Corruption and instability in Iraq cast doubts on ambitious new oil targets

Recently, several members of the Organization of the Petroleum Exporting Countries (OPEC) have started debating whether to suspend Russia from participating in an oil-production deal. The discussions have been prompted by concerns that sanctions imposed by Western countries may be affecting Russia’s ability to meet its production targets.

With the price of Brent Crude travelling at well over $100 a barrel, suspending Russia’s participation from the agreement would mean relying on other major oil exporters, such as Saudi Arabia, the United Arab Emirates, to use their spare production capacity. Among the countries that could up its production is Iraq, which could leverage large untapped oil reserves. However, Iraq’s endemic issues with factional political fighting and corruption cast doubt as to whether it can truly deliver at this crucial time.

Iraq’s untapped riches

In recent weeks, the pressure on OPEC to increase its oil production has been mounting. At a recent G7 meeting, energy ministers publicly called on oil exporters to “act in a responsible manner and to respond to tightening international markets”. While Saudi Arabia has so far resisted Western pressure to increase production, the kingdom appears to be shifting its position as Russia becomes increasingly unlikely to fulfill its quotas. If OPEC goes through with suspending Russia from the agreement, the search will be on to find who will produce those extra barrels. 

While the obvious candidates are Saudi Arabia and the United Arab Emirates, Iraq is most likely to be playing a more crucial role in responding to the increased demand for oil. At the moment, Iraq produces around 4.1 million bpd, and has several untapped oil fields. It is for this reason that the oil minister recently announced Iraq’s intention to boost its production capacity to 5 million bpd by 2025 and eventually up to 8 million in 2028. Baghdad has already put the wheels in motion, by trying to secure diverse foreign investments that would enable the country to develop its oil industry infrastructure and start extracting from the fields.

Navigating political turmoil

Iraq has the resources to increase its oil production, but it remains to be seen whether the country’s longstanding issues surrounding political turmoil, fractionalization, and widespread corruption will deter necessary foreign investments. For now, infighting seem to be defining features of Iraqi politics, with politicians still unable to form a government eight months after the October parliamentary elections.

The impacts of this turmoil are often directly felt by foreign businesses and investors. For instance, the Iraqi federal government has been locked since February in a constitutional battle with the Kurdistan Regional Government (KRG) over control over oil revenues. The dispute, still awaiting final resolution, has recently escalated with federal authorities contacting foreign oil companies to notify them that the contracts previously agreed with the KRG were to be renegotiated.

More recently still, a project to extend a gas pipeline from the fields of Erbil to Dohuk, close to the Turkish border, is being threatened by factional disagreements between the Kurdish government of Prime Minister Masrour Barzani and the Patriotic Union of Kurdistan (PUK) party, which controls most of the land over the gas reserves. Such political wrangling has contributed towards creating a climate of investor uncertainty in Iraq, which is threatening to hamper long-term investment in the energy sector.

Iraq’s troubles with corruption

But political instability is not the only cause for concern in Iraq. The country has struggled with widespread corruption, ensnaring both the government and a wide range of key industries, often to the detriment of foreign investors. Such problems came to light prominently in the telecoms industry in 2011, when French-owned telecom group Orange and Kuwaiti-based Agility invested in Iraqi mobile telecoms operator Korek.

The two foreign investors, who had bought a 44% stake in Korek for $810 million, were unceremoniously stripped of their shares by an administrative order issued by Iraq’s Communications and Media Commission. The seemingly bewildering move to boot out Orange and Agility, however, seemingly had little to do with telecoms, as it was made by Ali Naser Al-Khwildi, the CEO of the Commission, who entertained personal links with Korek’s owner, Sirwan Barzani, that ultimately benefitted from the move by receiving the confiscated shares.

Whether Barzani – a member of the highly influential Kurdish family clan – had a hand in the decision that cemented his majority stake in Korek remains uncertain. What is clear, however, is that there remain many questions surrounding the propriety of Barzani’s dealings. Currently, Barzani stands accused of allegedly colluding with the Lebanese IBL Bank to obtain a fraudulent $150 million loan for Korek and setting up a system to embezzle funds.

While the Korek affair is emblematic of the corruption issues in Iraq, it is also far from the only case. Several such cases have also touched the oil and energy industries. An international investigation in 2020 revealed how two Australian executives allegedly paid bribes to Iraqi government officials to secure multi-million oil contracts. Corruption in the sector is so widespread that, in a shock admission, President Salih estimated that Iraq has lost over $150 billion in embezzled oil money since the US invasion in 2003.

A long battle commences

If Iraq is to step up to the plate and meet the increasing global demand for oil, it is clear that it must first address its systemic issues of political instability and widespread corruption that for many years have scared investors from investing in the country’s infrastructure. It is likely to be a long and uphill battle. As recently as March, the Federal Supreme Court dealt a heavy blow to reform efforts by disbanding the Prime Minister’s anti-corruption committee.

But President Salih’s recent calls for international assistance to help the country combat the scourge of corruption signals that there remains a political will to change. Given how badly the world needs Iraq to succeed for it to bolster global oil production, it is a call worth heeding.