Highlights
  • Iraq is one of the major reasons why OPEC has been able to increase oil production over the past year, even as oil prices have dropped to six-year lows
  • New minister wrestles with old problems in security, investment and production
  • Iraq’s response to falling crude prices and export revenues has been to increase production
  • Improvement in relations with international oil companies a high priority
  • Strong proven reserves give long term upside

 

Introduction

The new Minister of Oil in Iraq, Jabbar Ali al-Luaibi, who was appointed in August, has begun his term of office by announcing his intention to deal with the country’s severe energy problems. The list is a long one and includes problems with production, falling export revenues, widespread shortages of fuel, and disagreements with the Kurdistan Regional Government (KRG) over production and exports of oil. All of these problems are of long standing and require drastic action; the minister’s task is not made any easier by the sharp fall in global oil prices since 2014 or the violence that continues to plague large parts of the country. Mr Luaibi can do little about these last two issues but appears to be making a promising start on the items that are under his control.

Iraq’s oil reserves to draw upon

According to the Oil and Gas Journal, Iraq’s proven oil reserves are 115 billion barrels, although these statistics have not been revised since 2001 and are largely based on 2-D seismic data from nearly three decades ago.

Geologists and consultants have estimated that relatively unexplored territory in the western and southern deserts may contain an estimated additional 45 to 100 billion barrels (bbls) of recoverable oil. Iraqi Oil Minister Hussain al-Shahristani said that Iraq is re-evaluating its estimate of proven oil reserves, and expects to revise them upwards. A major challenge to Iraq’s development of the oil sector is that resources are not evenly divided across sectarian-demographic lines. Most known hydrocarbon resources are concentrated in the Shiite areas of the south and the ethnically Kurdish north, with few resources in control of the Sunni minority.

Map of Iraq Oil Fields
Map of Iraq Oil Fields

The majority of the known oil and gas reserves in Iraq form a belt that runs along the eastern edge of the country. Iraq has 9 fields that are considered super giants (over 5 billion bbls) as well as 22 known giant fields (over 1 billion bbls). According to independent consultants, the cluster of super-giant fields of southeastern Iraq forms the largest known concentration of such fields in the world and accounts for 70 to 80 percent of the country’s proven oil reserves. An estimated 20 percent of oil reserves are in the north of Iraq, near Kirkuk, Mosul and Khanaqin. Control over rights to reserves is a source of controversy between the ethnic Kurds and other groups in the area

Dealing with production

Iraq’s response to falling crude prices and export revenues has been to increase production. Output this year has risen by about 0.6 mn bpd compared with 2015 as a whole, according to the Ministry of Oil, which pegs production at about 4.6 mn bpd. Output from Iraq reached remains at a high level but output is hampered by a lack of export capacity made worse since a northern pipeline was blown up. The key oilfields in Iraq have largely escaped the real impact of the fighting because they are located in the south of the country. But threats to oil workers of kidnapping, coupled with corruption and equipment shortages, have already hampered their development.

The seizure of Kirkuk by Kurdish fighters strengthened Kurdistan’s hand in its verbal battle with Baghdad over its right to export its own crude. Kurdistan is producing 250,000 barrels of oil a day from oilfields operated by western companies such as Enel, whose chief executive is the old BP boss Tony Hayward. Baghdad does not recognise the Kurds’ right to export without a full agreement in place between the two and has been threatening buyers with legal action. The Kurdish regional government has repeatidly said that is looking at connecting the Kirkuk oil hub with its own export pipeline to Ceyhan in Turkey, but accepts that an agreement with Baghdad must be negotiated first.

In the broadsest sense, Iraq’s ability to go on increasing exports depends a good deal on the contribution of the international oil companies that are developing the country’s largest fields under technical service contracts.

There have been a number of problems with these contracts, however, with arguments between the Ministry and international oil companies over production plans, which have led to a sealing-down of proposals to increase the country’s production. Falling oil prices have reduced the amount of money available from both the Iraqi government and its foreign partners for ambitious schemes to boost production. Following the US-led invasion in 2003 and the overthrow of Saddam Hussein, the new government invited foreign oil firms to participate in a national plan to increase the country’s production to 12 mn bpd. The target was subsequently raised to 13 bn bpd, to be achieved by 2017.

Iraq Crude Oil exports
Iraq Crude Oil exports

In the year of the US invasion, output was only 1.3 mn bpd. Since that time it has risen, thanks in part to the efforts of the international companies, but it has never even begun to approach the stratospheric totals first mooted by the Oil Ministry. Production targets have been cut to a more modest 6 mn bpd, to be achieved by 2020, but even this looks optimistic, given current levels of output. Falling global oil prices are by no means the only constraint on output growth. There is also the violence that has engulfed the country since 2003, which has included damage to oil facilities and become a drain on the revenues of the central government, leaving it with less to spend on oil industry projects. One such area is the provision of much-needed new infrastructure in the form of pipelines, terminals, and storage to handle the proposed increases in oil production. The new minister has announced that storage capacity at Iraq’s Persian Gulf export terminals will be doubled to 24 mn bbl, although he gave no completion date for the scheme, and much more needs to be done.

