Center for a New American Security

My CNAS colleagues Melissa Dalton and Nora Bensahel published a policy brief recently assessing the state of U.S. policy toward Iraq a year after U.S. military forces completed their withdrawal from the country. Although U.S. policy toward Iraq has been drifting since the withdrawal, Dalton and Bensahel argue in Revitalizing the Partnership: The United States and Iraq a Year after Withdrawal that the United States has strategic interests in a strong, unified and sovereign Iraq. 

Among some of the common interests shared by Iraq and the United States include Iraq’s continued progress in producing the country’s oil resources. According to Dalton and Bensahel:

Iraq’s substantial petroleum resources could rejuvenate the country’s economy if Iraq’s leaders can navigate the dispute between the KRG and the central government on oil-rich territory and enact critical hydrocarbon legislation. Iraq possesses an estimated 43 billion barrels of crude oil, the world’s fifth-largest oil reserves, and it surpassed Iran in terms of output in July. Iraq’s output could stabilize or agitate the global market, directly affecting the U.S. economy in the near term, although the United States may be less vulnerable to shocks as additional domestic oil resources come on line. Iraqi oil exports could help offset the negative impact on the global market of oil sanctions on Iran (as exports from Saudi Arabia have), but such exports may face stiff pressure from Iranian allies in Iraq.

Read more at CNAS.org.

In July, the Obama administration barred Iraq’s Elaf Islamic Bank from doing business with the U.S. banking system due to alleged ties to illegal financial transactions with Iran that threaten to undermine the effectiveness of Western sanctions against Tehran’s illicit nuclear program, according to The New York Times.

“The little-known bank singled out by the United States, the Elaf Islamic Bank, is only part of a network of financial institutions and oil-smuggling operations that, according to current and former American and Iraqi government officials and experts on the Iraqi banking sector, has provided Iran with a crucial flow of dollars at a time when sanctions are squeezing its economy,” The New York Times reported on Sunday.

Iraq and Iran have steadily increased economic ties since the U.S.-led invasion in 2003, with trade estimated at around $11 billion a year, according to The New York Times report. “Just last week, an Iraqi delegation that includes the deputy prime minister and top officials from the ministries of finance and trade and the central bank met in Tehran with their Iranian counterparts for talks about further increasing economic ties.”

Some have suggested recently that renewed Iraqi crude oil production could be a boon to the country’s future, but a closer look shows that oil alone will not rejuvenate the Persian Gulf state.

Iraq has returned to oil production levels it has not experienced since the 1980s, producing 3 million barrels per day in 2012, up from 2 million barrels per day in 2006. Moreover, Baghdad announced a goal of expanding production by 400,000 barrels of oil per day by 2013 and eventually increasing production to a whopping 10 million barrels per day by 2017.  (By comparison, the top three producers, Russia, Saudi Arabia and the United States each produce 9.7, 8.9 and 5.5 million barrels of oil per day, respectively.)  This all sounds positive at face value, but the situation in Iraq is more complicated than observers let on, and the country faces four looming challenges that illustrate why oil may not be its saving grace.

Iraq’s crude oil production has increased substantially this year despite sectarian violence, political infighting and modest recovery from years of war.

Increased oil production has contributed to a 20 percent rise in oil exports, bringing total exports to approximately 2.5 million barrels of oil a day, according to a report in The New York Times.  The increased production is owed largely to modest improvements in security as well as technical service contracts with experienced foreign oil companies. “The companies brought in modern seismic equipment and modern well recovery techniques to resuscitate old fields,” The New York Times reported. Baghdad claims that these production improvements will enable the country to produce an additional 400,000 barrels a day by 2013, a step on the road to an announced goal of producing 10 million barrels of oil a day by 2017.

Iraq’s resurgent oil sector is likely to have positive benefits for the country and the global oil market. On the one hand, increased oil production will provide Baghdad additional revenue to help the fledgling government strengthen its legitimacy. As The New York Times reported, “Oil provides more than 95 percent of the government’s revenues, has enabled the building of roads and the expansion of social services, and has greatly strengthened the Shiite-led government’s hand in this ethnically divided country.” Moreover, Iraq’s production increase comes as Libya’s oil production is nearing a full recovery. Last week, Libyan officials announced that oil production had reached 90 percent of pre-civil war levels, with the country producing 1.6 million barrels of petroleum a day. Taken together, Iraq’s and Libya’s oil recoveries could help offset the impact of Iranian oil sanctions that will come into full force beginning in July. This will provide the global oil market added volume to satisfy demand and insulate consumers from dramatic price spikes.  

A perennial dispute between Baghdad and the Kurdish Regional Government over how to manage Kurdistan’s oil resources is exacerbating tensions between the Iraqi central government and the semi-autonomous Kurdistan region.

Baghdad and Erbil brokered an oil revenue sharing agreement in 2011. The deal allowed the Kurdish Regional Government to export oil to Baghdad, which would then export oil to the international market through Iraq’s main oil exporting body, the State Oil Marketing Organization. Baghdad agreed to share half of the oil revenues with Erbil. However, Baghdad has reportedly failed to make payments for the oil since May 2011. According to one report, “The Kurdish region's Ministry of Natural Resources said Sunday that Baghdad had not made any payments to Kurdistan since May 2011. A ministry statement said that Kurdistan has ‘reluctantly decided to halt oil exports until further notice,’ due to the lack of payment. The region has been shipping about 50,000 barrels a day to Baghdad.” The Wall Street Journal added that “The Kurds say that Baghdad owes them some $1.5 billion,” in back payments.

