amid Corruption Case,” Bloomberg, 6/5/11

Reuters, “Iraq election commission chief released from jail-official,” 4/15/12

Al Sayegh, Hadeel, “Iraq’s former central bank chief criticizes government,” The National, 11/9/12
- “Iraqi bank chief says he fled after visit by al Maliki,” The National, 6/18/11

Shafaq News, “Integrity Committee: sentenced 15 years on chairman of the Trade Bank of Iraq and his adviser,” 10/2/12
- “Shabibi: attempts to dismiss me started since 2009,” 11/10/12

Sowell, Kirk, “Inside Iraqi Politics No. 16,” 6/12/11
- “Inside Iraqi Politics No, 18,” 7/14/11
- “Inside Iraqi Politics No. 19,” 7/28/11
- “Inside Iraqi Politics, No. 41,” 7/3/12
- “Inside Iraqi Politics No. 49,” 10/31/12

Special Inspector General for Iraq Reconstruction, “Quarterly report to the United States Congress,” 10/30/12

Visser, Reidar, “Iraq’s New Independent Electoral Commission: Some Initial Thoughts,” Iraq and Gulf Analysis, 9/17/12

Tuesday, November 27, 2012

Problems With Iraq’s Southern Oil Fields’ Common Seawater Supply Project


Iraq wants to become the largest oil producer in the world surpassing the current leader Saudi Arabia. In 2009, it opened up its oil and gas market to major oil corporations, and has seen steady growth in its petroleum production and exports since then. Slowly it is also building up the necessary infrastructure to support these plans. There are still some major barriers however, that could derail all of these hopes. One is the Common Seawater Supply Facility. It’s supposed to pump water into the southern fields to produce the necessary pressure to extract oil. The project is years behind schedule, and may be a major impediment to Baghdad’s ambitions.

The lack of water in Iraq could be a major cause of Iraq failing to achieve its oil production goals. The International Energy Agency (IEA) predicted that Iraq’s petroleum output would grow from its current 3 million barrels a day to 6 million by 2020, and 8 million by 2035. The Oil Ministry is hoping for even more at 6 million barrels by 2015 and 10 million by 2020. Without water being injected into its fields in southern Iraq, which has responsibility for most of this growth, there will not be enough pressure to maintain or even increase production. The south needs an estimated 8 million barrels of water per day today to reach its short-term goals. The IEA believes that amount will increase to 12 million barrels by 2035. For every one barrel of oil extracted in Iraq, it needs 1.5 barrels of water. Baghdad therefore needs huge investments in its water pipelines and pumping stations. Adding to this issue is the fact that Iraq lacks fresh water. The country relies upon its two major rivers the Euphrates and Tigris, but Syria, Iran, and Turkey, all of which are building dams up river, are cutting Iraq’s supply. The Common Seawater Supply Facility is supposed to be the solution to this problem. It’s supposed to pump 12-15 million barrels a day of seawater from the Persian Gulf into the southern oil fields when it is fully operating. The project has run into many difficulties however.

