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Iraq faces a tough challenge in developing its potential

In many ways Iraq is a success story. The Islamic State, which until last year controlled large parts of the north and west of the country, has been defeated. The security situation across Iraq is probably better than at any time in the past three decades. After the independence referendum was ignored in 2017, a working relationship between the government in Baghdad and the semi-autonomous region of Kurdistan has been re-established. The success extends to the oil industry. Production is up to 5m barrels a day, according to the International Energy Agency, and Iraq is once again one of the world’s leading producers. The National Petroleum Law, which threatened to centralise control of every aspect of the oil and gas sector, has been scrapped. So far so good. But as a new report from the IEA makes clear this success is fragile. Iraq has not, for example, been able to manage the natural gas that it produces and which needs to be captured and utilised. Every day, 16bn cubic metres (bcm) is being flared, leaving the country dependent on imports of gas from Iran — an issue that could become a problem if the US tightens sanctions to make such trade illegal. Water is in short supply and this could limit production from a number of existing oilfields, including Rumaila and Majnoon. Production capacity could rise — the resources are certainly in place — but bureaucratic barriers and unattractive terms are not encouraging international investors. Electricity supplies are intermittent. Unemployment is already dangerously high given that the population is rising by more than 1m a year; 40 per cent of Iraq’s 38m citizens are under 14, the report says. The public sector provides 3m jobs but many are unproductive and, in common with many oil producing countries, Iraq has failed to diversify its economy. Isis may have been defeated but sectarian differences remain. The IEA emphasises the positive and the potential, but the underlying caution and concern is unmistakable. The successes achieved may not be sustainable and there is even a possibility that oil production levels could slip back. In the short term, the risk to Iraq is that US action against Iran draws the country into another unwanted conflict. Beyond that, the challenge is one becoming familiar across the oil-producing states — how to manage the limited levels of revenue available when oil prices are constrained within a limited band that shows no sign of rising much above $70 a barrel. The basic problem is the continued dependence on oil revenue, which accounts for 99 per cent of export earnings, 90 per cent of government revenue and 60 per cent of gross domestic product. Iraq is not the poorest country in the region but the demands for investment outstrip what is available. An additional 3m barrels a day of water will be needed to sustain any growth in oil production. The electricity sector needs comprehensive reconstruction to reduce losses, upgrade existing plants and expand capacity, including from natural gas and renewables, to meet a predicted doubling of demand by 2030. The obvious answer is to encourage international investment, but that will require both political stability and a realistic understanding on the part of the Iraqi government that a fair return will be required. Contracts with minimal returns will not attract investors with the needed technical skills, given the risks associated with the region and in particular with Iraq’s two key neighbours, Iran and Saudi Arabia. As the IEA report makes clear, Iraq is a country of great potential. Adding another million barrels a day to oil production could make it the world’s fourth-largest producer within the next decade. The undeveloped resource base is enormous and could be developed at low cost. The basic infrastructure is in place. The level of local skills is high, even if too many talented people have left the country during the successive conflicts of the past 30 years. But success is not preordained and there is no guarantee that the progress made in the past five years will continue.
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