East Asia, India, Natural Gas, Oil, Oil Refinery, Regulatory Regime, Security, South Asia, Southeast Asia

The Impact of ISIS on Iraq’s Oil Industry

  • Majority of oil fields located far from ISIS controlled areas; Iraq’s oil industry largely unaffected in short-term

  • Iraq’s top export countries to be affected if ISIS moves south of Baghdad

  • Iraq oil industry to suffer standstill in investment, infrastructure, and human capital

In June 2014, ISIS (Islamic State of Iraq and Syria) launched an offensive on Northern Iraq, specifically targeting the country’s second largest city- Mosul. ISIS successfully took control of Mosul, and has since been consolidating its power and forces among the Sunni Muslim minority community.

ISIS seeks to establish an Islamic caliphate in the Middle East, primarily in Iraqi and Syrian territory. Driving aggressively towards this goal, ISIS has been recruiting thousands of soldiers to join their military. In order to finance their ambitions, they have been selling oil on the black market.

Who is ISIS?


ISIS (Islamic State of Iraq and Syria), also known as IS (Islamic State) and ISIL (Islamic State of Iraq and the Levant), is an insurgency group made up of militant jihadist Sunni Muslims.

The group was established in 2003 as a branch of Al-Qaeda. In 2014, Al-Qaeda severed ties with the group due to their use of extreme violence toward Shia Muslims and Christians. Since the fall of Saddam Hussein’s regime, they have been gaining traction in Iraq due to the government’s political discrimination of Sunni Muslims in Northern Iraq. At the moment, the group has a reported 10,000 fighters among their ranks in both Syria and Iraq.

Why Iraq?

Flag of Iraq

ISIS has made a strategic move by targeting Iraq. Iraq is well-endowed with natural resources, where in 2011 Iraq’s hydrocarbon industries made up 72% of the country’s total GDP.

The country currently holds the world’s 5th largest proven oil reserves (141 billion barrels) and has been slowly ramping up production since the end of the Iraq War. Moreover, the unstable political environment and political discrimination of Sunni Muslims in Northern Iraq has given ISIS a built-in community from which to recruit fighters and supporters.

ISIS’s Territorial Control

Iraq’s Oil Fields

Iraq’s Hydrocarbon Resources

Iraq Hydrocarbon Resources

Iraq has eight supergiant oil fields. Six of these supergiant oil fields are found in Southern Iraq and account for 60% of the country’s proven oil reserves. The remaining two are located in the north and central part of the country. As of April 2014, Iraq was reported to be producing an estimated 3.3 million barrels per day, making up 4% of the world’s oil supply. Of the 3.3 milllion barrels per day produced, 75% is reported to be produced from the south and 25% from the north and central regions of Iraq.

As of August 2014, ISIS currently controls many Northern and Northwestern provinces of Iraq. Notable cities include: Mosul, Tal Afar, Sinjar, and Fallujah. The city of Zumar and the Ain Zalah oil field in the Kurdistan Regional Government has also recently fallen into their hands. This turn of events is significant as ISIS can leverage their control of the Ain Zalah oil field to sell crude oil on the black market. It has been reported that ISIS is making up to $1 million per day off the sale of Iraqi crude oil — at a rate of $30 USD per barrel — significantly below the market price of ~$100 USD per barrel.

Control of Terrain in Iraq- August 10, 2014

August 10- ISIS Control Zone

The capture of the Ain Zalah oil field will enable them better funding to launch an offensive for one of Iraq’s largest oil fields- the Kirkuk oil field. After which ISIS is anticipated to consolidate their claims over the northern and Kurdish territories to ultimately head for Baghdad.

Iraq’s Pipelines and Ports

A major factor in Iraq’s ability to export its crude oil is through its network of pipelines and ports, which are currently largely unaffected by ISIS.

In terms of ports, ISIS has little interference with this infrastructure. Iraq is able to maintain a business-as-usual scenario since the country exports the majority of its crude oil through its port systems along the Persian Gulf. This is done primarily through the main Basrah Oil Terminal (capacity is an estimated 1.5 million bbl/d) and 5 other ports along the Persian Gulf. In 2012, Iraq upgraded its export capacity by an additional 1.6 million bbl/d via the completion of two mooring systems. The third, and last, scheduled mooring system is reported to be still under construction and would push the country’s export capacity to 4.5 million bbl/d.

Iraq Oil Infrastructure

Iraq Oil Infrastructure

In terms of pipelines, ISIS has little control over the current infrastructure until they are able to take control of the Kirkuk supergiant oil field. The Kirkuk oil field is connected to the country’s main export pipeline running from the Kirkuk to Turkey. The pipeline is reported to have a capacity of 1.65 million bbl/d, but is in need of severe maintenance due to neglect reducing its actual capacity to around 600,000 bbl/d. In addition, militant attacks along the pipeline have closed off certain sections.

ISIS taking control of Kirkuk could potentially open this pipeline up to the black market, but they will first have to fight off Kurdish forces first. Iraq’s two other pipelines, located in the West and East, will be a non-issue for ISIS as they have fallen into disuse.