The Common Seawater Facility is behind schedule, and has been caught up in Iraq’s domestic politics. Originally, it was supposed to start operation in 2013, but now 2017 might be the earliest it will begin pumping water. First, Baghdad is behind in its contracting. The project was ready for bidding two years ago, but nothing happened. It wasn’t until May 2012 that the Oil Ministry asked 10 companies to submit proposals for the facility. It then took until October for a $170 million consultancy contract to be signed with CH2M Hill for the deal. Second, the government has not filed its initial design contract for the project. Third, the work got caught up in the dispute between Baghdad and the Kurds. Exxon was supposed to be in the lead on the project, but when it signed an oil and gas deal with the Kurdistan Regional Government (KRG) in October 2011, it became the focus of the central government’s ire. Baghdad kicked Exxon out of the water project in February 2012 claiming that it was failing to coordinate with the Oil Ministry, and its economics were poor, but the real reason was that it was one of the few ways the government could retaliate against the corporation. The central authorities want to control the country’s energy policy, and therefore objects to the Kurds signing their own independent deals like that with Exxon. As soon as the company signed with the KRG it began receiving threats from Baghdad, which resulted in it losing its place in the seawater project. Even before that, the Oil Ministry was arguing with Exxon and the other oil majors that were involved in the deal, British Petroleum, Eni, and Lukoil. It was claiming that their cost estimates were too high, and that they were holding up work. Iraq’s bureaucracy is notorious for acting slowly, because it lacks the capacity and experience to deal with such major contracts. That explains all the delays in the work, and partially why it is so far behind schedule. On the other hand, Maliki’s anger at Exxon deciding to work in northern Iraq added a political element to the project as well. It seemed like the Oil Ministry was having trouble with the oil corporations even before that, pushing for the lowest possible prices for the work, which might not always be the best strategy to take on something so important. The result is that the seawater facility is years behind where it needs to be, which will have a direct affect upon Iraq’s ability to increase its oil production in the south.

Iraq’s energy goals are widely questioned by analysts as being overly ambitious. The government itself has recently had to revise what it hoped to achieve. Its numbers are still audacious, and would be one of the largest sustained spurts of growth in world history. The lack of infrastructure will be a major impediment upon these plans. The Common Seawater Supply Facility is a key piece in the puzzle in boosting output in the southern fields. It is moving along, but at a slow and often times delayed pace. Red tape holding things up could have been predicted. The fact that Iraq would take out its anger on Exxon by taking away its lead role in the project was not. Either way, the project is years behind schedule. Iraq lacks the freshwater to pump into the fields, and could use the natural gas that it flares in the south, but it has not liked that process, and would require an entirely new project being planned and contracted to go that direction. It therefore needs to trudge ahead with its seawater concept, and hope that it can be finished by 2017 otherwise petroleum production could hit a massive roadblock, which would be very difficult to overcome.

SOURCES

Adal, Mirza, “ExxonMobil exits seawater supply project: further delays expected at common supply facility, which could affect Iraq’s oil production,” Middle East Economic Digest, 4/13/12

Ajrash, Kadhim and Razzouk, Nayla, “Iraq Awards CH2M Water-Injection Oil Project, Replacing Exxon,” Bloomberg, 10/10/12

Berdikeeva, Saltanat, “No Water, No Gain for Iraq’s Oil Development,” The Great Energy Challenge, 11/13/12

Al Fathi, Saadallah, “Iraq oil: Less ambition and more realism,” Gulf News, 10/7/12

Hafidh, Hassan, “Iraq, Oil Majors Agree To Build Oil Field Water Injection Plant,” Dow Jones, 10/19/11

Jacobs, Caroline and Boselli, Muriel, “UPDATE 3-Total latest oil group to shift Iraq focus to Kurdistan,” Reuters, 2/10/12

Lando, Ben, “Despite nationwide investment, Exxon has Iraq output doubts,” Iraq Oil Report, 1/3/12

Lee, John, “Will CH2M Hill Replace Exxon in Water-Injection Project?” Iraq Business News, 10/13/12

Reuters, “Iraq Invites Firms to Manage Water Injection,” Iraq Business News, 5/15/12
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Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 4/30/12
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Van Heuvelen, Ben, “Crude Awakening,” Foreign Policy, 1/31/12

Monday, November 26, 2012

Investing In Iraq, Opportunities And Difficulties Ahead For Doing Business In A Country In Transition, An Interview With Northern Gulf Partners' Zaab Sethna

Zaab Sethna is a partner at Northern Gulf Partners. It is one of the leading investment companies in Iraq. Below is an interview with Sethna about the reasons why foreign investment is increasing in Iraq, what sectors are attracting attention, and the difficult process the country is going through to open itself up to private enterprise, trade, and diversification. Overall, he is quite optimistic about the future of the country.

