Oil production and abrupt institutional change: the multi-cyclic Hubbert model and the case of Iraq

ABSTRACT

Iraq, one of the world’s leading crude oil producers with the fifth largest share of proven global oil reserves, recently ranked as the second-largest producer among Organization of the Petroleum Exporting Countries (OPEC) members. Nevertheless, performance of the upstream subsector in terms of oil production volume has been subject to severe disruptions for more than four decades. The main sources for these fluctuations are multi-institutional changes caused by nationalization, wars and United Nations sanctions. This article applies to the Iraqi case an extended version of the multi-cycle Hubbert model, developed by Reynolds and Kolodziej in 2008 and 2009. This econometrics model explores and attempts to quantify statistically the relationship between oil production and multi-institutional changes within Iraq. Findings indicate the negative and significant impacts of abrupt institutional change on the performance of the oil industry where this adverse impact varies in magnitude from one episode to another. As Iraq is still yet in the midst of a turbulent transition, the article also discusses the major challenges of the post-2003 era, associated with the present and potential future development of the Iraqi oil-producing sector. This is especially with regard to the increasing economic and political fragmentation that stems from the absence of a unified oil policy.

KEYWORDS:

• Iraqi oil production
• impact of wars
• institutional change
• Iraq
• multi-cycle Hubbert model
• case study

Acknowledgements

The author gives special thanks for the invaluable feedback provided by Gianni Vaggi, Bassam Yousif and Mario Biggeri. He is very grateful to Kair al-Din Haseeb for continuous support. He also thanks Walid Khadduri, James Condor, Douglas Reynolds and Murad Harasheh for their comments and suggestions. The author is particularly indebted to Ahmad Jiyad and Marek Kolodziej for helpful discussion and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. The article focuses on the upstream subsector and, in particular, the volume of production of the petroleum sector divided into three subsectors: upstream (exploration, development and production), midstream (storage, pipeline and export outlets) and downstream (refining and gas processing).

2. Despite the substantial natural gas reserves, the export revenue from gas is very small; the revenue is derived from liquefied natural and propane gas shipments. While about 60% of the produced natural gas is flared, a substantial amount is reinjected to assist in crude oil recovery (Zedalis 2009).

3. Jiyad (2013) provides useful insight into the relationship between the oil sector and sustainable economic development in Iraq.

4. The IPC and its two entities owned by the following four partners each held 23.75% (Zedalis 2009; Koucher 1999): BP; Royale Dutch Shell; Comagnie Francais des Petroles (CEF); and The Near Eastern Development Corporation (US). The remaining 5% is held by the Participation and Exploration Company (Gulbenkian).

5. According to Alnasrawi (1994), most of the oil produced in the world (excluding the United States and territories of the former USSR until the early 1970s) were produced by eight international oil firms integrated vertically: Exxon, Shell, BP, Mobil, Texaco, Gulf Oil Corporation (Gulf), Standard Oil of California (Chevron) and CFP. In 1960, 90% of operating companies in Iraq were owned by a number of these oil firms.

6. Iraqi crude oil was shipped by pipelines to the Iraqi town of Haditha, where the pipeline split into two branches: the first connected to Tripoli, Lebanon, the second to Haifa, which was part of the British Mandate Palestine (Zedalis 2009).

7. Iraq until 1959 was part of the sterling area. Thus, 1 Iraqi dinar (ID) = £1 sterling.

8. Farouk-Sluglett and Sluglett (1991) asserted that while the change from royalty rate to profit sharing had long faced opposition from the IPC, the crisis in Iran had undeniable influence on the company’s decision.

9. An alternative approach is dealing with the period 1928–2015 by examining it as four distinct periods instead of two as follows: 1928–58, 1958–79, 1980–2003 and 2003 to date. In this scheme, the second and fourth periods would be subject to in-depth analysis pertaining to institutional change (Jiyad, personal communication, 26 August 2016). However, this approach would be rather more suitable for a qualitative analysis than a quantitative one.

10. In this respect, Jiyad made the essential point that oil production under the concessions system that dominated Iraq prior to nationalization in the 1970s was hardly to be considered a competitive market rather than the monopoly of multi-international corporation (Jiyad 2016, personal communication).

11. For a detailed discussion of the constitution, see Jawad (2013).

12. For a detailed analysis and assessment of the drafted Oil and Gas Law of 2007, see Jiyad (2008).

13. Jiyad (2010) provides a detailed review for the points of disagreement between the federal government and the KRG.

14. Al-Kāsim (2010) provides a general review of the different forms of contractual models; while Jiyad (2010) compared between the pre-contractual procedures adopted by KRG and the federal government.

15. According to Jiyad (2010), in the 2004–08 period, the MoO signed numerous memoranda of cooperation with IOCs with three main objectives: conduct of joint technical studies; training and development of staff; and technical consultancy. This was followed by technical support contracts that were supposed to be implemented during 2008–09. The major objective was addressing the decline of production in the primary oil fields.

16. Nakhle (2008) discussed in detail the policy options for development of the Iraq oil industry.

17. In this respect, Jiyad (2011) explores four possible development scenarios for the Iraqi case, dubbed somewhat cynically: honeymoon, delicate balance, risky endeavours and nightmare.

18. Jiyad (2010) provides a useful assessment for the first- and second-round bids, including discussion of the mindset of the IOCs.