Outlook for Iraqi Crude Oil Production and Exports

2. Outlook for Iraqi Crude OilProduction and Exports Muayyad Al-Chalabi Axelrod Energy Projects LLC Columbia University School of International and Public Affairs December 3, 2012

3. Overview • Brief history of the Iraqi oil sector • Iraqi reserves • Development contracts • Infrastructure development • Challenges • Internal • External • Conclusion

4. Brief history of Iraqi oil sector • 1912: Establishment of the Turkish Petroleum Company to negotiate an oil concession from the Ottoman Empire • 1920: TPC receives concession from the British Mandate in Iraq. • 1927: Oil struck near Baba Gurgur. Broad international participation in the TPC. • 75 year term for exploration rights • Iraqi government would receive royalties on production, but royalties contingent on oil company profits, and not payable for the first 20 years • 1930: 70-year concession negotiated by the Iraq Petroleum Company (IPC) • 1932: British mandate ends, but Hashemite monarchy maintains a pro-western stance.

5. Brief history (continued) • 1951: Mossaddegh nationalizes oil operations in Iran. British led embargo on Iranian oil. Mossadegh overthrown in 1953. • 1958: Hashemite Kingdom overthrown by Abd al-Karim Qasim • 1959: Qasim withdraws Iraq from Baghdad Pact • 1960: Iraq helps found OPEC. Qasim threatens legislation to revoke a large portion of the concession granted to the IPC. • 1963: Qasim ousted in Ramadan Revolution. • 1968: Ba’ath Party rises to power. • 1972: IPC nationalized

6. Brief history (continued) • 1979: Saddam Hussein assumes presidency • 1980–1988: Iran-Iraq War • 1990–1991: Gulf War I. • 1990–2003: Sanctions on Iraq. No-fly zones enforced. • 1995–2003: UN Oil-for-Food Program • 2003–2011: Gulf War II • 2007: The military surge

7. Iraq oil production (1958-2012, kb/d)

8. Iraq proven oil reserves Iraq Historical Proven Reserves (billion barrels) Oil Reserves in the ME by Country (million barrels)

9. Iraqi oil fields

10. Oil Development Contracts • Iraq model contract • 20 year service agreement • Government has 25% stake in operating company, IOCs have remaining 75% stake • Government pays the operating company a fixed fee of ~$2 per barrel for oil produced. • IOC not granted exclusive rights to either exploration or production

11. Iraq oil development contracts First Round (2009) Second Round (2010)

12. Infrastructure expansion • Pipeline overhaul and construction • Construction of new on-shore pipelines (6,000 km) • Construction of new off-shore pipelines (300 km) • Oil storage expansion • Final storage capacity of 60 million barrels • Add 20 million barrels to existing facilities • Build new tank farms with 30 million barrels • Common seawater supply facility (12-15 mb/d)

13. Pipeline infrastructure

14. Loading terminal infrastructure • Loading terminal expansion • Final capacity of 4.8 mb/d • Expand existing loading terminals with an additional capacity of 1.6 mb/d • Construct 4 new single point moorings (SPMs) with a total capacity of 3.2 mb/d

15. Iraq crude oil production • In July 2012, Iraq becomes second largest producer of oil in OPEC at 3 mb/d • Robust production growth since 2007 • Improved security environment since 2007 • IOC investments since 2009 • Iraqi government officially projecting 12 mb/d by 2017. • By comparison, Saudi Arabia’s total production capacity is 12 mb/d, with actual production between 8-10 mb/d. • Production targets written into contracts with IOCs total 8.8 mb/d.

16. Iraq oil production and exports Iraq oil production and exports (kb/d) • Robust production growth • Domestic demand • Small domestic refining capacity • No new domestic refining capacity expected until 2019 • Small domestic power generation demand • Any additional crude production to be exported

17. Internal challenges KRG territory • Lack of a comprehensive hydrocarbon law • Dispute with the Kurdistan Regional Government • KRG has its own hydrocarbon law, and has negotiated independent contracts with IOCs on that basis • Baghdad has banned IOCs doing business with the KRG from bidding on any future contracts

18. External challenges • OPEC production quotas • Iraq exempt since 1998 • Iraq’s production quota has been absorbed by Saudi Arabia, the UAE, Venezuela, and others • Iraq set to reenter the production quota system in 2014. • Conflicting interests • Need to maintain prices (total production quota cannot rise significantly). Iraq needs $90 per barrel crude in order to meet budgetary requirements. • Need to carve out a space for Iraq in the production quota system

19. External challenges • Historical rivalry with Iran • Growth in Iraq oil exports has gone to fill the gap left by sanctions on Iran • Iran is currently the number two country (both in terms of reserves and production quota) in OPEC • Traditionally, Iran has maintained parity with Iraq in OPEC. • Currently cooperative relationship with Iran may deteriorate rapidly if Iraqi production and exports grow rapidly • Iran has effective control over the Straight of Hormuz • Security of pipeline routes to the Mediterranean • Kirkuk-Ceyhan pipeline is frequent target for Kurdish separatists. • Pipeline to Syria will not materialize in the short run • Pipeline through Jordan makes no strategic difference.

20. External challenges • Softening demand • Slow growth in European markets • Slowing growth in Asian markets • Rising supply in North America • Shale oil backing out imported conventional oil • North America moving towards energy independence