Iraqi Oil Minister Hussein al-Shahristani has high hopes for his country’s refining industry, and is asking for international investors to help support his vision. (image: uk.biz.yahoo.com)

Over the last year or two, Iraq has been making measured but steady progress toward its goal of returning to its pre-2003 position of prominence in the international oil sector. In November of last year, the Iraqi Oil Ministry struck deals with foreign companies to work Iraqi oil fields for the first time in the nation’s history. On Saturday, the AFP reported that the country has plans to ramp up its production of refined products alongside development of its crude production infrastructure, and is seeking $20 billion in investment to get started.

Iraqi Oil Minister Hussein al-Shahristani made a bold and optimistic statement on the future of Iraq’s capabilities to produce crude oil and refined oil products, declaring, “Iraq during the next six years will become the biggest producer and exporter of crude as well as a major exporter of refined products.”

To achieve the status of “major exporter” of refined products, the Oil Ministry is asking for a total of $20 billion to help construct four new refineries. The Ministry is open to all levels of investment, including partnerships with the Iraqi government, which plans to invest $25 billion of its own funds to modernize its crude production and refining infrastructure.

Most oil industry analysts note that the resurgence of the Iraqi oil industry over the next five to ten years could provide a massive boost to global oil supplies. Al-Shahristani’s call for investment and bold challenge to other oil-exporting nations makes it clear that the Iraqi government plans to make the transition to world oil power as fast as possible.

Iraq’s potential contribution to world supplies of crude and refined products is so large that it could have some effect on heating oil prices. The nation currently produces about 9 million liters (about 2.38 million gallons) of heating oil per day. Adding four modern refineries could quadruple that figure and provide the kind of increase in world heating oil supplies that has the power to make prices inch downward.

Despite being a world leader in oil production, Iran lacks the refining capacity to supply its domestic demand for gasoline. (image: s.wsj.net)

The US is still working on legislation to impose new sanctions on gasoline sales to Iran, but the threat of sanctions is already having an impact. On Monday, Reuters reported that oil trading firms Vitol, the world’s largest oil trader, and Trafigura are going to stop selling gasoline to Iran. The firms join BP, Glencore, and Reliance Industries, who have already stopped selling fuel to Iran as the fear of US sanctions convinced them to halt their supplies.

The US is trying to use sanctions to pressure Iran to abandon its nuclear program. Firms who have operations in the US would be penalized for trading with Iran if sanctions pass. Gasoline sanctions are considered one of the most severe and effective sanctions that could be levied against Iran. Though it’s the world’s fifth-largest exporter of oil, Iran lacks the refineries necessarily to produce adequate supplies of its own fuel products and imports 40 percent of its gasoline.

In December Iran cut its rations of gasoline, but so far its domestic consumption has remained steady, reported Israel’s Haaretz on Sunday. The current rations allow consumers to buy 80 liters (down from 100 liters) at a subsidized price of roughly 10 cents per liter; any gasoline purchased beyond the allotted amount costs four times as much. The failure to reduce demand, coupled with Iran’s generous gasoline subsidies, could make sanctions especially painful. As major suppliers stop doing business with the country, Iran will have to seek out smaller suppliers that demand higher prices.

Vitol will complete any fuel deliveries that stem from previous agreements, but told Reuters that the company had not made any new deals with Iran since the beginning of 2010. Chinese oil traders supply Iran with 30 percent of its oil; France’s Total, Malaysia’s Petronas, and Kuwait’s Independent Petroleum Group also continue to sell to Iran.

The proposed US sanctions have already been successful in curbing gasoline supplies to Iran, even if they do not become law. How Iran will respond is unclear—especially because no new sanctions have actually been imposed. The Iranian government already plans to phase out subsidies, and is working to expand its refining capacity to make the country more energy independent. Iran’s envoy to OPEC, Mohammad Ali Khatibi, reminded observers of the most powerful card Iran has to play when he said on Monday that current oil prices were too low and that crude oil should be closer to $100 a barrel—a price point that some think would bring global economic recovery to a grinding halt.

Whether sanctions on gasoline (or the threat of them) will successfully disrupt Iran’s nuclear program—or whether Iran will use its oil exports as an economic weapon to combat sanctions and create a shock in global oil markets—remains to be seen.

UPDATE: On Wednesday the Wall Street Journal reported that Royal Dutch Shell is the latest company to announce that it has stopped selling gasoline to Iran. A company spokesperson would not comment on how possible sanctions may have influenced Shell’s decision, saying only, “Shell is not currently selling gasoline to Iran.” According to the Journal, Western companies are being replaced by companies from Asia, regardless of the threat of sanctions. Petronas, Malaysia’s state-owned oil company, confirmed that it was continuing its gasoline sales to Iran.

Iran’s president may have to tone down his belligerent rhetoric if oil prices stay below $100 much longer. (image: vimooz.com)

Iran’s influence on oil prices appears to be a two-way street. Just as saber rattling by President Ahmadinejad or any other hints of possible armed conflict between Iran and its neighbors can push up oil prices, oil prices can force the Iranian government into negotiating with the international community. According to a report published by CNN Money on Thursday, the current price of crude oil (around $75 per barrel) is wreaking havoc on Iran’s economy and could force Ahmadinejad to the negotiating table over his country’s controversial nuclear program.

