Iraq’s future — supernova or black hole?

The stars aligned for Iraqi prime minister Haidar al-Abadi, allowing him to flex his political muscle this week. Strong popular demand for reform and a nod from Shiite Iraq’s highest authority, Ayatollah Ali al-Sistani, allowed Abadi to put forward the biggest shake-up to the domestic political system since the 2003 US-led invasion.

The reform plans have aroused hopes that progress can be made in solving the country’s parlous economic and security problems. Inevitably, it’s a gamble, not just politically, but also economically. The oil industry is notoriously conservative, fearing uncertainty more than anything else and, generally, preferring the devil it knows to devil it doesn’t. That is true of North Sea tax regimes and developing country political regimes.

To summarise, Iraq’s parliament unanimously backed to Abadi’s reforms on 11 August, which include the abolition of the senior posts of vice-president and deputy prime minister, with his predecessor Nuri al-Maliki losing his job as vice-president.  He will downsize the cabinet and merge some ministries and departments in an effort to cut spending.

And he plans to end the arrangement whereby public-sector jobs are distributed on an ethno-sectarian basis devised to maintain a delicate balance between Shia, Sunnis, Kurds, and other groups. Abadi also said the Popular Mobilisation Forces should focus on the battlefield and stay away from politics — an acknowledgment of the growing clout of the mostly-Shia coalition of militias spearheading the fight against Islamist group Isis.

The reforms follow weeks of widespread protests in Baghdad and across the south against corruption and the disintegration of state services. Parts of the country are getting only a few hours of electricity, when temperatures are soaring above 50°C.

Iraq’s economy has been under severe strain because of the burgeoning cost of the war against Isis and the global slump in oil prices. The country borrowed $1.25bn of emergency funding from the IMF last month. The IMF expects Iraq’s budget deficit to rise to 17pc this year from 5pc in 2014.

Ratings agency Fitch gave Iraq’s debt a junk B-rating and forecast government debt at 51pc of GDP by the end of 2015. Iraq is planning a $5bn bond issue later this year. “Political risk and insecurity are among the highest faced by any sovereign rated by Fitch,” Fitch said.

The potential impact of this overhaul on Iraq’s energy industry — the backbone of the economy — is being mulled by foreign energy firms. There are worries about possible shake-ups in the structure of the oil ministry and national oil firms. And there are concerns that the ramifications will go beyond eliminating senior political posts.

Some companies are concerned that the time needed for enacting, bedding in, and assessing the reforms will put a further brake on an already sluggish decision-making process for energy investments.  There are worries that increased scrutiny from the newly established integrity commission will slow down decision.  Diplomatic sources in the county this week said some cabinet members politely declined to meet in Baghdad, as they are waiting to see what changes the reforms will bring about.

While in the short term Iraq’s energy industry has been making strides, with the country reaching record crude exports in recent months, the outlook looks bleaker.  Near term at least, the crude export deal with the Kurdistan Regional Government (KRG) has collapsed. State-owned marketing agency Somo is receiving only a trickle of Kirkuk crude at Ceyhan, as Erbil demonstrates that it can exercise de facto economic independence.

Longer term, the oil ministry in Baghdad has been trying to push forward projects that are vital to achieving capacity growth goals to 5.5mn-6mn b/d by 2020, including the Common Seawater Supply Project, to which it is trying to entice ExxonMobil and China’s state-owned CNPC. And the country is continuing to negotiate the terms of its service contracts with energy companies developing its oil and gas facilities in the south, to cut their costs.

More uncertainty is the last thing those companies — including the likes of  Shell, BP, Eni, Gazpromneft or Lukoil — want to see.

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