Iraq’s Oil Production Goals Have Not Been Met and Oil Production Figures May Be Overstated

Despite U.S. and Iraqi government efforts to reconstruct Iraq’s key  economic sector, oil production has consistently fallen below U.S.  program goals. At an average price of $50 per  barrel, this is a discrepancy of $5 million to $15 million per day, or $1.8  billion to $5.5 billion per year. An improved metering system has been a U.S. and international donor  priority since early 2004, but implementation has been delayed. Security, Corruption, and Funding Challenges Hinder Reconstruction Efforts

The U.S. government and Iraq face several key challenges in improving  Iraq’s oil sector. Corruption and Smuggling Reduce Oil Revenues

U.S. and international officials have noted that corruption in Iraq’s oil  sector is pervasive. Future Funding Needs Are Significant but Funding Sources Are Uncertain

While billions have been provided to rebuild Iraq’s oil sector, Iraq’s future  needs are significant and sources of funding are uncertain. In 2006, Iraq  planned to spend more than $3.5 billion for capital projects in the oil  sector. Launched in May 2007, the compact  was intended to secure additional funding for Iraq’s oil, electricity, and  other sectors. Iraq has yet to enact and implement comprehensive  hydrocarbon legislation that would define the distribution of future oil  revenues and the rights of foreign investors. According to U.S. officials,  until such legislation is passed and implemented, it will be difficult for Iraq  to attract the billions of dollars in foreign investment it needs to modernize  the oil sector. As of July 13, 2007, the Iraqi government was in various stages of drafting  and enacting four separate, yet interrelated, pieces of legislation:  hydrocarbon framework legislation that establishes the structure,  management, and oversight for the sector; revenue-sharing legislation (the  draft “Law of Financial Resources”); legislation restructuring the Ministry  of Oil; and legislation establishing the Iraq National Oil Company (INOC). Moreover, enacting and implementing hydrocarbon legislation and  subsequent regulations and procedures will likely be impeded by some of  the same challenges, such as poor security and corruption, that affect  achieving program goals and reconstruction of the oil sector. 2. 3. Appendix I: Data on Iraq’s Crude Oil Production and Exports

Table 1 provides the data used in figures 3 and 4 of this testimony. We calculated Iraq’s production for domestic consumption (the  amount of oil produced that remains in the country) as the remainder of  Iraq’s production of crude oil after exports, based on State Department’s  data.
Why GAO Did This Study

Rebuilding Iraq's oil sector is crucial to rebuilding Iraq's economy. For example, oil export revenues account for over half of Iraq's gross domestic product and over 90 percent of government revenues. This testimony addresses (1) the U.S. goals for Iraq's oil sector and progress in achieving these goals, (2) key challenges the U.S. government faces in helping Iraq restore its oil sector, and (3) efforts to enact and implement hydrocarbon legislation. This statement is based on our May 2007 report and updated data, where appropriate.

What GAO Found

Despite 4 years of effort and $2.7 billion in U.S. reconstruction funds, Iraqi oil output has consistently fallen below U.S. program goals. In addition, the State Department's data on Iraq's oil production may be overstated since data from the U.S. Department of Energy show lower production levels--between 100,000 and 300,000 barrels less per day. Inadequate metering, re-injection, corruption, theft, and sabotage account for the discrepancy, which amounts to about $1.8 to $5.5 billion per year. Comprehensive metering of Iraq's oil production has been a long-standing problem and continuing need. Poor security, corruption, and funding constraints continue to impede reconstruction of Iraq's oil sector. The deteriorating security environment places workers and infrastructure at risk while protection efforts have been insufficient. Widespread corruption and smuggling reduce oil revenues. Moreover, Iraq's needs are significant and future funding for the oil sector is uncertain as nearly 80 percent of U.S. funds for the oil sector have been spent. Iraq's contribution has been minimal with the government spending less than 3 percent of the $3.5 billion it approved for oil reconstruction projects in 2006. Iraq has yet to enact and implement hydrocarbon legislation that defines the distribution of oil revenues and the rights of foreign investors. Until this legislation is enacted and implemented, it will be difficult for Iraq to attract the billions of dollars in foreign investment it needs to modernize the sector. As of July 13, 2007, Iraq's cabinet has approved only one of four separate but interrelated pieces of legislation--a framework that establishes the structure, management, and oversight. Another part is in draft and two others are not yet drafted. Poor security, corruption, and the lack of national unity will likely impede the implementation of this legislation.