Oil region is Iraq. Oil reserves in Iraq

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Oil region is Iraq. Oil reserves in Iraq

 

Oil
wells in Iraq; an analysis of the European and Chinese access

The Middle East knows a history power
politics, conflicts and structural governance problems creating a complex
environment for exporting energy. Major consuming entities like the EU and US
traditionally competed for access to fossil fuel resources in the region. At the end of the 20th century, China
joined the battle for fossil fuel access in the Middle East. Especially the 21st
century, Chinese energy companies gradually enlarged their activities in
the Middle East. China is  now the major
investor in the region and is expected to have a higher energy demand in the
coming decades. Where the US is able to decrease their foreign dependency by
shale-oil exploitation, energy security issues are looming for the EU. These
European issues for energy security are also discussed in scholarly literature
(Bilgin, 2009; Amineh & Crijns-Graus, 2017). Amineh and Crijns-Graus (2017)
argue that the economic rise of China and additional geopolitical shift in the
Middle East might pose a threat to EU supply security in the future.

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A Middle Eastern state
that is able to exemplify the geopolitical shift in the region is Iraq. Oil reserves in Iraq are
considered one of the world’s largest, having 148,77 billion barrels of crude oil reserves in
2017 which is 12,2 % of the OPEC-reserves share. Both European and Chinese oil companies
invested significantly in Iraq’s oil wells to secure their energy flows, but
not without restrictions. The suffering from sanctions, conflicts and
lack of modernisation have hampered the development of Iraq’s oil industry. Multiple
examples of internal unrest occurred in the last decades. In the period of the US-intervention
in Iraq (2003-2011) pipelines were sabotaged and during the emergence of ISIL
(2014) damage was done to the Iraqi oil wells and infrastructure. Later, the
self-proclaimed Kurdish region controlled several oil fields in the north of Iraq,
but they were taken back by the government army in response to the independence
referendum in September 2017. The country continues to be unstable due to
internal conflict.

This paper will elaborate on
the academic prediction as made in Amineh and Crijns-Graus, regarding the geopolitical
competition for fossil fuel access in the Middle East. The access of two of the
biggest consuming entities in Iraq will be focus of this paper in particulars
by asking the following question:

What are
the factors that influence the Chinese and European access to Iraq’s fossil fuel sources?

The answer the question it is necessary to examine how the supply
streams to the EU and China are constructed within Iraq. These internal factors
consists of energy policies, investments and geopolitical facets. As the rise
of China investments applies to more states in the Middle East, the
generalisability of Iraq’s case in the regional geopolitical shift will also be
considered. First, this essay will elaborate on energy theories and the energy
situation in the EU and China. Second, an analysis of Iraq will be conducted to
reveal their economy and the energy policies. The investments of European and
Chinese companies in Iraq will also be analysed. When the economic features are
elucidated, the geopolitical dimensions of the Chinese investments will be
discussed in the light of the remarks made in Amineh and Crijns-Graus (2017, p.
439). At last, future prospects and impediments will be scrutinised and the
findings will be concluded and discussed.

Theory and concepts

This section
is aimed to introduce the theories and concepts that are used as a framework
for the paper. An outline of theories and concepts is necessary to explain the
relations between energy supplies, investments, geopolitical dynamics and
securitisation. When applying security issues to the import and export
relations of states, realism provides a useful framework. Realists have often viewed energy and environmental
issues as peripheral to power relations between states and the
security dilemma (Schmidt,
2004, p. 434). However, energy security, which has strong geopolitical as well as environmental
linkages, has become a major issue to realists (Cohn, 2015,
p. 440). This is because energy is an
important commodity in all aspects of the industrialised state: markets,
industries and households. Energy is essential for industrial economic activity
and the survival of the wealth-power structure in modern industrial or
industrializing state-societies depends on it. The problem that comes with it
is the scarcity of fossil fuels like
oil and gas. These are still the main sources of generating energy and are
unequally distributed across the planet. States will have to address the issue
of scarcity if they want to protect their domestic wealth-power structure in
the long-run. through the energy scarcity model.

Amineh and Houweling (2007) have discussed three possible
ways  in which energy scarcity can occur:
demand-induced, supply-induced and structural scarcity . Demand-induced scarcity refers to a situation in which population
growth, a rising per capita income resulting in higher levels of consumption
and technological change, which renders fossil fuels more essential for the
production of wealth and power, increase domestic demand for fossil fuels. Supply-induced scarcity refers to a
situation in which a decrease in stock or the inefficient use of supplies
reduces the supply of energy resources. Structural
scarcity refers to a situation in which there is a supply-induced scarcity
caused by the deliberate action of a major power or non-state actors, such as
transnational oil companies and producer cartels such as OPEC. To reduce the
instability of energy supply through the scarcity model, states have
increasingly engaged in energy relations in order to secure energy supply.