1. Recently there has been a huge jump in foreign investment in Iraq. According to Dunia Frontier Consultants there was only $2.7 billion in 2007. That then jumped to $17.9 billion in 2008, $28.7 billion in 2009, $39.6 billion in 2010, before reaching $55.6 billion in 2011. One major reason for the increase seems to be the end of the civil war, and major fighting in 2008. Today, how much does concern over security play in investing and doing business in Iraq?

The security situation in Iraq has certainly improved significantly. There have been virtually no incidents involving foreign companies in the last couple of years and the oil-producing areas of southern Iraq have seen few incidents of any kind. Nevertheless security remains a primary concern for foreign investors, and definitely adds to the cost of doing business in Iraq. Of course another major reason for the spike in foreign direct investment are the oil and gas contracts, which the Government of Iraq signed with major international energy companies in the last three years. The massive investment required to develop Iraq’s hydrocarbon reserves is only just beginning, and I would expect to see foreign direct investment numbers continuing to go up dramatically.

2. What do you see as the other major reasons why people are interested in investing in Iraq now?

Iraq is currently poor, but it has the capacity to lift itself quite quickly into the ranks of the middle-income countries, and eventually to the level of the Gulf States. Obviously, oil and gas is the primary driver of the Iraqi economy, but Iraq is a country with vast needs in almost every sector. With a population of 30 million who have been cut off from the outside world for generations the possibilities for growth are enormous. As per capita gross domestic product (GDP) increases, we expect it to double by 2020, there will be great demand for everything from consumer products to financial services to healthcare. Iraq is attractive to foreign investors because the population is relatively young, there is a history of an educated middle class, and there are possibilities to develop the non-oil economy in areas such as agriculture, technology, and industry.

3. When people think about Iraq’s economy, oil is the first thing that comes to mind. Companies are actually putting their money into a wide variety of industries today. Can you tell us some of those fields that are garnering interest?

Telecommunications is one sector that has seen huge foreign investment. There are three extremely profitable mobile phone carriers all of which have significant stakes held by international operators. There are also two national CDMA carriers, which is a different mobile technology, and they are both foreign-owned as well as a number of internet service providers and other telecoms companies. Financial services is a sector that is interesting to foreign investors. The market for financial services is still nascent in Iraq with unsophisticated banks, no asset management industry, a primitive insurance sector, and virtually non-existent capital markets. International financial institutions see the opportunity, so they are investing in Iraqi banks or in building their own networks. Housing is another area where we are hearing of large foreign investments although how real these are remains to be seen.

4. What countries seem the most interested in putting their money into Iraq these days?

Definitely regional countries are at the forefront. The Gulf Cooperation Council (GCC) and Turkey are leaders in investing in Iraq, although not all GCC countries are there. The United Arab Emirates and Kuwait are probably the most advanced followed by Qatar. Saudi companies are still hesitant to invest, and that is probably a reflection of the chilly diplomatic relations between the two governments. However in the last year we are also seeing increasing interest from European, U.S. and Asian firms, and 2013 should see a flurry of deals.

5. The World Bank has ranked Iraq one of the most difficult places to do business in for the last couple years. What kinds of problems do companies face when entering the Iraqi market?

Iraq is undergoing three transitions simultaneously: from war and occupation to post-conflict, from sanctions to free trade, and from socialist central planning to a market economy.  Such transitions are wrenching at the best of times, and few countries in history have had to undergo all three at the same time. Foreign investors have to bear this in mind, and realize that while change is taking place it is happening slowly and incrementally. The problems that companies face arise mostly from Iraq’s recent history: lack of infrastructure, security, corruption, red tape, and uncertainty in the legal and regulatory environment.

6. What role does the lack of a modern and private banking sector play?

The financial sector is changing quickly as Iraqi banks offer new products and services, and their customers get more sophisticated and demand even more. Banking is an area where we will see change relatively quickly, so I am not too worried.

