Oil and the Iraqi Civil War: How Security Dynamics May Affect Oil Production

Brookings

Kenneth M. Pollack | June 23, 2014 11:00am

http://www.brookings.edu/blogs/up-front/posts/2014/06/23-oil-iraqi-civil-war-pollack

It should be obvious that a key consideration for the United States arising from the revived civil war in Iraq is its potential to affect Iraqi oil production. Iraq is now the second largest producer in OPEC. And although Americans are ecstatic about fracking, energy experts have been warning that future oil prices are more dependent on increasing Iraqi production than North American shale. In October 2012, the International Energy Agency stated that, “The increase in Iraq’s oil production in the Central Scenario of more than 5 [million barrels per day] over the period to 2035 makes Iraq by far the largest contributor to global supply growth. Over the current decade, Iraq accounts for around 45% of the anticipated growth in global output.”

Consequently, any significant disruption of current Iraqi oil production or long-term diminution in its expected growth could have major repercussions for the U.S. economy. As former Federal Reserve Chairman Alan Greenspan pointed out back in 2002, “. . . all economic downturns in the United States since 1973, when oil became a prominent cost factor in business, have been preceded by sharp increases in the price of oil.” Greenspan’s observation came before the 2007-2009 “Great Recession,” which was also preceded by a tripling of oil prices.[1]

Iraqi Oil in the Near Term

The vast majority of Iraq’s oil production comes from southern Iraq, and primarily from fields far from the current frontlines. It is nearly 200 miles from Muqdadiyah—which is as far as the southward Sunni militant advance has so far gotten—to the northernmost of Iraq’s major southern oilfields. It is 220 miles from Fallujah—which is as far as the eastward Sunni militant offensive has gotten—to those same fields.

It is true that the ISIS offensive that kicked off around June 5 did cover roughly 250 miles from the Syrian border down to Muqdadiyah, but the conditions that made that possible have abated if not evaporated. Then, the ISIS fighters benefited from tactical (if not strategic) surprise, which is always an enormously important advantage in warfare. Moreover, the Iraqi security forces collapsed after about four days of fighting in Mosul for a variety of reasons. Since then, Prime Minister Maliki’s forces have regrouped, they are more homogeneously Shi’a, they have been reinforced both by hardened Shi’a militiamen and large numbers of new recruits, and they are defending the largely Shi’a cities of central Iraq. In addition, the Iranians and Americans are providing Maliki’s forces with assistance, although the U.S. support is modest and the full extent of Iranian support is unknown. Nevertheless, both can only help the Shi’a coalition forces militarily in the immediate future.

For all of these reasons, it is not surprising that the Sunni militant drive has stalled. The Sunnis are themselves regrouping, recruiting new personnel and striking alliances with other Sunni militias and tribes to try to get their offensive going again, but it is likely to prove far more difficult for them to take Baghdad and the other Shi’a cities of central Iraq than it was for them to overrun Mosul, Tikrit and the other mostly Sunni cities of northern Iraq.

We should always remember that war is highly unpredictable, and it is exceptionally difficult to assess a dynamic balance of combat forces with such limited information. Nevertheless, the evidence we have suggests that it is more likely that the Iraqi civil war will settle into a vicious stalemate roughly along current lines for the foreseeable future than it is that the Sunni militant fighters will be able to swiftly overrun Baghdad and drive south into Iraq’s main oil fields.

If this most likely scenario is borne out, it would mean that there would be relatively little near-term impact on Iraqi oil production. Iraq’s oil exports come overwhelmingly from these southern fields and they flow southward, to the Persian Gulf, where they are exported from terminals at the southernmost tip of Iraq (indeed, from offshore). The loss of Baghdad could affect that export infrastructure if the Sunni militants were able to tamper with water flows southward (which are important for oil production and power generation) or with the power grid itself, although both would be difficult. In addition, the loss of the seat of government in such a heavily micromanaged state would certainly create some short-term problems in the management and administration of Iraqi oil production. However, over the longer term, it seems likely that Iraq’s oil industry could recover even from the fall of Baghdad.

The battle for Bayji, where Iraq’s largest oil refinery is located, is important because that refinery supplies much of Iraq’s domestic petroleum needs, and the town also controls important power, water, communications and transportation nodes. However, it means little for current Iraqi oil production, which largely stopped flowing northward to Turkey over the past 18 months because of repeated sabotage by Sunni militant groups. The one exception to that is the Kurds, who have been exporting northward to Turkey, but not through Bayji.

All of this suggests that it is unlikely that the revived civil war will cause a near-term collapse in Iraqi oil production.

Looking Down the Road

Looking out toward the medium- and longer-term horizons, however, the security situation has the potential to create greater problems for Iraqi oil.