Energy relations consist of three important elements: diplomacy,
trade and investment. Diplomacy is executed by the central government, commonly
represented by official state visits. In contrast, trade and investment
relations are executed by (oil) companies, but the connections between these
companies and the state  can be organised
differently. Amineh and Guang (2014) categorise two ideal types of
state-society and market relations in industrialised state: the liberal state-society and the authoritarian state-led society. Examples
of liberal state-societies are advanced industrial and democratic states, where
civil-society and privately owned corporations operate relatively independent
from the government. In the other type the sovereign state, representing the elite
of the ruling party, determines the long-term strategic orientation of market
and societal forces. The capacity of business- and civil-society forces to
articulate their interests, domestically or in transnational space, is
determined by the geopolitical and geo-economic objectives of the ruling elite.

In the current neoliberal world order, both state-society
complexes have character traits of a capitalist state. Their thrive for wealth induce
them to engage in cross-border activities and interact with other state-society
complexes in transnational space. According to Amineh & Guang (2014), these
activities follow two logics: a geo-economic
logic and a geopolitical logic. The
geo-economic logic is derived from the natural tendency of capital to expand
geographically in search for new resources and markets. As the state is heavily
dependent on capitalist market parties in order to protect its power in the
domestic wealth-power structure, capitalist forces influence the political
process that determines the nature of these cross-border quest for resources
and markets. Therefore, states have the tendency to follow a ‘geopolitical
logic’ by making efforts to gain access and secure control over resources and
markets in transnational space. For authoritarian stated led societies, this
process of ‘power projection’ is controlled by the state as the business sector
that engages in cross-border economic activity often consists of state-owned
corporations or corporations that have close ties to the ruling elite. For
liberal state societies, identifying the actors behind cross-border economic
activity is more difficult as the business sector formally operates
independently from the state. However, as state and market are interdependent,
state forces are inclined to facilitate cross-border economic activities more
indirectly. For both types of state-society complexes, the geopolitical
tendency to project power beyond national borders in order to protect the
domestic wealth power structure is the consequence of a factor called ‘lateral pressure’ (Amineh & Guang,
2014, p. 509).

In summary, states are aiming for energy security as energy is a vital
part of industrialised economies. Fossil fuels are the most important source
for energy generation, but oil and gas are scarce.
States that do not naturally have access to fossil fuel engage in energy relations with  resource rich states by using diplomacy,
trade and investment. The companies that carry out trade and investment, act as
an agency in a structure of the liberal
state-society or the authoritarian state-led
society. Nowadays both types demonstrate capitalist thrives with a geoeconomic logic and a geopolitical logic. As a result of lateral pressure, the governments of
those states are inclined to project their power by facilitating cross-border
economic activity that connects the domestic business sector with new markets
and resources. The mentioned theories and concepts will help

 

The energy situation of the target states

The research question aims to find the factors that influence the access
of the EU and China to Iraq’s fossil fuel sources. Before digging into the
state of Iraq, the target states will be analysed. Is the access to Iraq’s
fossil fuel sources significant for their energy security? The energy situation
will be unfold by analysing energy production, energy consumption, energy
policies and actors.  

 

The European Union

The Gross inland consumption of energy within the EU in 2015 was 1627 million tonnes of oil equivalent and is expected to rise in the
coming years (Eurostat, 2017).  The EU needs energy sources to fulfil this
amount by getting energy from both local production and imports. Looking at the
production of primary energy in the EU 28, a
total of 767 million tonnes of oil equivalent was produced in 2015 by the EU itself. When comparing the
production amount to the consumption a clear gap is evident, the EU knows a
demand-induced scarcity of fossil fuels. Therefore, the EU member states
are the world’s largest energy importer, importing about 55% of their energy
supply, approximately 84% of their oil and 64% of their natural gas (Belkin,
2013, p. 5). Russia is by far the main supplier of fossil fuels to the EU, but a
significant amount comes from Africa and the Middle East that are a member of
OPEC. Saudi Arabia (7,5%), Nigeria (8%) and Iraq
(7,2%) have the most significant shares of oil imports from OPEC-members in
2015 (Eurostat, 2017). Natural gas is also imported from the MENA-region,
roughly about 20% with Nigeria, Libya and Qatar as the main suppliers in 2015
(Eurostat, 2017). 

