Reforming of Iraqi economy;Investing in Iraq

A Hot Tip about Economic Development in Iraq

Last updated: 19 Dec 2011

The economy of Iraq is slowly starting to recover after years of war and instability.
The International Monetary Fund (IMF) has loaned Iraq $746.3 million to aid in the rebuilding of the war-torn nation. It has approved its first review of the country’s economic progress, as stipulated by the loan. The IMF said that Iraq’s economic success largely depends on its ability to maintain security, its reform policies, and how it looks after its oil revenue.
Iraq has the second largest proven oil reserves in the world after Saudi Arabia, and should therefore be one of the richest countries in the Middle East. That it is such an economic weakling today is a testament to its worn-torn recent past. But if the tenuous peace being enjoyed inside Iraq today can hold, there will be many years of positive economic growth as Iraq regains its former financial strength.
The challenge of remaking Iraq’s economy is twofold: to transform a centralized economy into a market economy and to reconstruct a war-torn economy. In post conflict countries, the task of rebuilding the economy is one of the central challenges for intimately connected with security, governance, and justice, as Iraq showed all too clearly in the first year of the occupation.

As of July 2009, Iraq is in the process of holding auctions for energy contracts to develop its massive oil fields, the third largest reserves in the world. The first auction was just completed, and only one deal closed. The Chinese were part of every consortium that bid and want to win even if they lose money - which is handy, because the Iraqi's don't want anyone to make too big a profit. 

The contract that was awarded, for the large fields at Rumaila, went to BP, whose consortium included China National Petroleum Corp (CNPET.UL). The bid had initially come in at $3.99 per barrel, but BP and CNPC eventually accepted $2 a barrel. This is one of the cheapest operating prices anywhere in the world. The Niger Delta currently costs $2 - $4, North Sea production costs $12- $14 and US costs $20.

One day after the close of the Iraqi oil auction, China's Sinopec offered US $7.22 billion to purchase the Swiss-Canadian firm Addax Petroleum, which operates in Kurdistan, in Iraq.
Such a deal would be China's biggest international energy purchase. Addax's shareholders may approve the deal, and its board is recommending it.

The political situation in Iraq around these deals is complex. Clearly, the Iraqi government needs the funds from increased oil production to help rebuild the war-torn nation. It relies on oil for most of its revenues and yet can do little without the oil majors to reduce its deficits, currently running in the billions per year. It is negotiating an IMF loan to help tide over this period.

Besides that, and recently as in November 2011, The Iraqi government has finalized a $17 billion deal with Royal Dutch Shell and Mitsubishi, as part of a joint venture to capture flared natural gas from the nation’s southern oilfields

Presently, more than 700 million cubic feet of natural gas gets burned off at Iraq’s southern oilfields every day, with analysts estimating that the country is losing up to $5 million daily in potential revenues

Is it worth to invest in Iraq?

After seeing the circumstances above about Iraqi economy, logically someone can ask: is it worth to invest in Iraq?
Iraq’s economy is recovering fast. Despite ever-present threats to its political, social and economic stability, the IMF still expects its GDP to grow by 12.5 percent in 2011 – largely on the back of increased oil exports, and high energy prices – after growth of just 1 percent last year. So, is this the right time to invest in Iraq?

Iraq is widely seen as having turned the corner when it successfully auctioned off the rights to develop its vast oil and gas fields in 2009-10. The move is not without controversy, but it enabled Iraq to boost its targeted hydrocarbon production from the current level of 2.7 million barrels per day to a massive 12 million barrels per day by 2017, meaning it would be nipping at Saudi Arabia's heels as the world's largest oil producers (though experts are arguing this target should be reduced to a more realistic 7 million barrels a day)

For the first few months of 2011, as the war was slowing down and the forces were leaving the country in greater numbers, total foreign direct investment in Iraq reached $70 billion. The United States represented 11.6% with $8 billion of investment, up from nearly $2 billion in 2010. 

The IMF has already projected that the Iraqi economy could grow at a faster pace than China or India over the next two to three years. It is the perfect time to invest and help create a well balanced, modern country, as well as secure a stake in the world’s fourth largest oil reserves.



Reuters & Watch economy*

Posted: 19 December 2011, last updated 19 December 2011

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Reforming of Iraqi economy;Investing in Iraq   By Waleed Dirani, Future Horizon Global Center