Shifts in the Balance of Power. First, there is the military balance itself. Although a scenario of protracted, bloody stalemate appears most likely at present, that could change.

Historically, intercommunal civil wars such as Iraq’s (and Syria’s, which is steadily merging with Iraq’s) often bog down into a deadlock along the internal ethno-sectarian divisions of the country. That is what has happened in Syria, and what happened in Lebanon, Afghanistan and Sudan before that. It is much easier for ethno-sectarian militias to hold terrain populated by their own identity group than to conquer terrain populated by their rivals’—which is one impetus to ethnic cleansing whenever a militia can conquer a rival’s territory.

But that does not meant that every civil war will grind on forever. One thing that can dramatically change the military balance is the emergence of one or more highly competent commanders. Because civil wars tend to be waged by relatively small and unorganized light infantry formations, a stand-out military commander can have a disproportionate impact on the fighting. Ahmed Shah Masood in Afghanistan in the 1980s and ‘90s is a good example of this. Masood frustrated every Taliban assault on the Tajik enclave in the Panjshir valley from 1994 until his death on September 9, 2001 at the hands of al-Qa’ida assassins. Hassan Djamous in Chad in the late 1980s comes to mind as another, similar example of a battlefield commander whose abilities helped rout both indigenous rival militias and their Libyan allies.

Because military geniuses are rare, it’s more often the case that one side receiving disproportionately greater external support than its adversary is what tips the balance in a civil war. The Shi’a in Lebanon, the Serbs initially in Bosnia, the Croats and Bosniaks later in Bosnia, the Pashtuns in Afghanistan, all made major advances in part because they had more potent assistance from a foreign backer than their adversary.

It’s hard to know how this will play out in Iraq—or Syria as some have started to refer to the mingling conflicts. Maliki’s increasingly Shi’a coalition obviously has some backing from Iran. The longer the civil war drags on, the deeper Iranian involvement with the Shi’a will become. (And the Russians are also now talking about supporting Maliki too.) Of course, the Iraqi civil war takes place against the wider Sunni-Shi’a and Saudi-Iranian tensions that have been growing since the first embers of the Iraqi civil war started to glow in 2004. The Saudis and their Gulf allies have been providing support to the Iraqi-Syrian Sunnis for some time, both indirectly through Saudi private donations and directly by covert Saudi government assistance to the Syrian opposition. The more Iran aids the Shi’a, the more that Saudi Arabia and other Sunni Arab states will aid the Sunnis.

Whether one state or the other will provide the kind of disproportionate support that will allow its allies/proxies to make more than local gains remains to be seen. For instance, Iran and Russia have been providing very extensive support to the Asad regime in Syria, and this has allowed the regime’s forces to make some important local gains in Aleppo, Homs and elsewhere, but (1) these gains have so far not changed the strategic picture in Syria where the battle lines still largely conform to the internal sectarian divide; and (2) they have already caused the Gulf to respond with stepped up support to the Syrian Sunni militias which threatens to stalemate the fighting again.

The final thing to watch for over the longer term is the direct intervention of one or more neighboring states. This too is a frequent occurrence with long-running civil wars and can dramatically shake things up. Without going into too much detail, it is often the case that neighboring states begin to support one or more of the militias waging the conflict both to minimize spillover from the civil war onto their own country (in the form of refugees, terrorists, secessionist movements, etc.), to placate popular demands to assist co-religionists or co-ethnics in the country in civil war, and/or to prevent other neighboring states from gaining too much influence in the state in civil war. If their allies/proxies begins to lose ground, they face the choice either of folding or doubling down by sending in their own forces. Too many choose the latter: Syria in Lebanon, NATO in Bosnia, seven different countries in Congo, etc.

It can often get worse, because when one of the neighbors invades, other neighbors may follow suit to protect their own interests and/or to prevent the other neighbor from conquering much or all of the target state. The Israeli invasion of Lebanon in 1982 was as much about driving the Syrians out (despite having welcomed Syrian intervention in 1976) as it was about halting the terrorist spillover that Israel was facing. Likewise, many of the seven different African states that have invaded Congo did so in response to the moves of one another. In the Iraq context, we heard the Saudis threaten to intervene militarily in 2006 if the U.S. did not get the situation under control. And in the past week, the Saudi foreign minister has again publicly warned against excessive Iranian involvement in Iraq.

Given Iraq’s strategic importance, over time we are likely to see greater and greater involvement by both Iran and the Sunni Arab states. We could see direct armed interventions by either or both, despite the fact that none of them currently has any interest in doing so. Neighboring states that intervene militarily in civil wars typically only do so after many years of resisting the urge. If they do intervene directly, that could radically alter the military dynamics, but in ways that are impossible to gauge today.

