Richard Morningstar
Special Envoy for Eurasian Energy
Houston, TX
March 8, 2011

This talk is timely for two reasons. First, I’ve just come back from Iraq, where Deputy Secretary of Energy Daniel Poneman and I met with the new government, including the new ministers of oil and electricity. This session is also timely because of what’s happening politically in Iraq. After many months, a new government has finally been formed, one that we believe is inclusive, experienced, and, I hope, ready to take on many of the economic and political challenges facing the country.

And while there are indeed many challenges ahead, significant progress has already been made and I believe the challenges are far outweighed by the tremendous opportunity that exists.

Let me start by outlining how the United States views the oil and gas sector in Iraq. First, we believe it is of utmost importance for Iraq to implement soon hydrocarbons and revenue sharing laws, which provide for a clear investment environment and clear authorities for the regional and federal governments. Such regulatory modernization is essential for Iraq’s people to fully reap the benefits of their country’s remarkable hydrocarbon resource base. And as you all know, this is important for current and future investors in Iraq, who will be looking for credible legal and fiscal regimes that will provide a reliable investment environment.

This issue is also important to us because it reinforces our primary policy goal when it comes to energy: help the Government of Iraq ensure that the country’s most vital resource – its oil and gas wealth – is wisely administered for the benefit of this and future generations of all Iraqis.

Now, let’s get into the issues. I’ll start with oil. The good news is that in the past couple weeks, crude oil exports from Iraq have, for the first time, reached pre-war levels. In fact, you’d have to go back to 1989 before Iraq had a higher total production level than it does today. A total of 15 international oil companies in 9 consortia are developing 12 of Iraq’s oil fields, some of them among the largest fields in the world. Total production has increased by roughly 35% since 2002, to around 2.7 million barrels per day. Exports have increased nearly 32%, to roughly 1.9 million barrels per day. In the north, Iraq’s North Oil Company produces around 630,000 barrels per day at Kirkuk and the surrounding oil fields, while the Iraqi Kurdistan Region is climbing towards almost 100,000 barrels per day.

As you have probably heard, Iraq has set ambitious targets for future production. Such a ramp-up in production will require not only billions of dollars in investment, it will require a tremendous amount of human capital to reconstitute Iraq’s oil sector. That’s one of the reasons I’m here today, to relay the message I heard repeatedly in Baghdad: IOC and service company investment – in dollars, technical expertise, and managerial experience – will be welcome as Iraq seeks to achieve these goals.

Let me say again, challenges remain. One of the primary impediments to further upstream development is actually a function of what’s happening in the midstream sector. After decades of war, sanctions, and mismanagement, Iraq’s export infrastructure is in disrepair and is being pushed to its limits. In order to reap the benefits of IOC ramp-ups, Iraq will need to rebuild, rehabilitate, and construct massive amounts of new critical national oil infrastructure, including pipelines, pump stations, and ports. And although Iraq has budgeted more than $80 billion for infrastructure development – highways, railways, telecom, security, and defense – and even with higher budget expenditures than in previous years, these challenges are still immense.

The good news is I can report that the new government understands both the needs of IOCs and the need to drastically revamp export infrastructure. It has launched projects to build up hundreds of miles of gathering and transport lines and new export systems, as well as gas-oil separation plants and extensive gas infrastructure. But much more remains to be done. I would encourage interested companies to explore opportunities to help revitalize Iraq’s oil and gas infrastructure, as there will be lots of opportunities for engineering, procurement and construction contracts coming up.

We’ve also recently learned that Iraq plans to hold a “fourth bid round,” likely offering some 12 gas exploration blocks located in Anbar, Najaf, and Muthanna provinces for exploration. I suspect that this bid round will be a priority for the new oil minister, because if Iraq is going to get on its way to meeting ambitious production targets, it will need to efficiently and transparently auction these blocks off and get production going. IOCs and service companies will again see opportunities to participate in what we expect to be another fruitful round of bidding.

In addition to vast oil reserves, Iraq also possesses more than 3.1 trillion cubic meters of recoverable natural gas reserves, according to various estimates by the Iraqi government, U.S. Geological Survey and industry consultants. The country’s upside potential in terms of undiscovered resources could be much larger, depending on the success of future exploration results in northern Iraq and in the Western Desert, the latter of which would be covered by the upcoming fourth bid round.

These gas resources will be instrumental in meeting Iraq’s mushrooming electricity needs. In last summer’s record heat, electricity shortages were so severe that Iraqis in Nasiriyah and Basrah took to the streets, ultimately forcing the resignation of the electricity minister. Demand is set only to grow as Iraq’s economy expands. And as more supply becomes available, Iraqis will be able to run more air conditioners, televisions, and other appliances.