            In
response to several concerns around energy supply, namely regarding Russia, the
EC released an Energy Security Strategy in 2014. This strategy aims to ensure a
stable and abundant supply of energy for EU citizens and the economy (European
Commission, 2014, p. 3). The strategy of the EU consists of short-term and long-term
measures, of which the most relevant for this research are diversifying
supplier countries, routes and related infrastructure, improving coordination
of national energy policy, and speaking with one voice in external energy
policy. In 2016, the European Commission announced in its Green Paper that the
EU policy is aiming to increase the share of European renewable energy. The EU strives for
a 20% share of energy from renewable sources in 2030 while now only 11 member
states meet this norm (Eurostat, 2017).

The
combination of the fact that renewables come slow and the fact that there is a
need for diversification (Belgin, 2009) make Iraq an important oil supplier. As
Iraq’s share of imports have continued to grow over the last 10 years
(Eurostat, 2017), it might become an even more important supplier in the
future.  But how does the EU engage in
business with Iraq? When we look at the categorisations of Amineh & Guang
the EU is an example of a liberal state-society. In these states,
civil-society and privately owned corporations operate relatively independent
from the government. European oil companies like Shell, Total and BP all invest
in Iraq’s oil fields. This means that besides the EU-commission and member
states, European oil companies are important units of analysis in examining
EU-Iraq oil relations. 

 

The People’s Republic of China

In 2014, China produced 4.6 million barrels per day
(bbl/d) of petroleum and other liquids. Next to that China holds 24.6 billion
barrels of proved oil reserves, but China’s total petroleum and other oil
production solely serves the domestic market. China consumed an
estimated 10.7 mb/d of oil in 2014, up 370,000 b/d, or almost 4%, from 2013. A the domestic energy consumption will continue to grow, China knows a demand-induced scarcity of fossil fuels. To fulfil this need China continues to be
an major importer of fossil fuels. According to the EIA (2015) China’s
top ten crude oil suppliers were respectively Saudi Arabia (16%), Angola (13%)
, Oman (11%), Russia (10%), Iraq (9%) in 2014. China imported 1.8
Tcf of LNG and pipeline gas in 2013, which accounts for 32% of its energy
demand.

The Chinese ruling party became aware that it had to guarantee its energy
supply security in order to fuel its enormous economic growth, which resulted
in an increased search for relations with resource-rich countries. Gradually,
this has changed Chinese foreign  policy
from bilateral relations into a multilateral approach. However, there is a second,
more implicit reason for this gradual transition towards multilateralism. The
creation of the Shanghai Cooperation Organization (SCO) in 1996 was also the
beginning of Chinese attempts, in cooperation with Russia, to limit U.S.
influence in Central Eurasia and the Middle East (Amineh & Guang, 2014). In
early 2015, the contours of Beijing’s strategy began to emerge as China’s
leadership laid out plans for this “One Belt, One Road” (OBOR).

Iraq does
not take a prominent position in OBOR, but this does not mean that its role as
a supplier is not significant. Since the Iraq War in 2003,
Chinese energy companies have invested some $10 billion in Iraq’s nascent oil
industry. According to the International Energy Agency (IEA), by 2035, 80
percent of Iraqi production will go to China (Chaziza, 2016, p. 28). The way
that China engages in business with Iraq can be described by the authoritarian
state-complex type of Amineh and Guang (2014). The state or representing the
ruling elite of the Communist Party, determines the long-term strategic
orientation of market and societal forces. For example, state planning controls
labour mobilization, wages, savings, sectoral investment priorities and the
nature of investments in transnational space through state-owned corporations. The
most important tools for the Chinese multilateral approach are the national oil
companies (NOC’s) like Sinopec, CNOOC and CNPC. This means that besides the
Chinese government, the extended arm of NOC’s are important units of analysis
in China-Iraq energy relations.

 

Analysis
of Iraq as a supplier

The research question focusses on the factors
that influence the European and Chinese access to fossil fuels in Iraq. The
previous section already stated that fossil fuels are demand-induced scarce in
the target regions of China and the EU. In contrast, Iraq is a major supplier
of fossil fuels is not so concerned with the question of scarcity. This section
first examines the energy situation in Iraq. Afterwards, the energy relations
between Iraq and the EU/China will be demonstrated from a political and
economic perspective. At the end of this section the geopolitical economic
challenges and impediments will be scrutinised.