ISIS’s Impact on Iraq’s Oil Industry


ISIS’s control of Iraq is largely concentrated in the Northern and Northwestern Iraq, far from the country’s top producing oil fields and export infrastructure. As such, Iraq’s oil industry will be largely unaffected in the short-term. This point is illustrated by the lack of price hikes to global crude oil prices up to this date.

2012 Iraq Oil Exports

Iraq 2012 crude oil exports

Risk, however, will still exist for Iraq’s top export destination countries which include China, India, South Korea, and the United States. These countries may need to start looking at other suppliers when ISIS starts heading further south. However, this seems unlikely as Southern Iraq is dominated by Shiite Muslims, offering ISIS few opportunities to gain the type of support, traction, or manpower they received from Sunni Muslim communities in the North.


The true impact of ISIS on Iraq’s oil industry will not be felt for a few years.

Before the June 2014 ISIS offensive on Iraq, the International Energy Agency (IEA) predicted Iraq to account for 45% of the world’s global production growth through 2030. This meant an estimated 40% increase in production growth by 2019. However, with the political instability and infighting ISIS has presented, Iraq will be hard-pressed to achieve these goals.

For one, Iraq needs investment, infrastructure, and human capital to achieve their oil export dreams. This applies to the entire supply chain of the oil industry, from downstream exploration and production, to midstream pipelines, and to upstream refining. Iraq has a severe lack of resources, making the country’s economic growth extremely vulnerable in the years to come.

This is troubling for world markets facing increased demand for oil. We can expect Iraq’s oil production and export capacity to stay stagnant, which means that global crude oil prices may dramatically increase over the next decade.


Indonesia, Natural Gas, Oil, Regulatory Regime, Southeast Asia

Indonesia’s Fuel Subsidies and 2014 Presidential Election: Country Risks, Opportunities, and Outlook

  • “Out of control” fuel subsidies seen as hampering economic growth

  • Top Indonesian presidential candidates want to reduce fuel subsidies

  • Fuel-related industries likely to suffer; infrastructure projects may benefit

  • Minor protests can be expected as a result of subsidy cut

On July 9th, Indonesians will go to the voting booth to elect their next president. Two frontrunners have emerged: Joko Widodo, the current governor of Jakarta, and Prabowo Subianto, a businessman with ties to the Suharto regime. Widowo is widely favored to win, but his victory is far from certain. The only certainty is that the new leader will inherit Indonesia’s complex fiscal environment and will need to deal with the country’s increasingly urgent fuel subsidy crisis.

Understanding Indonesia’s economic climate

In the last decade, President Yudhoyono has taken Indonesia through a boom period, growing at an average of 5.8% per year over the last 10 years. With a GDP of US$878 billion in 2012, it is now the world’s 16th largest economy, ranking above the Netherlands.

However, Indonesia’s economic growth has slowed in recent years. A depreciating currency and an increase in its current account deficit have contributed to the slowdown. In 2014 Q1, the economy only grew 5.2%, the smallest growth it has seen in the last 4 years.

President Yudhoyono expects the deficit to increase, recently adjusting his budget deficit forecast for 2014 to an estimated 2.5% of GDP. This is much higher than the original forecast of 1.69% and higher than its 2013 budget deficit of 2.38%. This forecast is also notable for being within striking distance of Indonesia’s legally mandated threshold for its GDP deficit, set at 3%. Fuel subsidies are one of the chief reasons for the newly inflated forecast.

Economic impact of the fuel subsidy

Indonesia’s fuel subsidies create a situation where the price of fuel is dramatically lower than what consumers would normally pay. This leads to consumer overuse of resources, leading to waste and an increasing financial burden on the government. This is evidenced by the following table, illustrating the country’s soaring fuel subsidy budget from 2010-2013. In practical terms, this translates into a subsidy of 35% for every liter of gasoline bought.

Indonesian Fuel Subsidies 2010-2013

Indonesia's fuel subsidy deficit

Instead of producing its own oil, Indonesia is now at the mercy of international oil prices. Indonesia has been a net importer of oil since 2004. With its weakening currency, Indonesia has had to spend much more to get the same amount of fuel: every 100 IDR (US$0.00842) weakening of the currency results in an additional 3 trillion IDR (US$254 million) worth of spending on fuel subsidies. It’s an acknowledged problem, and observers are hoping that incoming leadership have promising ideas on how to solve it.

Presidential candidates’ stances on subsidies


For the upcoming presidential election, Widodo and Subianto have both made controlling the country’s soaring fuel subsidies one of their key campaign issues. For Widodo, this means a slow reduction of fuel subsidies over a period of 4-5 years. Subianto’s proposal involves policies that hold fuel prices steady, but only for poor and lower middle-class income citizens.

There is agreement among election front-runners, politicians, and the Indonesian media that fuel subsidies have to be decreased. But what impact might this have on Indonesia?

Analysis: Political Risks

The biggest impact that a fuel subsidy cut will have on Indonesia is its political stability. Fuel subsidies is a legacy of the country’s original founding father, Sukarno. Under him, and every succeeding leader of Indonesia, fuel subsidies have been implemented to soften the blow of high inflationary prices for the country’s lower income citizens.