A massive amount of investment is required, starting with new processing plants, power stations, and transmission lines. The good news is I can report that Iraq’s new government is ready for proposals. I can also report that based on my most recent conversations with Iraqi leaders, they recognize the need to create the right fiscal and regulatory conditions to attract adequate investment to produce and deliver natural gas to power plants. One option we discussed was a series of fully integrated projects where companies produce, process, and supply natural gas for domestic power and then export surplus volumes. Another option would be dedicating revenues from exports to an electricity infrastructure investment fund.

But the speed and efficiency in which Iraq’s natural gas resources get developed – from producing fields in the north to the major gas capture projects in the south – will to an important degree depend on whether the private sector and the appropriate officials in Iraq can come up with sound business cases that deliver adequate volumes of natural gas for power production and industry while capturing long-term reliable revenues from exports. Of course, this must be done in the right order so that significant and visible progress is made towards meeting Iraq’s domestic priority of increased electricity generation.

One of the best long-term reliable sources of gas export revenues for Iraq is Europe, and we hope that Iraq will play a role in supplying a Southern Gas Corridor. However, this is not as simple as just matching supply with demand. As I said, it requires a sound business model that also helps Iraq to meet domestic demands for gas and does so in a way acceptable to all Iraqis. It will also require close coordination between the governments of Iraq and Turkey, as well as strong diplomatic engagement from the EU.

I’d encourage any company interested in investing in this sector to get in touch with us so that we may discuss how best to present the right business case to our colleagues in the Iraqi government.

One issue I know is on the minds of a lot of companies is security. While it will remain a concern, Iraqis know the importance of providing adequate security for the oil and gas sector, and they are talking steps to ensure people and assets are protected. In 2004, Iraq formed the Oil Police Force with the express mandate of protecting oil infrastructure, IOC operations, and personnel. Iraq plans to provide approximately a battalion sized force to secure each field under development. This is a new program that has not reached maturity, but its capabilities have grown steadily.

The recent attack on the Beyji refinery highlights the challenges Iraq still faces, both from a security standpoint and from an infrastructure and redundancy standpoint. While the Ministry of Oil has plans to improve the operation of existing refineries and build four new ones throughout the country, this attack, which temporarily shut down Iraq’s biggest refinery, only underscores the need for rapid deployment of investment and private sector involvement.

On the civilian side, the United States is committed to long term close cooperation with Iraq. As U.S. forces withdraw, civilians – diplomats, aid workers, advisors and police trainers – are moving into the lead to support Iraq as it strengthens its government, resolves political disputes, and builds ties with the region and the world. We have in Baghdad the largest diplomatic mission in the world – over 4,000 personnel on a 100-plus acre campus – the sole focus of which is to help Iraq transition to a stable democracy with open markets that can maintain its sovereignty and provide for the security and well-being of the Iraqi people.

We are committed to helping Iraq develop its oil and gas sector in an efficient, sustainable yet expeditious manner so as to provide the resources needed for Iraq’s development goals. Since 2003, the U.S. has contributed roughly $1.7 billion to improve Iraq’s oil and gas sector, and current assistance projects total about $68 million. Multiple agencies – the Department of Commerce’s Commercial Law Development Program, the Departments of Energy and Interior, the U.S. Trade and Development Agency and USAID – are all providing training and technical assistance to the Ministry of Oil.

Our two nations have signed a Strategic Framework Agreement that is a blue-print for deepening our cooperation and exchange across a number of political and economic areas. Under the SFA, as we call it, we have a Joint-Coordinating Committee on Economics and Energy with an Oil and Gas Working Group that meets quarterly to discuss how we can assist Iraq in reaching its goals in the oil and gas sector.

And that cooperation is not limited to improving conditions for American firms. As Ambassador James Jeffrey has made clear, we will work to support the efficient operation of all international oil companies that are active there as part of our continuing close civilian cooperation with Iraq.

To assist, our embassy has established an IOC Support Team to address IOC requests for assistance and information from all companies regardless of their nationality as they seek to enter Iraq. The Support Team gathers information on the challenges and impediments that IOCs are encountering and, through the Strategic Framework Agreement, provide useful feed back to the government of Iraq.

I don’t mean to sound Pollyannaish. There continue to be many issues, from security to capacity building to payment questions and more. But I can tell you that the United States government is committed to working with you and the government of Iraq to support the people of Iraq in overcoming these challenges. And so I encourage those of you in the private sector to seriously consider investing in Iraq’s oil and gas sector and playing a part in helping get Iraq on its feet.

And if you’re ever in either Washington or Baghdad, come by and see us and let us know what your plans are and the challenges and successes you are facing. Who knows, maybe we can help. Thank you.

[This is a mobile copy of Remarks at CERA Week 2011]