Direct Problems for the Iraqi Oil Industry. Regardless of what happens with the balance of power in a protracted Iraqi civil war, the longer the war goes on, the greater the potential for it to affect Iraqi production from the southern fields. There are at least three problems that are likely to crop up:

Terrorism/Sabotage. ISIS and other Salafi Jihadist groups have been trying to curtail Iraqi oil production by attacking the southern Iraqi oil infrastructure for years. As I noted above, they have had considerable success with the northern infrastructure, but so far have not had the same impact in the south. Now that they are locked in a full-scale, conventional war with their Shi’a adversaries, they are likely to redouble those efforts. After all, Iraq’s oil production is now the revenue stream funding the Shi’a coalition forces. Just as Baghdad and Tehran tried to cut each other’s oil exports for the same reason during the Iran-Iraq War, so the Sunni militants will make the same effort this time around. Moreover, now that they control a huge swath of northern Iraq, their ability to do so may improve.

A Distracted Bureaucracy. Even before the civil war re-ignited, Iraq was experiencing various problems ramping up oil production. The Iraqi government is inefficient, corrupt and badly overcentralized. Oil companies (and other Western firms) have had problems obtaining visas and licenses, moving personnel and equipment, and securing resources that the Iraqis were expected to provide. Some huge projects of critical importance to Iraq and its hydrocarbon industry have encountered numerous bureaucratic SNAFUs that have delayed their completion. These include crucial ventures to capture flared Iraqi natural gas and bring sea water up for injection into the southern oil fields to substitute for Iraq’s diminishing fresh water flows. With an all-out civil war to fight (as well as what is likely to be a series of internal challenges), the Iraqi government is going to be even more distracted and probably less efficient than it was before the events of the past two weeks.

Lawlessness. Over the past 6-8 months, the Iraqi government had been pulling Iraqi Army and police formations out of southern Iraq and sending them west to Anbar to fight the ISIS offensive that had captured Fallujah and threatened Ramadi, Abu Ghraib, and Samarra. The removal of so many security personnel from the south (for instance, 11 of 17 Iraqi army battalions had already redeployed from Basra province) was already complicating the security situation in the south. There were increasing reports of tribal violence, expanding organized crime rings, local political violence, and just more criminal activity overall. Since then, Baghdad has pulled even more troops and police from the south and sent them north to fight the new Sunni militant offensive. Over time, it may be able to stand up new security units for the south, but it will always face competition for more troops along the frontlines as long as the civil war goes on, and historically it is the latter that gets priority over policing rear areas.

All of this will increase the costs of doing business in Iraq for the major oil companies and make it harder for Iraq to reach its full oil-export potential.

One possible mitigating factor is whether Baghdad would use the opportunity presented by the new civil war to revise its approach to oil contracting. So far, Baghdad has insisted on terms for its contracts with foreign oil firms that have significantly diminished their profitability. Many of the major oil companies signed these contracts only in the hope that they would later be able to secure more lucrative contracts if they demonstrated their commitment to Iraq. Some of these became so frustrated with Baghdad’s stubbornness that they pulled out of the south and began to shift their operations to Iraqi Kurdistan instead. Although Baghdad has been remarkably stubborn on this matter, the demands of waging the civil war might force it to reconsider as the only way to keep the major oil companies in Iraq and pumping the oil that is now vital to its war effort.

Tentative Conclusions Regarding Iraqi Oil Production and the New Civil War

Obviously, there is a lot more to be said on this topic. I have purposely not dealt with the Iraqi Kurds here; that is a sizable topic deserving of its own analysis. In addition, their situation is still too uncertain right now to say more than the obvious point that there is a high probability that they will declare independence in the near future as long as the Iraqi civil war roils on.

Nevertheless, even this limited analysis indicates that while Iraqi oil production is unlikely to collapse in the near term, or even in the foreseeable future, over the longer term it may be difficult for Iraqi oil exports to continue to expand as previously projected. Indeed, Iraqi oil production might even begin to decline over time depending on a variety of military and political factors. At the very least, it calls into question whether Iraqi oil production will continue to expand at the pace needed to conform to the projections of soft oil prices over the longer term.

[1] Jad Muawad, “Rising Demand for Oil Provokes new Energy Crisis,” The New York Times, November 9, 2007

Kenneth M. Pollack

Senior Fellow, Foreign Policy, Saban Center for Middle East Policy

Kenneth M. Pollack is an expert on Middle Eastern political-military affairs, with particular emphasis on Iraq, Iran, Saudi Arabia and the other nations of the Persian Gulf region. He is currently a senior fellow in the Saban Center for Middle East Policy at the Brookings Institution. He served as the director of the Saban Center from 2009 to 2012, and its director of research from 2002 to 2009. His most recent book is