Reserves and relationships remain key

Mr Luaibi is making improvement in relations with the international oil companies a high priority in an attempt to ensure that Iraq’s production capacity goes on increasing; but these increases will require large spending commitments from both sides. An early issue that will need to be resolved is the fate of a $10 bn water injection project to allow output to be increased in a number of existing oilfields, including West Qurna, Zubair, and Kirkuk.

Northern exports Mr Luaibi has also taken early action on another of Iraq’s pressing problems: relations with the KRG over the export of crude oil from Iraq’s northern fields. Iraq relies on a spur pipeline operated by the KRG to transport the oil produced in its northern oilfields to the main Iraqi export pipeline to Ceyhan in Turkey. This pipeline is also used to export oil from fields in Iraqi Kurdistan, and the oil is sold as a combined Iraqi and Kurdish export stream. Baghdad and Arbil, however, have been unable to agree on how to split the proceeds from the exports [3]. Iraq stopped exporting any of its oil by this route in March as a result. Mr Luaibi has ordered a resumption of Iraqi exports via the Ceyhan pipeline and has stated that he wishes to find a long-term solution to the problem of how to divide the revenue from the exports. Initial throughputs from Iraq’s fields are reported at 75,000 bpd: about half their pre-March levels. Under a deal agreed at the end of August, volumes are supposed to rise to 150,000 bpd.

Oil Majors in Iraq
Oil Majors in Iraq

Both sides have a strong economic interest in a long-lasting agreement since both need the additional revenue from the exports. The two sides are nevertheless a long way apart. The KRG is reported to want $1 bn a month as its share of the combined export stream; but Baghdad was paying less than half that a year ago under the previous export agreement. The Ministry of Oil has said that if the two sides cannot come to a new agreement, it will consider other options, including exporting oil from Iraq’s northern fields via Iran, although the details of such an agreement remain vague. The KRG has also been looking at the idea of exporting oil independently of the Ceyhan pipeline by building a pipeline of its own to Iran.

Fuel shortages

Iraq is suffering from severe shortages of fuel because of the damage to the refining and distribution networks from the violence that followed the US invasion. Luaibi has announced some short-term measures, such as ordering petrol stations in Baghdad to remain open for 24 hours a day and promising cuts in the price of petrol and diesel; but the poor state of the refining sector remains a major problem, which Iraq lacks the money to remedy. The minister hopes to persuade foreign companies to invest in new capacity by allowing them to participate on a build-operate-transfer or build-operate-own basis; but such schemes would almost certainly require the pacification of much of Iraq, of which there is little sign at present.

Iraq Oil Production, 2003-2016
Iraq Oil Production, 2003-2016

Impact of ISIS

The Middle East is no stranger to instability. In the past, when violence would erupt in a major oil producing country, such as Iraq, oil prices would respond with a price spike. The threat of supply disruptions would add a risk premium on top of the price of oil, adding a few dollars per barrel. Prices skyrocketed in 2011 after the onset of the Arab Spring, for example, particularly when Libya began to unravel.

But with an ongoing glut in oil supplies, geopolitical instability appears to be having much less of an impact on oil than it did in years past. The fall of Ramadi in 2015, along with moves to recapture territory, would raise some serious questions about Iraq’s security, and as it relates to energy, the security of its oil supplies. To be sure, most of Iraq’s oil production is situated far south of Ramadi, around Basra on the Persian Gulf. Those massive oil fields are not in any immediate danger. But that hasn’t stopped markets from surging in the past on news of violence. Just last year, when ISIS overran parts of northern Iraq, the price of crude jumped.

However, the high level of existing Iraqi output is being pumped into an already-oversupplied market. That is why the offensive by ISIS is not having much of an effect on the price of crude. Unlike previous years, when very little was known about ISIS, oil traders are no longer worried about Iraqi supplies. Unless, and until, a major field is taken offline, the fortunes of the militant group may not have much influence on oil prices.

Conclusion

Iraq is one of the major reasons why OPEC has been able to increase oil production over the past year, even as oil prices have dropped to six-year lows. However, although Iraq has succeeded in defying gravity thus far, the cracks in the country’s oil success story are starting to show. For now, these appear to be short-term problems but if low oil prices, security concerns, or political instability (or a combination of all three) deter investment today, Iraq could fall short of its production goals over the long-term.

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References
  1. Reuters. Iraq says still set pm expanding oil output to gain market share; uk.reuters.com/article/uk-iraqopec-idUKKCN1120C3.
  2. Focus: Iraq’s oil plans under threat. Oil and Energy Trends 2015; 40:6, pp 4–7, DOI: 10.1111/oet.12254.
  3. Focus: Kurdistan faces grim future as economy crashes and chaos engulfs its neighbours. Oil and Energy Trends 2016; 41:3, pp 3–6, DOI: 10.1111/oet.12356.
  4. Looking Ahead: Iraq: New minister wrestles with old problems – Oil and Energy Trends – Vol41, Issue 9 P11-12
  5. https://www.theguardian.com/world/2014/jun/18/dwindling-iraq-oil-reserves-cause-price-spike
  6. https://en.wikipedia.org/wiki/Oil_reserves_in_Iraq#/media/File:Iraq_Proved_Oil_Reserves.png
  7. https://en.wikipedia.org/wiki/Petroleum_industry_in_Iraq
  8. http://oilprice.com/Energy/Oil-Prices/Oil-Markets-Indifferent-To-Latest-ISIS-Victory-In-Iraq.html

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