Iraq’s Integrated National Energy Strategy: Investment And Institutional Requirements

INES INVESTMENT REQUIREMENTS

The development program recommended by INES will require capital and operating expenditures of approximately $620 billion ($530 billion as capital expenditures and $90 billion as operating expenses), in 2011 dollars between 2012 and 2030, including all contracted payments to TSC operators. Of this total figure, it is assumed that about 15% will be available from private investments, primarily in refineries and linked industries.

Approximately 60% of projected INES expenditures by the Government of Iraq will go toward the production and evacuation of crude oil, and much of that amount will consist of reimbursements to the Ministry of Oil’s (MoO) TSC operators. 15% of expenditures will go toward the production and handling of natural gas, and another 15% toward the renovation and expansion of the national power system.

Over the period covered by INES, the revenue to the government generated by these expenditures is expected to amount to approximately $6 trillion. Of this amount, almost 85% is attributable to oil exports. The cash flow from these cost and revenue projections is highly positive from the outset. At the base-case benchmark oil price assumption of $110/b for Brent (in constant 2011 dollars), the net present value of cash flow over the span of INES is $5 trillion. The NPV rises or falls by roughly $1 trillion as the assumed average oil price over the INES time period rises or falls by $20.

This investment program also provides positive results with respect to the other four INES dimensions of strategy evaluation. All domestic demand for energy and energy-intensive products will be met through domestic production by 2022. Employment in the general economy, spurred by governmental reinvestment of energy sector revenue, is expected to rise by 10 million jobs by 2030, bringing Iraq to a condition of full employment. By 2020, economic activity in the non-oil-and-gas sectors of the economy will be growing at a pace that surpasses growth in the oil and gas sector. Thereafter, the economy’s relative dependence on oil will steadily diminish.

By displacing inefficient power plants, by improving the quality of transportation fuels, by eliminating gas flaring, and by establishing a comprehensive water-resource infrastructure

for use in oil production, the INES investments will address directly some of the most glaring environmental challenges currently facing Iraq. The economic growth engendered by these investments will need to be accompanied by a comprehensive national commitment to environmental protection.

While specific economic projections are of course sensitive to oil price and production assumptions, the basic INES recommendations for infrastructure investment, timing, and capacity development appear to be valid under a broad range of economic assumptions.

In this sense, INES is a low-risk strategy.

However, successful execution of INES is subject to numerous risks. INES calls for infrastructure build-up at a pace well beyond anything that Iraq has managed before now. Iraq must overcome logistics bottlenecks, resource constraints, and institutional limitations to coordinate and manage multiple major initiatives. Iraq also must design and plan a long-term structure for sector governance capable of achieving the long-term INES vision. These challenges highlight the importance of institutional alignment with the INES plan.

INSTITUTIONAL REFORM

The energy sector’s institutional challenges fall into two time-frames, short-term and middle- to long-term.

Short term: The paramount challenges concern implementation. The INES plan is front-loaded, in the sense that numerous significant infrastructure and design decisions need to be made and implemented within the next three years, all in coordination with one another. The sector’s rate of investment spending will double during this period. Large numbers of contracts will need to be awarded and managed, and a greatly expanded capital plant will need to be built and operated.

Three ministries will have primary responsibility for these tasks: the Ministry of Oil, the Ministry of Electricity, and the Ministry of Industry and Minerals. INES proposes that each of these Ministries establish a task force empowered to coordinate and expedite the INES agenda within its Ministry. Because of the need for simultaneous development of oil and gas infrastructure, it is proposed that the Ministry of Oil establish two such task forces, one for oil and one for gas.

It is proposed also that each Ministry also establish an institutional reforms committee in addition to its task forces. This committee would be assigned to oversee the improvement of long-term institutional capabilities and the design of a long-term institutional structure.

The task forces and the institutional reforms committees should be chaired by a Minister or Deputy Minister. Each task force and committee should comprise 6 to 7 senior officials of its Ministry, supported by external advisors as needed. Each should have the authority to make decisions on behalf of its Ministry, and each should be held accountable for accomplishing a specific set of tasks pursuant to the INES schedule.

The MoO’s Oil Task Force will be responsible for ensuring that oil production ramps up on schedule. It will monitor and expedite field works, facilitate logistics, and oversee development of the water injection infrastructure and oil evacuation infrastructure. The Gas Task Force will monitor the development of needed gas gathering, processing, and transport infrastructure, and ensure alignment with user requirements. It will commission the design of a Master Gas System that optimizes pipeline architecture, provides efficient systems of flow control, and defines appropriate technical standards and regulations for the gas system.

The MoO’s Institutional Reforms Committee will be responsible for developing and overseeing a long-term agenda for building institutional capabilities and reforming institutional structures. In the short term it will establish a Petroleum Reserve Management System to help organize and analyze oil field data and support the development of long-term production targets. It also will review and revise current programs to incentivize private investment in refineries, and will recommend policies for the domestic pricing of oil products, to be implemented within the next year in order to permit industrial planning.

