Iraq currently exports 1.7 million barrels per day of oil. I notice today that the price of oil has hit a 5 month low of $67.50, so I want to do some ballpark style calculations. Iraqi oil is known to be cheap to extract, possibly around $5 per barrel. Add $3 per barrel for exploration costs in the area (even though we’re dealing with established fields), and because it’s Iraq we should add let’s make a wild guess $10 per barrel for the cost of the outdated and sabotaged infrastructure and the protection it needs. That leaves about $50 per barrel.
Let’s say it incurs another $5 per barrel in costs getting it to western markets. That shouldn’t be unreasonable since Saudi oil was not that long ago selling at $15 per barrel and we assume they made a profit over their $5 per barrel extraction costs. That means the net profit from Iraq’s oil export is somewhere in the region of $28 billion dollars a year, at a conservative estimate.
By the way the CIA world factbook puts Iraq’s total exports at $18 billion of which 85% is due to oil. That would mean their oil exports are worth $15 billion – but then again their figures may reflect a lower oil price from a couple of years ago.
In Saudi Arabia oil provides 95% of export earnings and 75% of the government’s revenue. It’s had a huge windfall profit from the rise in oil price – even in fiscal year 2004 its total revenue was $105 billion, primarily from oil. But then the state owned oil company Saudi Aramco controls 98% of the country’s oil reserves.
There’s the rub. Iraq’s oil has been quietly given to big oil. Global Policy Forum released a major report at the end of last year showing that 64% of the country’s reserves had been put in the hands of the multinational oil companies in a plan originating in the US State Department.
- At an oil price of $40 per barrel, Iraq stands to lose between $74 billion and $194 billion over the lifetime of the proposed contracts, from only the first 12 oilfields to be developed. These estimates, based on conservative assumptions, represent between two and seven times the current Iraqi government budget.
- Under the likely terms of the contracts, oil company rates of return from investing in Iraq would range from 42% to 162%, far in excess of usual industry minimum target of around 12% return on investment.
A strong autonomous Iraqi government would never agree to such a policy. The oil fields have not been “privatised†exactly, but the control and the profits are locked in private hands under production sharing agreements (PSAs) for up to 40 years, and the companies involved are indemnified against future changes in the law. What’s worse the exact conditions of PSAs are normally treated as confidential commercial arrangements and kept secret from examination.
According to International Energy Agency figures, PSAs are only used in respect of about 12% of world oil reserves, in countries where oilfields are small (and often offshore), production costs are high, and exploration prospects are uncertain. None of these conditions applies to Iraq.
None of the top oil producers in the Middle East uses PSAs. Some governments that have signed them regret doing so. In Russia, where political upheaval was followed by rapid opening up to the private sector in the 1990s, PSAs have cost the state billions of dollars, making it unlikely that any more will be signed.
So $28 billion dollars per year is being earnt by the sale of Iraqi oil, even at today’s low production rates. In a world increasingly short of oil, the reserves are potentially worth far more than that. By slowing the development of the Iraqi fields, the oil companies are effectively banking that oil at a higher rate of return than they could earn by any other means if they converted it into shorter term profits.
Iraq’s 26 million people earn an average of $1770 per capita and the government has a total budget of $19 billion. The country’s finances are in ruins and there is an extensive black market in petrol sales while long queues wait at every bowser.
Someone’s getting rich from Iraqi oil. It’s clearly not the US taxpayer, nor the Iraqis. But then not everyone’s got mates in the White House.