Liberating Iraq from the politically repressive and economically backwards regime of Saddam Hussein ought at this point to at least have liberated a few of the 40 billion barrels of oil known to be lying just underneath Kurdistan. Yet  here we are, six and a half years later, and despite the best efforts of certain Kurdish leaders, no company has been able to produce substantial amounts of oil and get it to market. Oil production remains well below its 2000 peak.

Source: EIA

The Kirkuk-Ceyhan pipeline, an artery that normally carries around a third of Iraq’s oil exports stopped pumping oil over the weekend after a bomb sabotaged a portion near Shirqat. This is the second disruption this month, after a bomb destroyed part of the pipeline on November 2. Between 2003 and 2007, violence kept the pipeline almost entirely idle.

Iraq holds some of the worlds richest and easiest to access oil fields. In an era of declining production from existing fields and tight national oil company control over much of the oil that will meet future demand, companies are eager to exploit Iraqi opportunities. Yet they have been stymied by violence, political upheaval and bad terms.  For example, Heritage Oil decided yesterday to nix a deal with Turkey’s Genel Energy, worth around $6 billion, to merge and expand Kurdistan operations. The primary reason is that the Kurdistan Regional Government can’t figure out how to pay private operators, and so Heritage doesn’t want to risk developing its greenfield acreage – or take a stake in Genel’s already producing acreage – before it is clear that oil companies will get paid for the oil they produce.

China has, however, been willing to take risks in exchange for control, and bought Switzerland-based Addax Petroleum in X in order to gain X over a number of fields in Y. Their eagerness is being punished, however, by the central Iraqi government, which has proclaimed in its second auction for rights to specified oil fields that no company doing business with the Kurdish Regional Government is permitted to bid. So Sinopec has been shut out. In the first round of bidding earlier this year, no company was willing to accept the onerous conditions imposed by the Iraqis. Thus far in 2009, the leading foreign investor (24%) in Iraq is the United Arab Emirates, which has ploughed $37.7 billion in Iraqi oil, gas, and some real estate.

Taken together, the regular kidnappings of oil workers and sabotaging of pipelines, major bombings in Baghdad, the withdrawal of American troops, and significant sectarian discord around electoral law ahead of parliamentary elections suggest that Iraq needs a miracle if it is to avoid catastrophe. The third largest oil reserves in the world are meaningless if they cannot be brought to a market willing to pay $80 a barrel. This is the meaning of political peak oil. The actual reserves in the ground, whether they be Canadian oil sands or Kurdish crude, are irrelevant to national and economic security in the face of political constraints like environmental regulations or Sunni-Shia-Kurdish strife.

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