7. In the last two years, the government has moved against the Trade Bank of Iraq (TBI) and currently the Central Bank of Iraq (CBI) charging their directors with corruption. Are you concerned about these cases?

As a foreign investor one is always concerned to see what might be political interference in independent institutions. However, in my experience the Iraqi judicial system is relatively robust and I would have faith in it to deal with the issues of TBI and CBI.

8. Iraq also does not offer sovereign guarantees where the government would be responsible if a business defaults in a deal. How big is that in financing major development projects?

This is a major issue that is certainly holding back development in areas such as housing or independent power projects. Let’s be clear that a sovereign guarantee does not make the government responsible if a private business defaults on an obligation. A sovereign guarantee is an irrevocable commitment by the state to pay for something. For that reason a sovereign guarantee is considered indebtedness of the state and under the Iraqi constitution any indebtedness must be approved by the legislature. As I understand it, this is one of the main reasons that Iraq has not been able to offer such guarantees, because the government is unwilling or unable to get parliamentary approval.

9. Iraq still has a state-run economy, but there is talk every year about diversifying. Have you seen any moves in that direction or is Baghdad just using all its oil revenue to increase the government’s role?

The transition from state control to a free market is taking place albeit slowly. It will probably take a generation or more to complete. Actually the recent decision by the government to stop giving every family a basket of food every month, and replace it with a cash payment was an important step in the right direction. The Government of Iraq is one of the largest purchasers in the world of bulk commodities such as wheat, rice, tea, and sugar. This is pointless, and an open invitation for corruption. Much better to put cash directly in the hands of the people, and let the private sector take over importing and selling commodities. This could even serve to jumpstart the banking sector, since there are only about 700 bank branches, but nearly 17,000 ration distribution centers in the country. It is a great opportunity to introduce leapfrogging technologies such as smart cards or mobile payments. Unfortunately, the government botched the announcement, and scared people that their rations were being taken away, so the decision has been rescinded for the time being.

10. Iraq has 260 state-run enterprises that have struggled for years from out of date technology and business practices, over staffing, etc. Recently there has been talk that foreign firms are interested in investing in joint ventures with them. Are those public companies really attracting a lot of attention, and is there a chance to really turn them around, and make them successful?

Yes, there are some companies that have a chance to survive in a free market. What Iraq has lacked for over 20 years is capital, technology and skills. The government understands that foreign investors can bring all three of these vital inputs. However, the government must recognize that investors need to make a return that is commensurate with the risks and difficulties of doing business in Iraq. Some of the companies will survive if the government is realistic about the terms it offers foreign investors. Others probably wouldn’t survive under any terms. After all how could Iraq possibly make bicycles cheaper or more efficiently than countries in Asia with long experience and huge internal markets? And why bother?  There are plenty of other industries that Iraq can develop using its abundant energy, water, and human resources.

11. What do you see as the future for Iraq’s economy?

I see the fastest growing economy in the world for the next few years. An economy that will become increasingly sophisticated, and Iraq regaining its rightful place as an important player in the international commercial and financial system.

SOURCES

Aswat al-Iraq, “Turkish company to rehabilitate iron and steel factories in Basra,” 11/19/12

Dunia Frontier Consultants, “2011 Year in Review, Foreign Commercial Activity in Iraq,” March 2012

Iraq Business News, “Details of New Basra Logistics City,” 6/27/11

Kami, Aseel, “Iraq industrial sector attracts growing investment,” Reuters, 11/19/12

World Bank, “Doing Business in the Arab World 2012,” 2012

VIDEO: Iraq Ashura Nov. 2012



Wednesday, November 21, 2012

Iraq Does Badly In Another Global Ranking, This Time On Economics


In November 2012, England’s Legatum Institute released its annual Prosperity Index. The survey covered 142 countries, and ranked them according to eight categories. Those were economics, entrepreneurship, governance, education, health, safety and security, personal freedom, and social capital. The Institute supports the growth of democracy and capitalism, and the index was meant to measure the state of those two systems across the globe. Iraq fell towards the bottom of the list at 131. That placed it second to last in the Middle East and North Africa. Iraq routinely finishes low in these types of lists, because it is coming out of decades of dictatorship, an invasion, and civil war.

