The understandable focus on Syria, in particular on the horrific situation that has unfolded in Aleppo over the last few weeks, has distracted attention from the potentially more dangerous developments in Iraq, Nick Butler said in a commentary published by the Financial Times.
Ten years after the execution of Saddam Hussein and five years after the official exit of American troops that was supposed to mark the end of a conflict which began with the US invasion in 2003, Iraq remains a war zone. The unrelenting bomb attacks on both military and civilian targets demonstrate the defiance of Islamist militants. As the battle to retake the strategic northern Iraqi city of Mosul – held by ISIS since 2014 – comes to a head the risks are very high, with implications that will shape not only the future of Iraq itself but also the international oil market.
The last three months have seen inch-by-inch territorial gains for the Iraqi government forces with advances in the north and east of Mosul and its immediate surroundings. But the cost has been high, with 115,000 displaced civilians now living in temporary shelters or camps and widespread physical destruction. Four of the five bridges that link the two sides of the city across the River Tigris have been destroyed, in some cases in a deliberate effort to cut off supplies to ISIS.
The militant fighters have not retreated passively. In October, in a classic scorched-earth manoeuvre they set fire to oil wells and to the Mishraq sulphur plant near the town of Qayyarah south of Mosul. In recent weeks they have intensified their campaign of sniper attacks and suicide bombings centred on Baghdad. Over the last two weeks, hundreds of Iraqi civilians have been killed and the main road north from Baghdad to Mosul – one of the Iraqi forces’ main supply routes – has been closed. These events brought the total of civilians killed in conflicts across Iraq in 2016 to almost 6,800 according to the United Nations.
The Iraqi government’s plan is to retake the whole of Mosul by March. The risk is that as the fighting intensifies ISIS will do more damage as they scatter across the rest of Iraq and other parts of the region. Mosul lies close to the oil producing areas of northern Iraq – in Kirkuk (now under Kurdish control) and in the Kurdish region itself.
Producing facilities, oilfield workers and pipeline networks linking northern Iraq to Turkey are all vulnerable.
The Kurds are famously tough fighters but it is very hard to defend installations and pipelines that run across hundreds of miles of remote territory against a ruthless enemy prepared to use suicide bombers. The potential for an environmental disaster is clear, as is the damage that could be done to the already fragile Iraqi economy if infrastructure routes carrying oil for export were cut for any length of time.
The risks are not limited to oil. North of the city lies the Mosul Dam – one of the most important engineering projects in the region. The dam holds back some 11bn cubic metres of water. At the moment it sits in territory controlled by Iraqi government and Kurdish forces but it needs repair. A fascinating article in the latest issue of the New Yorker by Dexter Filkins spells out the challenge. The dam urgently needs significant work to manage the risk of identified weaknesses in its foundations causing a disastrous collapse. Ideally it needs to be supplemented or even replaced by new infrastructure located closer to Mosul itself – but that area is currently held by ISIS.
If the dam did break it could produce an unprecedented flood tide, potentially overwhelming Mosul and a large area to the south. And, of course, ISIS in retreat could try to break the dam – adding a flood to their scorched-earch approach and in the process further weakening both economic and social conditions.
The return to widespread violence in Iraq is beginning to discourage investors even in areas to the south of Baghdad that have so far been relatively immune to attack. Over the last two years Iraqi oil production backed by international funding and technology has risen from 3.2m barrels a day in 2014 to 4.8mbd in November. Now, however, there are signs that investment is slowing as the negative assessments of political and physical risk increase.
In the north, ISIS may be beaten out of Mosul but there is no sign of a long-term peace – the militant fighters who survive will regroup elsewhere. There is equally little sign of a deal between the Iraqi government in Baghdad and the Kurdish regional government to share the oil revenue from exports. The result is that companies working in the Kurdish region are living on promises and are not likely to put in more capital until they have greater confidence in future returns. Hopes of Iraqi output rising to 6mbd or more look very slim.
In the short term, the security situation is all-consuming and the half promise made by the Iraqi government to Opec to cut production by 200,000 barrels a day starting this month seems to have been quietly set aside. The government is nominally standing by its stated commitment, but according to producers such as the Russian oil company Lukoil, which operates the West Qurna 2 field, no instructions to cut output have been received. The Kurdish authorities are already refusing to participate in the cutback while recently leaked documents suggest that the government in Baghdad has plans to increase short-term export capacity in the south of the country.
Iraq may be the second largest oil producer in Opec but the country’s primary concern is still the daily struggle for survival. The need for cash is the predominant driver of government policy. The dark irony is that the only force likely to produce a cut in oil production in Iraq this year is Isis.