Iraq was producing about 2.4 mn bpd at the beginning of the year. Oil production capacity is about 2.5 mn bpd. The Oil Ministry wants to raise this to 3.0 mn bpd by the end of the year. Domestic consumption is about 0.5 mn bpd, though some of this is illegally traded across Iraq’s frontiers for cash, much of which is used to fund attacks on foreign troops, Iraqi civilians and oil industry installations. The amount raised from smuggling is estimated at over $1 bn a year.

The ’surge strategy’ now being pursued by the US of flooding trouble spots in the centre of the country with extra military personnel appears to have had some success in reducing levels of violence within the country. The improvement in security shows-up in figures recently released by the Oil Ministry covering the whole of 2007. These show an 8% annual rise in production from the northern fields, which are prone to disruption from attacks on the two main pipelines serving them: one to the Baiji refinery and the other to the Turkish Mediterranean port of Ceyhan. Security has been stepped-up along the pipelines and a new spur-line has been built on the Ceyhan route, by-passing one of the most attack-prone areas. The State Oil Marketing Organization (SOMO), which has frequently had to suspend exports from Ceyhan, expects to be able to export up to 400,000 bpd via the improved pipeline this year: more than three-times the volume exported along this route in 2007.

These improvements in security appear to be tempting a number of international oil companies to consider taking part in oil production, though there is a long way to go before they become involved in any strength. As a first step, they have been discussing two-year contracts under which they would provide technical support. Four companies are reported to have submitted proposals covering five fields. They are BP, Chevron, ExxonMobil and Shell. The fields involved are Missan, Rumailah, West Qurna and Zubair, in the south, and the northern field-complex at Kirkuk. Their combined production exceeds 2 mn bpd, but all five are mature and in long term decline.

The oil companies are likely initially to offer advice and to help Iraq procure the necessary technology for raising oil production rather than establishing a presence on the ground there. Years of sanctions since 1990 and the collapse of central authority following the US-led invasion of 2003 have kept Iraq’s oil industry starved not only of modern technology but even routine spare parts. The companies clearly hope that any assistance that they can give will be recognised when Iraq is finally able to make major awards of upstream acreage.

Before Iraq can proceed with a wider opening of its oil industry, it will need to establish a comprehensive legal framework for the upstream industry. Iraq has struggled in vain to pass an oil law. All it has at present is a model contract covering individual fields, dating from the Saddam era, which international oil companies are likely to regard as providing inadequate legal protection.

The situation is complicated, moreover, by the existence of a regional petroleum law in Kurdistan. The KRG declared itself unwilling to wait whilst the Iraqi parliament endlessly deliberated the federal oil law and went ahead unilaterally with legislation under which it has already awarded several upstream contracts.

An early contract covered the Tawke field, which is now producing 6,000. In an attempt to curb the actions of the KRG, Baghdad has forbidden Iraqi state companies to handle oil produced under contracts signed with the KRG, which is obliged to buy Tawke’s production itself.

Several larger fields are now proposed for development, including Taq Taq, which is scheduled to produce 300,000 bpd by 2011-12, and the 20,000 bpd Miran field. Most controversial of all is a deal signed with the Korea National Oil Corporation for the Khurmala field, which is described by the Oil Ministry as being part of the Kirkuk field and therefore belonging to the federal government.

Baghdad needs to pass an oil law as soon as possible in order to resolve this and other issues connected with Kurdistan. It also needs to make clear the status of contracts legally entered into by foreign companies with Saddam Hussain’s government. Without such clarification the development of some fields - notably West Qurna, where Lukoil has such an agreement - may be delayed.