The purpose of the Prosperity Index was to look at economic opportunity, access, confidence, and well being across the globe. This was based upon eight factors. The first was economics that included macroeconomic policies, economic satisfaction and expectations, foundations for growth, and the financial sector. Economic policies obviously affect income and well being, and also shape expectations of the future. Entrepreneurship looked at the entrepreneurial environment, innovation, and access to opportunity. A good business environment can improve the economy, and living standards. Governance included effective and accountable government, fair elections, political participation, and rule of law. Good governance can help with economic growth, as well as protect freedom. Education was made up of three factors including access to schools, quality of education, and human capital. Education can stimulate economic growth. Outcomes, infrastructure, and satisfaction made up the Health factor. Safety and security was made up of national security and personal safety. Stability is obviously necessary for investment and economic growth. Personal freedom looked at individual rights and social tolerance. Finally, social networks covered social cohesion and community networks.

2012 was the first year that Iraq was included in the Legatum Institute’s index, and it did not do well. It ranked 131 out of 142, just placing it outside of the bottom ten. It was also second to last in the Middle East and North Africa. The United Arab Emirates ranked best in the region at 29, followed by Kuwait at 38, Israel at 40, Saudi Arabia at 52. At the very bottom was Yemen at 134. Libya, Oman, and Qatar were not included. Iraq did badly on all eight of the Institute’s eight categories, which could be expected. On economy it was 92, on entrepreneurship 125, governance 137, education 112, health 107, safety 135, personal freedom 141, and social capital 105. The information for these scores mostly came from 2008-2011, although a few were from before that period. The earlier information is problematic, because that would place it during the civil war when Iraq was a failed state. 2008 to the present is much better, because security is much improved allowing for a sense of normality to return. Since Legatum was mostly concerned about economics, the newer the data the better, because Iraq is seeing large economic growth with massive investment in the oil industry, which is fueling state revenue that is at the heart of everything since Iraq still has a largely command economy. At the same time, the bureaucracy is notoriously bad, the state is the largest employer, the economy is dominated by oil and gas, and the government goes from crisis to crisis. Finally, the insurgency is still around carrying out daily terrorist acts. Given all that it’s no surprise that Iraq would do badly on the index.

Legatum Institute’s Prosperity Index – Middle East/North Africa
United Arab Emirates 29
Kuwait 38
Israel 40
Saudi Arabia 52
Morocco 73
Jordan 77
Tunisia 78
Algeria 100
Iran 102
Egypt 106
Syria 113
Iraq 131
Yemen 134
Libya N/A
Oman N/A
Qatar N/A

Iraq’s Scores On Index
Economy 92
Entrepreneurship and Opportunity 125
Governance 137
Education 112
Health 107
Safety and Security 135
Personal Freedom 141
Social Capital 105

Iraq is a struggling country coming out of two decades of wars, sanctions, and dictatorship. It’s for those reasons it consistently struggles in global rankings such as the Legatum Institute’s. At the same time, things are beginning to turn around, at least economically now that major fighting is over. That doesn’t mean the government isn’t dysfunctional, and there aren’t large structural problems with a society based upon the exploitation of natural resources. It does mean that some things are improving however. It will probably take several years for outside groups to catch up with these changes going on. Even then, Iraq will still probably rate the same as many other developing countries, and have a hard time moving up the list of other Middle Eastern and North African nations, because of its government and oil dependence.

SOURCES

Legatum Institute, “2012 Legatum Prosperity Index,” November 2012