Few Iranians have forgotten the losses suffered during the Islamic Republic’s eight-year war with Iraq. At the time, Baghdad was seen by the US as a counterweight to Tehran’s ambitions in the region. Today, Iraq is viewed by Iran, as a much better behaved neighbour.

Once almost entirely absent, Tehran’s influence in Baghdad now reaches up to the highest levels of the government. 

Tehran’s presence in Iraq is far from universal. Old rivalries die hard. As Baghdad plans to raise oil production to 12.5 million barrels a day (b/d) by 2017 from less than 2.5 million b/d currently, tensions are resurfacing between the neighbouring oil producers. Estimates of their crude oil reserves are increasingly becoming powerful political and economic weapons in disputes between the two Opec members.

Iraq’s oil ambitions

On the eve of the October Opec meeting in Vienna, Iraq’s oil ministry announced an increase in its estimate of its crude oil reserves to 143 billion barrels, up from 115 billion barrels. The declaration pushed Iraq past Iran as the world’s second largest holder of crude reserves after Saudi Arabia.

Soon after, Tehran’s oil minister Massoud Mirkazemi, raised Iran’s reserve estimate to 150.31 billion barrels from 138 billion barrels earlier.

Iraq’s assessment of its oil assets has taken decades to produce, having been neglected and understated under the regime of Saddam Hussain. With more than a dozen major international oil companies (IOCs) now racing to get production started from new field development concessions, the estimates are likely to be revised upwards again. And the involvement of the IOCs adds a layer of credibility to the figures that is currently lacking in both markets. 

Despite the tensions, there are also increasing signs of cooperation between the two oil neighbours

Iran’s reserves on the other hand have been under almost constant scrutiny, leading many analysts to question Tehran’s latest figures. They are doubly sceptical given the timing of the announcement and its potential impact on future Opec production quotas. Analysts anticipate further increases to match anything coming out of Baghdad, but Tehran must be careful to protect its credibility.

“Iran’s increase is being said to have come from new discoveries and from better reservoir mapping technologies,” says Samuel Ciszuk, Middle East analyst at IHS Global Insight. “Although both arguments ring somewhat hollow given the slow pace throughout Iran’s oil and gas industry’s operations that have been reported over the past few years.”

International sanctions over the past three decades, which since June have been further enhanced, have deprived Iran’s hydrocarbons sector of the essential technology it needs to develop its fields.

One of Opec’s main considerations in setting oil production quotas is the size of a country’s oil reserves compared to current production capacity. Iraq is currently not subject to the quota system, allowing it to sell as much oil as it can in order to fund its reconstruction efforts. But as its production levels increase, calls for limits to be re-imposed are likely to be heard from other Opec members.

This will depend on Baghdad’s ability to raise its production capacity to more than 12 million b/d. Its own ambitious target of hitting this figure by 2017 looks unlikely and many have put a more realistic target at around 7 million b/d within the next 10 years. Tehran will be particularly vocal.

UK oil major BP estimates Iran produced some 4.2 million b/d in 2009, compared to 2.5 million b/d in Iraq.

Under the burden of sanctions and the expanding cost of public spending, Iran cannot afford to lose market share to Iraq and will want its production limited.

Middle East border conflicts

Borders, particularly in the Middle East have often been drawn with little or no knowledge of the reserves underground. Where they are not jointly developed, national oil companies can choose to deliberately drill diagonally under a border to access the crude oil beneath, a practice known as slant drilling. It is no surprise that fields crossing national boundaries can become a source of tension. Iraq’s invasion of Kuwait in 1990 was launched on the pretext that Kuwait was slant drilling into Iraq’s Rumaila oil field.

The proximity to the Iranian border of some of the fields auctioned by Baghdad in 2009 explains a subdued response by Tehran to the licensing round. Tensions between the two flared up around the same period, when Iranian troops briefly seized an unused oil well at the Fakka oil field in Iraq’s remote Maysan province.

Although Baghdad and Tehran moved to calm the situation, the action provided a blunt reminder to Baghdad and IOCs operating near the border that Tehran remains a key player in Iraq’s energy sector and one that expects to be consulted with.

On its side of the border, Tehran has identified nearly 20 oil and gas fields near the border with Iraq that are shared by the two countries, although it has made no announcement regarding the reserves of the wells. 

While the Fakka and Abu Ghraib fields are not clearly defined, the area includes the 109 million barrel Badra field, which was awarded in April to a consortium led by Russia’s Gazprom. It includes South Korea’s Kogas, Malaysia’s Petronas and TPAO of Turkey.

Iran’s oil ministry is preparing to launch the development of its share of the field, known as Azar and hopes to bring 20,000 b/d production onstream by March 2012, with a long-term target of up to 65,000 b/d.

Iran oil plans

At Badra, Gazprom is targeting a 170,000 b/d production capacity within less than six-and-a-half years. As Iran’s oil sector lags under the weight of sanctions and a lack of financing, its fears of reservoir migration will become more pronounced.

“Badra is led by Gazprom now, so it could be interesting to see whether the Iranians will work against the Russians, or if they actually will end up cooperating,” says a London-based source. “The chances are of course that the development of the field will get beyond the discussion stage, given Iran’s problems.”

There is also the giant 13 billion barrel Majnoon field, being developed by UK-Dutch Shell Group along with Petronas that meets the dividing line in the south. Shell is seeking to raise production to 1.8 million b/d from less than 100,000 b/d currently.

Iran is also seeking to raise production at the 26 billion barrel Azadegan field, which runs parallel to Majnoon. Iranian geologists claim the two fields are linked, while Iraq says the Majnoon field lies entirely in Iraqi territory. According to one source at an IOC, the two are likely to be linked to some degree, but without further studies it remains uncertain.

Signs of Iraq-Iran cooperation

Despite the tensions, there are also increasing signs of cooperation between the two oil neighbours.

In May, Alireza Zeighami, managing director of Iranian Central Oil Fields Company (ICOFC), said Iran and Iraq had come to an agreement to provide a master development plan for five unnamed shared oil fields.

The neighbours have also seen $4bn-worth of bilateral trade since the beginning of 2009, according to the US Congressional Research Service. Iran provides refined fuels to Iraq and now supplies 750MW of electricity, in addition to diesel for a number of power stations.

Iran’s influence in Iraq remains substantial, but as the overall security situation has improved, Tehran’s sway has declined.

Full cooperation will take a long time to realise, but Iran and Iraq are unlikely to return to their conflict days that existed under the regime of Saddam Hussein.