The Ministry of Electricity’s (MoE) Power Task Force will be responsible for ensuring that the Ministry’s short-term plan for expanding and commissioning new generation capacity is accomplished on time. It will confirm that the necessary EPC contracts and fuel allocations are in place, that plant construction proceeds on schedule, that transmission is upgraded to handle new production, and that plans are in place for operating the new plants once they are commissioned. The MoE’s Institutional Reforms Committee will develop a long-term agenda for capabilities improvement and institutional restructuring. It also will initiate a program for the phased introduction of Independent Power Projects (IPPs) into the Ministry’s generation portfolio. Finally, the MoE will establish a Loss Reduction Committee charged with developing a program for reducing technical and commercial losses and defining a potential role for private- sector operators of distribution systems.

The Ministry of Industry and Minerals’ Linked Industries Task Force will have two short-term responsibilities. The first is to establish a government-owned Iraq Strategic Industries Company to coordinate and sponsor joint ventures in petrochemicals, fertilizers, steel, and aluminum. The second is to establish an Industrial Park Authority with the authority and resources to develop a major industrial park near Basra to provide shared infrastructure and facilities support to strategic export industries. The Ministry’s Institutional Reforms Committee will be responsible for developing long-term plans for capabilities improvement, Ministry restructuring, and promotion of local content in industry.

Medium to Long term: Iraq’s energy sector needs to adopt institutional reforms that will equip it to oversee lasting growth and value creation. Because hydrocarbon resources and their energy derivatives will dominate Iraq’s economy for the foreseeable future, Iraq’s future prosperity will depend to a large degree on the professionalism, transparency, efficiency, and integrity of its energy sector management. A framework ofenergy governance is needed that insulates the sector from short-term political pressure and allows sector managers to focus on the economic performance of their businesses.

The Industry Reforms Committees within each Ministry will be responsible for four issues that are central to establishing this kind of institutional environment. During the short term, these committees will develop plans addressing these issues; in the medium term the Ministries will implement those plans.

> Capability development. Each Ministry needs to expand and strengthen its base of professional skills. Skills are particularly needed in the areas of contracting, project management, operations and maintenance, planning, regulation, and environmental management. Each Ministry needs an aggressive program to recruit, hire, and train skilled personnel. It also should work with national universities to develop programs of classroom and on-the-job technical and managerial training. In addition, each Ministry should work with its international contractors to incorporate training opportunities for Iraqis into their construction and management services.

> Institutional design. Governance of the energy sector should be characterized by (1) clear separation and accountability for the policy, regulatory, and operational aspects of governance; (2) unambiguous distribution of responsibility between federal and regional authority; (3) corporatized structures for the entities responsible for operations, and (4) unbundling of operational responsibilities to the extent needed for transparency, economic coherence, and competitive readiness. INES provides institutional design recommendations in these areas for each Ministry, for consideration by that Ministry’s Institutional Reform Committee.

>Private sector involvement. Participation by international investors provides not only a source of capital to the energy sector but also a source of investment discipline. International investors in Iraq would introduce international standards of financial accountability and transparency, serve as a reality check on the economic viability of investments, and provide a path for the introduction of world-class technology and expertise. Each Ministry should explore opportunities for expanding private-sector participation opportunities and attracting private sector investment. It also should establish programs to encourage and develop local private-sector content in its sphere of operation in order to expand and diversify Iraq’s private economy.

>Pricing. Many of Iraq’s energy products, most notably power, are priced at levels that have little relationship to their cost of production or their opportunity cost. Over the long run this misalignment leads to resource inefficiency, creates barriers to competition, and makes it difficult to establish a workable market environment. Over the course of INES, indirect subsidization of energy pricing through non-economic pricing should be gradually phased out.

INES GOVERNANCE

INES establishes a highly ambitious set of objectives, many of which are scheduled for achievement in the initial, short-term phase. The expansion of oil production, the installation of gas infrastructure, and the elimination of power shortages cannot be delayed without great cost to the economy, the environment, and to the well-being of the Iraqi people.

Once these short-term objectives are accomplished, a strong foundation will be laid for long- term development. The energy sector at that point will have momentum for accomplishing the significant objectives that lie beyond 2015.

The short term is the point of critical risk. Objectives are front-loaded into this period, but institutions have little running room to build the capabilities needed.

In addition to the special Ministerial task forces recommended, INES requires an oversight framework at the highest levels of government to ensure that the right economic and managerial resources are applied to these immediate needs, and that appropriate coordination occurs among Ministries.

INES should be owned by the Executive Branch of the Government through the Prime Minister’s office that will approve strategic decisions and allocate budgets. The Legislative Branch represented by the Council of Representatives and its dedicated committees will monitor the implementation of INES and support the Government in its responsibilities.

INES recommends that Iraq establish an INES Steering Committee responsible for the Implementation of INES. The Steering Committee will be chaired by the Deputy Prime Minister for Energy Affairs or the Chairman of the PMAC. It will comprise senior representatives such as deputy ministers from the Ministries of Oil, Electricity, Industry and Minerals, Environment, Planning, and Finance. The responsibility of the Steering Committee will be to keep INES implementation on track and to provide a forum where high-level decisions can be reached quickly .

Supporting the Steering Committee will be a Program Management Office (PMO) that will monitor progress, provide regular reports, and identify issues for resolution. It also will provide a day-to-day point of coordination among the Ministerial task forces and committees to ensure that plans are aligned and synchronized, and that necessary collaborations between Ministries are occurring.