GRM 2010 GRM 2011

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Iran-Iraq Cooperation in Oil and Gas Sectors post-2003: Opportunities, Challenges and Future Scenarios
Paper Proposal Text :
After decades of contentious relationship and a disastrous eight-year war from 1980 to 1988, relations between Iran and Iraq have improved markedly since the U.S. invasion in 2003 that deposed Iraqi dictator Saddam Hussein. Subsequently, as a Shia-led government took power in Iraq, changes in bilateral relationship between the two countries spurred cooperation in oil and gas sectors, besides other areas. Both Iran and Iraq are well endowed in hydrocarbon resources. In fact, they are two of the top producers in the Organization of Petroleum Exporting Countries (OPEC) and between them have nearly 300 billion barrels of oil. A bold oil expansion programme boosted by service contracts with International Oil Companies (IOCs), has thrust Baghdad on a output path of more than 3 million barrels per day (bpd), which is its highest since 1991.
Iran-Iraq energy cooperation since 2006 has been primarily focused on four areas: initiatives for utilization of cross-border oil fields i.e. those fields whose reservoirs cross national boundaries; development of shared oil and gas infrastructure for energy export and import; and combined backing for high oil prices in the OPEC.
Utilization of cross-border oil fields
Iran and Iraq share some 23 joint hydrocarbon fields. In 2010, the two countries came to an agreement to provide a Master Development Plan for five shared oilfields, but not much has actually taken place yet on the ground. While shared oil fields are being developed by IOCs on the Iraqi side, there are reports that Iranian national companies are also producing separately from their reservoirs. IOCs working on cross-border or frontier fields present an ideal basis for a unitization agreement i.e. they can act as mediators to institute an arrangement between states on how to divide geological structures split by a political border.
However, international sanctions on Iran prohibit such a venture. In addition, the two countries have different legal and contractual systems for the development of their hydrocarbon resources, which need harmonisation in case of joint utilisation ventures. Lack of coordination on joint fields, exhibited in development of the field at different times or partial development, can ruin the field from a technical viewpoint. Aside the high level trust and cooperation engendered as political capital in bilateral relations, joint development is ideal even technically.
Development of joint fields is a sensitive issue on both sides of the border. Much will depend upon how the two countries take steps to resolve the border issues between them in accordance with previous treaties and agreements (such as, the 1975 Algiers Agreement) and demarcate clear boundaries in the fields. The future of sanctions on Iran and health of the Iranian economy are important factors in the developmental issues of overlapping fields.

Development of shared energy infrastructure: Oil and gas pipelines
Iraq has signed a number of co operation agreements with Iran in the oil and gas sectors. One such infrastructure project is the Basra-Abadan pipeline agreement, involving construction of 24-mile, 350,000 bpd oil pipeline from the southern Iraqi city of Basra to the Abadan refinery in southwestern Iran. In exchange, Iran would ship refined products (gasoline, gas, oil and kerosene) back to Iraq. While the pipeline will support Iraq’s ability to meet local demand for petroleum products with domestic crude, it will allow Iran’s oil refinery to use Iraq’s cheap crude as feedstock, permitting the country to export a larger share of its own crude.
The first problem with the deal revolves around the ability of Iran’s old and aging Abadan refinery to process Basra Light in significant volumes. And, secondly, if the refining capacity does not keep pace with piped crude flowing in, Iran may have to ship from its already tight domestic gasoline supplies. Nonetheless, plans afoot to revamp Abadan refinery and build new oil refinery in the same city can handle constraints in refining large amounts of crude. Given the American-Iranian rapprochement, Iran’s gasoline import is likely to ease and alleviate supply. Therefore, from a cost and benefit analysis, this project can prove beneficial for both countries.
