Estimates put the number land mines scattered across Iraq at 25 million or more (most in the southern part of the country). Yet despite their obvious danger to human life and their impediment to economic development, you won’t find Hollywood celebrities on camera in these areas asking for your donations or thoughtfully nodding while a village chieftain explains the plight of his people. That’s because many of these mines are concentrated in areas being developed by foreign oil companies.
The Iraqi Oil Ministry and Iraqi NGOs describe the mine problem as “catastrophic.” Yet despite the fact that oil production represents the country’s best hope for raising the Iraqi people out of poverty, international organizations are not contributing enough to the de-mining effort and the government can’t seem to get its act together. Why?
There are nearly a dozen national and international agencies working to get rid of munitions in Iraq. Sources within the energy community have told me, however, that cooperation among these groups has been problematic, based on a perceived bias by non-Iraqi NGOs, in particular, against cooperation with the petroleum industry. The result: the burden has fallen on the service companies to make their areas of operation safe for development. Without the effective support of the government and NGOs, oilfield companies must turn to private firms for help.
Outside of Kurdistan, all development is being let by the Iraqi government on a service contract basis. This means that oil companies don’t share on any of the upside of oil prices, but instead receive a low, flat fee per barrel produced.
Since the Iraqi government did not take mines into account until after the bid rounds closed on current contracts, it made no allowance for delays and cost increases attributable to de-mining activities. Foreign oil companies that have signed contracts to develop Iraq's oil reserves may therefore be unable to meet deadlines due to the danger of land mines. This theoretically places their whole contract at risk.
Service companies, already on thin margins (because many of these contracts are considered brownfield developments in established fields) stand to get the worst end of this situation. With a relatively impotent government and little cooperation from international non-profits, they have had to turn to contract assistance. The impact on margins is obvious.
Iraq could hold the greatest potential for growth in global oil production. With 115 billion barrels of oil, Iraq has the world’s third-largest proven reserves, behind only Saudi Arabia and Iran. Some geologists believe that Iraq’s reserves are even greater than that, as many oil fields have yet to be fully explored. There are few, if any, places that have as much oil that’s untapped and close to the surface (and thus relatively economical to extract) as Iraq does. But oil production in Iraq has fallen woefully short of its potential. The government has announced double digit projections for mmboe production. These numbers are far from realistic, and, more to the point, should the Iraqi government fail to resolve issues like de-mining, continued development under a service contract model could make new projects unprofitable, and untenable, for IOCs.
Tell me what you think (or what you have heard) about these and other operational issues on the ground in Iraq!