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Iraq: what happened to the oil after the war?

VALDRIN XHEMAJ. Valdrin Xhemaj / EPA

Iraq: what happened to the oil after the war?

Opponents of the Iraq war often highlight the importance of oil when explaining why the invasion took place. While leaders at the time denied it was a motivation there is no doubt the country’s huge oilfields did offer possible post-conflict opportunities for the Iraqi industry and international corporations.

However what is missing from the post-Chilcot Report discussions and debates is a sense of what Iraqi oil sector is actually like today. So, even if the war really was “all about oil” … did it succeed on those terms?

For Iraqis dealing with the aftermath of invasion, the development of its oil and gas sector after 2003 is analogous to the nation as a whole: the vaulting ambition of the American occupation; the dysfunctional institutions they bequeathed; and Iraq’s internal rivalries that may lead to its partition.

Oil is central to Iraq’s present and future. It accounts for 99% of all government revenue. Along with existing reserves of 143 billion barrels (5th in the world) it is estimated there are 50 to 200 billion barrels yet to be discovered making it the largest unexplored market in the world.

For decades before the invasion, the industry had been in the hands of the state-owned Iraq National Oil Company. “Arab oil for the Arabs” was one of the most popular slogans of the Baathist era (1968-2003), and nationalisation in 1972 was the enactment of a policy that had first been demanded in the 1950s.

But if American post-war planners were aware of this history they appeared to ignore it. Away from Iraq, they planned to open up the nationalised oil industry to international investors and owners, and to the benefits of liberalisation.

Problems with privatisation

By 2003, the Iraqi oil industry was in desperate need of renovation and modernisation. A combination of war and sanctions had shielded it from many of the advances that the industry had made elsewhere in the previous quarter of a century. New techniques in seismic surveying and drilling technologies held the potential to transform current and future production. Iraq could have become a beacon of oil industry privatisation.

Now what? The occupation never worked out how to share Iraq’s oil. David Cheskin/PA

However, while external knowledge and investment may have been useful, there was no appetite among Iraqi politicians or people for privatisation. The occupation was also in no position to push through any reform that could unite nearly all the country’s political forces in opposition. In the end, the US-led administration announced in September 2003 that foreign investment was acceptable for the rest of the economy but not for the oil sector. The occupiers never actually resolved how the Iraqi oil sector would be rebuilt and its wealth distributed.

Prior to 2003 all oil profits had gone to Baghdad, providing a succession of authoritarian leaders with the means to maintain their rule (Saddam Hussein being the final and most brutal example). Oil was most plentiful in the supergiant fields of Rumaila, near Basra in the Shia-dominated south, and near Kirkuk in the north-east. Yet neither city received the full rewards of their oil as the Shia and Kurdish communities were marginalised in the era of Saddam.

An equitable distribution of oil wealth was therefore key to resolving conflict in Iraq and avoiding the emergence of another Saddam. Everyone knew this. However despite this ambition the governments that have followed the US-led occupation have proved themselves incapable of reaching a fair settlement.

The Iraqi Constitution, agreed in 2005, suggests oil is owned by all Iraqis but does not specify how its wealth would be shared. In an attempt to decide how money will be distributed, a National Hydrocarbon Law was drawn up back in 2007. However various drafts continue to fail to resolve disputes among oil and non-oil producing regions and the law still awaiting parliamentary approval nine years later.

In the middle of all of this the oil industry continues functioning in a complex framework of varying interpretations of the constitution and laws dating back to before 2003. Production has increased as international companies have entered to exploit the established oil fields around Basra and Kirkuk through a series of licensing agreements.

But the legal problems persists, foreign oil firms still employ few Iraqis, and local communities see no benefit from the international presence. The international companies persist using foreign workers and security companies to maintain their production.

Oil is a target for ISIS as a resource to be captured for its nascent state or an industry to be disrupted in the territories it does not control. Oil facilities in Baiji were a site of fierce fighting between government and ISIS forces in 2014 and 2015, and oil pipelines are frequently attacked. Although the sector functions, the chaos surrounding the oil industry mirrors the confused outcomes of the invasion.

Government and IS forces fought repeated battles for control of Iraq’s largest refinery in Baiji, north of Baghdad. It’s now badly damaged and may be beyond repair. EPA

Kurdistan goes rogue?

A different approach was followed in the north of Iraq where the semi-autonomous Kurdistan Regional Government (KRG) divided up its territory into blocks for exploration, inviting international companies in on production sharing contracts. When discoveries were made, major companies like ExxonMobil and Chevron got involved.

The difficulty the KRG faced was that, although oil had been discovered, the lack of an Iraq-wide agreement meant it was unclear how it could be monetised. Baghdad and the KRG have had endless disputes over ownership and budget allocation. The greater the dispute between the two, the more the KRG has pulled away, signing energy deals with the Turkish government and selling its oil on the international market. Getting oil out of Kurdistan was initially a problem, but in 2014 a new pipeline joined KRG oil fields to Turkey. For the leadership of Kurdistan, oil is a key political and economic asset, potentially leading to an independent future, although the recent global fall in the price of oil has called into question if this is financially viable.

The development of oil in Iraq after 2003 is much like the development of the new state. The oil industry is a mix of state ownership and international interests, while the legal framework they work in highlights the continued failure to resolve divisive issues. Kurdistan demonstrates the very real potential of the country dividing.

Divergent interests are joined together by oil but there are few political leaders who can articulate a unifying narrative. This is then played out within a dysfunctional political system left behind by a hasty and ill-conceived occupation, further complicated by the later emergence of ISIS. The invasion of Iraq in 2003 may not have been all about oil, but a settlement on oil is required if the post-invasion conflict is to be resolved.