According to CNN Money, the economy of Iran, the world’s fourth-largest exporter of crude, requires an oil price of $100 per barrel for sustained economic stability. With current prices at just three-quarters of that target, many believe that the Islamic republic is already feeling the economic pain. The poor state of the economy in Iran is playing a role in the growing unrest among its people. As Fariborc Ghadar, a senior adviser at the Center for Strategic and International Studies and a professor of global business strategy at Penn State, explained, “[The regime] has to shoot their own kids. Women in the cities are angry. The economy is in terrible shape. The place is a mess.”

As a result of this “mess,” Ahmadinejad and Iran’s ruling theocrats have seen their political power diminish both domestically and on the international stage. As Thursday’s reported antigovernment protests and resulting crackdown on dissidents in Tehran shows, the ruling party’s grip on power in Iran is already less than firm. A feeble economy and crumbling political power are enough to make any government swallow its pride in efforts to improve the situation. In Iran’s case, swallowing its pride may very well mean entering into negotiations with the US and other Western powers to halt or restrict its nuclear program, which many world powers see as a quest to attain a nuclear weapon. Agreeing to such negotiations would lead to an end of, or at least reduction in, trade sanctions that have exacerbated Iran’s economic woes. The lower the price of crude falls, the more pressure builds on Iran’s leadership to negotiate with the West.

If oil prices stay at or below current levels for the next few months, we may see a major shift in Iran’s tack in international relations sooner rather than later. When and if that shift occurs, Iran will likely be perceived as less of a threat to relative peace and stability in the oil-rich Middle East, which could, somewhat ironically, bring about lower and steadier oil prices.

And so it seems that the price of Iran’s power to control global oil prices is its vulnerability to being controlled by them.

There is a flame of hope in the dark desert of Kurdish/Iraqi oil negotiations. (image: kurdistan4all via flickr.com)

In Iraq, what promised to be one of the greatest oil bonanzas of modern times is now looking less like the proverbial spouting geyser and more like a crude-based quagmire. Since 2002 more than 30 foreign companies have set up operations in oil-rich Kurdistan, a semiautonomous region in Iraq, hoping to cash in on the immense oil reserves recently discovered there.

However, according to Sunday’s New York Times, a complex political dispute between Kurdistan and Iraq, involving the scrutiny of at least one oil contract held between the Kurdish government and an outside company, still threatens to choke off oil production and send profit margins into the red, though there are some faint glimmers of hope.

The controversy first arose in November, in the wake of revelations that a former American diplomat maintained a business relationship with Norwegian oil company DNO while acting as a political adviser to the Kurds during the drafting of Iraq’s Constitution in 2005. The scandal helped to exacerbate the more contentious issue of profit sharing between Kurdish authority and the central Iraqi government, and led some officials in Baghdad to question the legitimacy of the region’s production-sharing agreements. Kurdistan contends that it has every right under Iraq’s Constitution to sign the contracts, while Baghdad maintains that they are illegal in the absence of a national hydrocarbons law, and has gone so far as to blacklist the companies operating in the region.

However, there is some promise of reconciliation, however slight. In an effort to ease some of the immediate business concerns of the heavily invested foreign oil companies now operating in the region, the Kurdish government recently presented Baghdad with a major compromise that would permit DNO, along with a Chinese-Turkish joint venture called Ttopco, to resume exports of about 100,000 barrels a day via Iraq’s pipeline network. The proposed compromise would require the two producers to offer their oil to Iraq’s State Oil Marketing Organization, which would compensate them initially just for their costs.

While the compromise is yet to be accepted by Baghdad, it could lead to at least some oil coming out of Kurdistan. With talk of peak oil and rising demand for crude in China and India, much of the industrialized world has begun to look to Iraq to provide a major boost in supplies in the near future. Whether this happens or not may depend on how and when the dispute between Kurdistan and Iraq is finally resolved.

Iraqi oilfield. (image: trendsupdates.com)

A conflict between Iran and Iraq that erupted in late 2009 over a seized Iraqi oil well has finally ended peacefully. Reuters reported Wednesday that the small contingent of Iranian troops has fully withdrawn from the disputed and inactive oil field inside Iraqi territory. Foreign ministers from both countries agreed to “maintain friendly relations and withdraw all military forces in the area to their original positions.”

While Tehran initially dubbed the incident a “misunderstanding,” Iranian troops did move 100 meters into Iraqi territory in mid-December and refused to budge. The well in question was drilled in 1979 and has been inactive since 1980 due to war between the two countries.

As HeatingOil.com reported earlier this month, the border dispute tapped into two of Iraq’s most sensitive concerns: “sovereignty and oil.” The peaceful resolution to the conflict will likely go a long way towards bolstering relations between the neighboring, and oil-rich, nations.

An employee at the Tawke oil field, Iraq. (image: wsj.com)

In Iraq’s latest effort to expand its oil production, its Oil Ministry sealed a deal on Monday with a group of international companies led by ExxonMobil Corp. to redevelop the West Qurna-1 field in southern Iraq. According to Forbes.com, the field has reserves of about 8.5 billion barrels, and the new contract will boost production from 285,000 barrels per day to 2.325 million barrels per day.

The consortium is led by Exxon, and includes Royal Dutch Shell, which holds a 15 percent share. It marks the first time a United States company has been allowed into Iraq’s oil patch since the 2003 invasion.

Iraq opened its borders to foreign oil companies back in December, lacking the infrastructure, the experience, and the technology to alone tap into its 115 billion barrel reserves. Since then, HeatingOil.com has reported on the initial auctions, the deal with Royal Dutch Shell, and how Japan is trying to get in on the act.

Boosting production in the region should be a good thing for people around the world. An increased supply in the global marketplace will help to keep prices low for heating oil and other energy consumers alike.