Looking to historical precedents suggest caution: it was a combination of fuel subsidy cuts, inflation, and high food prices that led to Jakarta’s city-wide riots that overthrew President Suharto in 1998. President Wahid (1999-2001) and President Megawati (2001-2004) also faced protests and dissent before each subsidy cut.

The exception is President Yudhoyono (2004-present), who conducted campaigns to mentally prepare the population before the roll out of his fuel subsidy cut. He also gave handouts to lower income citizens to hedge against any dissent.

With Indonesia’s growth and increased economic power in the last decade, it is unlikely that a fuel subsidy reduction will trigger a repeat of the 1998 events. Furthermore, each subsequent protest has been focused solely on towards government policy, where the 1998 Jakarta riots were also focused on inflicting violence towards companies and businesses.

Analysis: Industry Risks & Opportunities

The industries most negatively impacted by a fuel subsidy cut will be downstream fuel companies and sectors involved in automobile, transportation, or shipping in Indonesia. With an estimated 1 million new cars and 8 million new motorcycles hitting the streets each year, this number may dramatically decrease once fuel prices normalize to market equilibrium. Expect families to begin carpooling to reduce fuel costs or to move their families closer to offices and schools. The money saved from cutting subsidies may also be invested in public transportation infrastructure.

Favorable changes are likely to occur in the energy sector. Due to artificially cheap fuel prices, Indonesia has not had the right environment in which to encourage renewable energy or fossil fuel exploration. Investment in these areas will surely increase like it has for other countries in the Asia-Pacific region. This offers a chance for both domestic and foreign firms to invest in Indonesia’s energy future.


As Indonesians head to the polls, they’re seemingly being asked to vote against their own best interests. The front-runners are two candidates who have openly pledged to make their daily lives more expensive. Both tout fuel subsidy policies that will harm Indonesia’s automobile, transportation, downstream fuel, and shipping sectors- established industries that employ many Indonesians.

While cutting fuel subsidies may cause some minor political and social unrest, there is wide agreement that it will secure the international competitiveness of Indonesia in the years to come. In 2013, fuel subsidies took 19.5% of the total government budget, amounting to 2.1% of the GDP. This amount can be put toward much needed infrastructure, education, and healthcare; international businesses and organizations dealing in these sectors should be watching closely.

Presidential front-runners Widowo and Subianto view their fuel subsidy reforms as a critical part to putting Indonesia back on the road to growth, and they’re hoping Indonesians see it the same way.


China, East Asia, Natural Gas, Regulatory Regime, Shale Gas

Why China Lags Behind the U.S. in Shale Gas Development

Summary Table

China has a strong will to develop shale gas but lags behind the USA

In the new shale gas revolution, the United States has taken the lead in exploration, development, technology, production, and even the export of shale gas. The U.S. is indisputably the best in this field and best practices from the U.S. will only help other countries develop their own shale gas industries.

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China, East Asia, Natural Gas, Shale Gas

3 Reasons Why Shale Gas is a Pipe Dream in China- Part I

China dreams of energy independence via shale gas, but challenges abound due to geography, infrastructure, and water.

In recent years, much attention has been paid to shale gas, an unconventional natural gas that was traditionally found to be too expensive to extract. But with rising fossil fuel costs and technological innovation, the United States has made shale gas into a serious game-changer for the future trade of natural gas around the world.

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Central Asia, China, Coal, India, Nabucco Project, Natural Gas, Oil, Oil Refinery, Russia, Security

The Other Energy Superpower: Central Asia? (Part II of II)

Although Kazakhstan, Turkmenistan, and Uzbekistan have the capacity to significantly influence the energy sector, their current development of oil, natural gas, and coal are too varied and many obstacles still stand in the way before they can be coined an “Energy Superpower.”

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Central Asia’s geographical location is landlocked: Russia to its north, China to its east, the Middle East to its south, and Eastern/Western Europe to its east. Of the three major resource-rich countries in Central Asia, only Kazakhstan and Turkmenistan have access to the Caspian Sea which has the  potential to link them to the world energy market via the Black Sea.

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China, Natural Gas, Oil, Security, Southeast Asia, Uncategorized, Water

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As recently as yesterday, the Spratly Islands disputes were again highlighted in the international media. This time we see India lining up with Vietnam against China to vouch for India’s state-owned ONGC company to begin their “legal” exploration activities in Vietnam’s territorial waters. Just a few months earlier, in May and June of 2011 Chinese ships cut sonar cables attached to PetroVietnam’s boats in the same area.

In the wake of the continuing Spratly Island disputes between China and Vietnam (among others), many still wonder why these small group of islands are so important?

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Central Asia, Coal, Natural Gas, Oil

The Other Energy Superpower: Central Asia? (Part I of II)

Ask anyone where fossil fuels come from today and they will probably say Canada, Qatar, Australia, Saudi Arabia, or the United Arab Emirates. This is not surprising seeing how these countries are the current leaders in exporting oil, natural gas, and coal in the world and will continue to do so over the next decade. However, what about countries that have not fully exploited their fossil fuels yet?

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