Iraq’s global oil plans and local power cuts

Berlin, Germany – Nearly a decade after the US invasion, Iraq has plans to become the world’s number one oil producer by 2020, yet it flares billions of dollars worth of gas every year – and still can’t supply its citizens with regular electricity.

On a recent trip to Baghdad, many people I spoke with were reporting five to six hours of power a day. With the intense heat, already reaching 40 degrees Celsius (104 F) by April, respite from the blazing sun was hard to come by. Outside every middle class house was a generator, chugging away day and night – with a whole street lined with generators, you can sometimes barely hear yourself think. In poor neighbourhoods, like Sadr City, sometimes a whole city block will share a generator, creating fuel bills that run easily to hundreds of dollars per month, providing enough power to cool just a couple of rooms into something bearable.

Analysts have put money numbers on all that – loss of gas as a commodity, the cost of imported fuel products, the higher cost of more imports of everything because with so little power available in Iraq domestic manufacturing cannot compete, the loss of productivity from overheated classrooms and offices. Once you factor in all externalities, some analysts suggest costs top $40bn annually in a $110bn GDP economy.

But nobody has counted the human cost. In France, some 14,000 people were estimated to have suffered heat-related deaths during the August 2003 heatwave. Similar analysis in Iraq would surely reveal higher and more constant numbers among the old, the young and the infirm. But the very lack of such analysis tells its own story. The toll is so factored in to the regular rhythm of life, season after season, year after year, that the story plays in Iraqi as well as international media more as one of citizen inconvenience, occasional street anger and the opportunity cost to an emerging economy. Somehow, the fact that people are dying unnecessarily gets largely overlooked.

There is a long and suitably complex aetiology of why this has happened. Many of them are specifically Iraqi: the occupation, the resistance, the sectarian conflict, perhaps also the rise of a neighbourhood generator mafia which must now be well connected to all levels of government and would just hate to see an effective grid. But before we sagely shake our heads and dismiss all this as one more example of screwed up Iraq, it’s worth reflecting on the fact that the biggest single factor is actually global, the result of capitalist orthodoxy unthinkingly applied not just in Iraq but in a dozen other countries around the world.

Export: the only path to profit?

The clear solution to Iraq’s power crisis is to develop its abundant natural gas to feed power stations. Iraq’s gas could easily cover the 10 gigawatt deficit the country currently suffers. But Iraq’s gas has never been developed because nobody could figure out how to commodify it. While oil is a global commodity, gas is often “stranded”, to use industry parlance, because although it just shoots out of the ground, you then face the challenge of figuring out how to capture it and send it anywhere.

In-country, you can lay pipelines to power stations or direct to people’s homes, as many European countries did in response to the oil crisis of 1973. In OECD countries oil has gone from about 50 per cent of the energy mix back then to about 35 per cent now, as gas has replaced it as a feedstock for power generation. But in a developing country like Iraq, it’s not clear you can charge enough to recover the large sunk costs of building the infrastructure and make a profit in domestic markets. And, borrowing from company concepts of a single bottom line, the orthodoxy says if you can’t turn a profit on it, it must somehow be irresponsible.

Somehow the total cost to society of human welfare, or the lack of it, has disappeared, the complex calculation of benefit maximisation required of a government accountable to its citizens has been collapsed into the single, crude and false indicator of money. The “public” has gone out of public policy planning.

That leaves export as the only path to profit. And funnily enough, Iraq does now have a project to develop its flared gas, led by Shell, a $17bn investment to create liquefied natural gas (LNG) and ship it to Europe or the Far East.

This is a deal which is unpopular even among other oil companies, because it was bilateral, no-compete and blocked counteroffers while it was under consideration. Faced with mounting public discontent, both the Iraqi government and Shell have declared that of course local needs for power would be met before large quantities of gas were chilled to minus 160 degrees, deposited in supertanker refrigerators and sent half way round the world. But they seem to have different ideas about what local needs are, or when they would be met, and exports could begin.

An Arab colleague became visibly agitated when he talked about this deal.

“Shell has done this in other places. Iraq will go the way of Oman, which exports natural gas in long-term contracts at locked-in prices while it doesn’t have enough power available at home.”

Within the region, Yemen and Egypt are gas exporters and net energy importers while down the African coast, Tanzania and Mozambique are both entertaining the idea of LNG export projects while facing chronic power shortages at home. In the case of Mozambique, a new investors’ darling, about ten per cent of the population have regular access to electricity.

Free market fundamentalists, of course, say the more money the government makes the more it can spend on public services. Which would be great in a world of ifs. If gas were wholly rather than semi-commodified, in fact, so Iraq and Mozambique could play a spot market and learn from their mistakes day by day.

If there were zero friction to transactions, so that billions of dollars could smoothly fly across the apparatus of state to the exact spot where a unified national plan, built through disinterested expertise, had decreed it should go. If there were no asymmetry of information between Iraqi and Mozambican officials on the one hand and Shell and Anadarko on the other. And a whole bunch of other assumptions that wouldn’t make it off the bench outside Economics 101.

Meanwhile another unknown number of Iraqis will die avoidable heat-related deaths this summer. And another generation of rural Mozambicans will struggle to learn to read by gaslight.

Johnny West is founder of OpenOil, a Berlin-based consultancy in oil and other extractive industries. He has covered global energy markets since the early 1990s. In 2011, he published the first book-length account of the Arab Spring, Karama! Journeys through the Arab Spring now translated into Arabic by Dar al-Shorouk in Cairo, which includes an analysis of the role of Libya’s oil industry in maintaining Muammar Gaddafi in power. West is currently working on a new book outlining the role of the oil industry and the Arab Spring.