Iran and Iraq have also increased cooperation in the natural gas sector. Although Iraq has abundant natural gas reserve, mainly associated with oilfields, their development is trailing behind (at least by 50 percent) the demand for power, hence the present need to import gas. In May 2011, the two countries signed a provisional agreement that would allow Iraq to import 25 million cubic metres (mcm) of Iranian natural gas per day and use it to power electric plants north-east of Baghdad. A second pipeline agreement was signed in 2013 for the provision of natural gas to power plants in southern Iraq. A major reason contributing to the more likely success of gas pipeline projects between Iran and Iraq is that they are funded by Iranian companies and hence able to escape international sanctions on Iran’s energy sector.
However, close economic relationship with Iran has long complicated Iraq’s internal politics as well as ties with the West and the Gulf countries. Energy cooperation with Iran has become intertwined in nationalistic discourse, raising fears of Iranian domination. Iran has poor relations with its Arab neighbours, and long-standing confrontation with the United States, which have added to Iraq’s woes internationally. If the current rapprochement between US and Iran does lead to a comprehensive agreement, it would be beneficial for Iran-Iraq energy projects. However, Iran’s antagonistic relations with the Gulf Arab countries will remain an impinging factor in Iraq’s economic ties with Iran.
Cooperation on OPEC policy: Rooting for high oil price
With warmer relations in the post-2003 period, historic rivals, Iran and Iraq are increasingly growing closer on OPEC policy, adding significant weight to the price hawks. The Shia-ruled neighbours together produce 6.5 million bpd and are a formidable force in the cartel. Both desire high price for oil along with Venezuela and Algeria. A mutual need for oil above $110 a barrel to balance their budgets has prompted Iran and Iraq to call for Saudi Arabia – the largest producer in the OPEC and pumping its highest in decades (10 million bpd) – to soak up the current glut by cutting output in order to boost oil prices. Oil prices have on a free fall since June 2014 in response to supply glut in the market, triggered by sluggish global demand and availability of shale oil from the United States.
The politics of rooting for high oil price also makes ample sense politically for the two countries. Aside from budgetary requirement, both Iran and Iraq need high oil prices for purely political purposes. Iraq needs it to fund its war against the ‘Islamic State’, which has torn the country apart, whereas Iran, with output stymied by Western sanctions, needs the same on its current production to continue assisting its ally, the Syrian leader Bashar al-Assad. While the pair did not get their way in the OPEC on the issue of reducing oil output, Iran and Iraq could emerge as strong competitors to Gulf Arab producers long inured to dominating the OPEC.
However, cooperation between Iran and Iraq has its limits. Old rivalry could be rekindled, as the latter takes over the former in oil production and sales. Some reports say Iraq could produce 6 million bpd by the end of the decade. So this is one issue in which Saudi Arabia and Iran can have a common cause: Iraq’s production should not get too high and should be under a negotiated production quota. The quota debate will certainly stir Iran, especially when Iraqi output notches about 4 million bpd, on par with Iran’s theoretical full potential.
In the context of the above, this paper argues that:
a) The energy relationship between Iran and Iraq is still evolving and much will depend on how the relations between the two governments evolves in the near future in the context of the future of Iran vis-à-vis sanctions, economic development, and regional and international politics.
b) The resolution of border issues, which commits the two countries to complete demarcation of their common boundary, is imperative to the development of cross-border oil resources and a smooth bilateral trade relationship. Without such a demarcation, ownership of natural resources will remain a perennial source of conflict.
c) Iran’s huge investments in Iraq is still a matter of great controversy, perceived a sign of domination and considered a trojan horse for exporting revolutionary ideology of the Islamic regime. Thus, oil and gas agreements will continue to generate storm amidst cooperation, which may sometimes be hampered. Pragmatism will eventually ride over politics, as evident in the gas deals for power plants to meeting soaring electricity demand in Baghdad and surrounding provinces.
d) Hydrocarbon deals between Iran and Iraq are mutually beneficial, so the common goal of national enrichment will play a strong role in cooperation between the two in the oil and gas sectors.
e) Demand for high oil price will always create a common cause between the two countries to cooperate in OPEC. However, rivalry over OPEC quota and production capacity cannot be ruled out in future.