Iraq’s energy situation  

The first
wells in Iraq were drilled from 1902 onwards and have continued to increase
ever since. Now, the state has 144bn barrels of oil reserves holding the
fifth-largest proved crude oil reserves after Venezuela, Saudi Arabia, Canada,
and Iran. The state is a member the Organization of the Petroleum Exporting
Countries (OPEC) delivering a production rate of  4.1 million barrels a day in 2015 (AIE, 2016,
p. 1) and even grew to almost 4,7 barrels a day in 2016 (OPEC, 2017). Iraqi
gross natural gas production was 771 billion cubic feet (Bcf). Next to that
Iraq holds the 11th position in reserves globally holding 112 TCF (AIE,
2016, p. 12).

 

Fields/map

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a supplying state Iraq produces more oil and gas than it consumes. In
2015, Iraq consumed 770,000 b/d of petroleum and other liquids (AIE, 2016).
Iraq commercially consumed almost 32 Bcf of dry natural gas in 2012, mostly
used in the electricity sector (AIE, 2016, p. 12). Logically, the economy of
Iraq relies for on fossil fuel revenues. The IMF stated that the economic oil dependency
of Iraq was about 80% in 2016, which is higher than all Middle Eastern states (IMF,
2017, p. 29). It is evident that Iraq’s niche is the oil market, but to which
states does it export the most? Looking at figure 1 one can see that China,
India, the US and Europe take the biggest share of the oil exports.

 

Figure 1: Iraq’s crude oil exports by
destination (2014)

Source: U.S. Energy Information Administration (Hannem & Partners, 2015, p. 13)

Total Iraqi crude oil exports averaged 2.6 million barrels per day in 2014 and 3,8
million b/d in 2016 (OPEC, 2017). Iraq is even expected to continue its export growth
and become the main additional oil supplier of the international oil market in the
next decades. Next to oil, Iraq holds enormous reserves in natural gas, but these
exports stay behind. The state does not so well in their gas export as much of the
gas is being flared. Limited gas infrastructure has left gas-prone exploration
untouched. As the gas production raised from 780 million cubic feet per day
in 2012 to 1600 mcf/d in 2015, a trend upwards has been solid. Plans to export
natural gas remain controversial because natural gas is needed as fuel for
Iraq’s electric power plants.

 

 

 

The Ministry
of Oil negotiates oil contracts through the Petroleum Contracts
and
Licensing Directorate, which is responsible for organising competitive
licensing
rounds,44 and markets Iraq’s oil through the
State Oil Marketing
Organization
(SOMO), which the federal government deems the sole body
invested
with the authority to organise the sale and export of Iraqi oil.4

 

 

 

           

 

 

 

 

 

 

 

 

 

 

 

Business-state and investments 600

Policy and treaties

 

 

Challenges and politics 600

 

 

 

 

 

 

 

 

Batlle of EU and China

 

 

Recent developments

 

 

 

 

Figure 1: Iraq’s total petroleum and
other liquids production and consumption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Most of Iraq’s major known
fields are producing or in development, although much of its known hydrocarbon
resources have not been fully exploited. All of Iraq’s known oil fields are
onshore.

 

yet remains one of the world’s
least explored major producing country.  

 

 

 

 

§ Most known oil and natural gas resources are concentrated in
the
Shiite areas of the south and the ethnically
Kurdish region in the
north, with significant prospectivity in the
western and central
parts of Iraq

Crude
oil production in 2014 was above 3.4 mmboepd,
forecast to
increase to over 7 mmboepd
§ Iraq will move to 4th largest oil producer, behind
Saudi Arabia,
Russia and the U.S. by 2017
§ There has been a rapid
widening of Iraq’s petroleum
sector to foreign
participation in the last five years
§ More than 25 international oil
companies now
have a licence
interest in Iraq
§ Producing fields in Iraq are
operated under Technical
Services
Contracts (TSC), offering some of the most
stringent terms
in the Middle East
§ Most of the major IOCs hold
strategic positions in Iraq,
focussing on
developing large-scale projects in the
south and have
to-date shown little interest in picking
up exploration
acreage due to non-friendly investor
terms

 

 

§
The giant fields of the south hold the majority ofthese reserves

 

Yet, if Iraq is not stabilized, ongoing
political instability will put off investments and keep the production of Iraq
far below its potential (Van der Linde et al., 2004, pp. 47–49).

 

Iraq
oil/gas industry
600

Exports,
map, transportation, business-state, local consumption

Iraq
foreign relations EU and China
300

Policy
and treaties

Shares
of European and Chinese investments
400
 

NOC’s
What
was the situation?
What is
the trend?

Domestic
challenges and geopolitics
 
500
 

Bad
governance
Conflicts
Paris
accords? Shift towards gas?

Future
prospects and inpediments
 
200

 

 

Conclusion & discussion (500)

 

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