U.S. Secretary of Defense Leon Panetta announced an end to the U.S. military mission in Iraq yesterday in Baghdad. As the U.S. military withdraws, U.S. State Department and other civilian officials that remain behind will need to stay cognizant of the water, energy and other resource challenges the country continues to face.

Photo: Courtesy of the U.S. Department of Defense.

The U.S. military officially declared an end to its mission in Iraq today. Secretary of Defense Leon Panetta, speaking in Baghdad, said that Iraq has shown remarkable progress in the past nine years. However, as with many countries transitioning to democracy, “Iraq will be tested in the days ahead — by terrorism, and by those who would seek to divide, by economic and social issues, by the demands of democracy itself,” Secretary Panetta said. Beyond the sectarian violence and a potentially aggressive Iran on its border, the Iraqi government will continue to face many of the perennial challenges it has been grappling with for the last nine years: reliable access to electricity, water and other basic services that the government is working to provide.

Despite U.S. and other government investments in Iraq since 2003, basic services are still largely unreliable. According to Al Jazeera, “Power cuts are routine, and millions of Iraqis lack regular access to clean water, proper hospitals, or basic infrastructure.” These challenges could hamstring Iraq’s economy, especially as the country looks to draw in foreign businesses to promote economic development. “Unemployment officially stands at around 16 per cent,” Al Jazeera reported. “Many Iraqis say the real number is nearly twice that high, especially among young Iraqis. The only reliable employer is the government, which provides jobs for nearly 40 per cent of the workforce.” Bloomberg reports that the government is trying to attract foreign business, including from U.S. hotel operators and developers. However, “A possible lack of fresh water, electricity and communications systems also can be obstacles to doing business in the country.”

As the U.S. military continues its drawdown of troops from Iraq – with the last of those troops to leave by December 31, 2011 – policymakers and analysts are likely to raise concerns over the country’s long-term stability and sustainability given the laundry list of challenges that continue to plague a fledgling and often times beleaguered central government.  The New York Times report this morning on China National Petroleum Corporation’s (CNPC) recent oil operations at Iraq’s Al-Ahdab oil field sheds light on some of those seams, including challenges stemming from access to food and water and other basic social services that are largely not provided evenly by the government in Baghdad:

The [CNPC] deal began drawing intense criticism from residents and officials in Wasit Province, where the [Al Ahdab] field is located, shortly after the contract was signed. Some people demanded that Wasit be granted a royalty of $1 a barrel to improve access to clean water, health services, schools, roads and other public needs in the province, which is among Iraq’s poorest. The Iraqi government rejected the demands.

As Iraq continues to grabble with these challenges, one cannot help but wonder how much ill-access to water, food, shelter and adequate electricity (to name just a few social needs) will continue to exacerbate existing grievances and drive a greater wedge between the Iraqi people and the government. I am reminded especially of the hurdles the country faces with acute water shortages. Last June, I wrote a piece for Tom Ricks’s Best Defense blog on this very issue. Here’s what I found:

Like many, my attention was fixed on the Middle East this weekend as I watched events in Egypt unfold, with demonstrations, it would seem, becoming more intense as the days pass. The United States closed its embassy in Egypt on Sunday and was making arrangements to evacuate American citizens. Meanwhile, many Egyptians are running out of food staples and are unable or afraid to go to the market as political and social unrest has paralyzed regular food shipments. But while I watched the events in Egypt, I was also drawn to this headline from a report published by Agence France Presse on Saturday that I worried would get buried, but has important implications for the Middle East, as well: “Iraq water shortages raising ethnic tensions.”

The nexus of water and security is an issue that I have followed closely for the last few years, with a particular interest in water and security in Iraq. In fact, in a guest post for Tom Ricks’s The Best Defense blog last June, I asked, concernedly, if water could undermine the American game plan there? And here in 2011, we are getting a clearer picture of just how important water is for long-term stability and security in Iraq.

“A worsening water shortage in Iraq is raising tensions in the multi-ethnic Kirkuk province, where Arab farmers accuse the Kurdistan region of ruining them by closing the valves to a dam in winter,” Marwan Ibrahim reported for Agence France Presse on Saturday. “‘We are harmed by the Kurds, and the officials responsible for Baghdad and Kirkuk will not lift a finger,’ said Sheikh Khaled al-Mafraji, a leader of the Arab Political Council that groups mainly Sunni tribal leaders.”

On Wednesday, Vice President Joe Biden, Defense Secretary Robert Gates, Chairman of the Joint Chiefs of Staff Admiral Mike Mullen and General James Mattis, Commander of U.S Central Command, were present for the change of command ceremony in Baghdad, marking the formal end of Operation Iraqi Freedom for U.S. forces after seven years of engagement. With the change of command, the Iraqi military assumed responsibility for Iraq’s security, leaving 50,000 U.S. troops in the country for the next year to conduct stability operations.  

Despite the end of combat operations, it’s important to remember that serious challenges remain in Iraq (see this CNAS experts’ commentary on the end of combat), including acute natural resource challenges. Consider this:

Serious infrastructure challenges abound in Iraq, including that one in four Iraqis do not have access to safe drinking water. Other resource issues such as reliable access to electricity continue to undermine long-term development and exacerbate existing social and political grievances. With an ongoing political stalemate that has left the government in limbo and unable or unwilling to address these issues, much of the work could fall on the shoulders of the thousands of contractors, civilian corps and embassy staff left in the country – and they need to be prepared.

Have a safe, long Labor Day weekend!

Photo: Courtesy of Mass Communication Specialist 1st Class Chad J. McNeeley and the U.S. Navy.