Oil-dependent Iraq weighs production freeze

IRAQ is the second largest producer of oil in the Organization of Petroleum Exporting Countries (OPEC) after Saudi Arabia and was the second biggest contributor to the rise in global oil supplies in 2015. The remarkable increases in Iraqi production have surprised many. If the trend continues, Iraq could capture market share from other OPEC members. The question now is whether the country will sustain its higher production, or join other OPEC members if they decide on an output freeze, writes World Review Expert Dr. Carole Nakhle. In 2015, Iraq set a new record by pumping nearly 4 million barrels of crude oil per day (Mb/d), including production from the Kurdistan Region in the country’s north. That level exceeded the country’s previous peak of 3.5Mb/d, which was achieved in 1979, before the Iran-Iraq war. What is equally impressive is the rapid rise in production since 2011, and especially between 2014 and 2015, when output jumped by almost 700,000 barrels per day – more than the total production of Egypt or Malaysia. The increase came mostly from the oil fields in Iraq’s south, which holds 75 percent of the country’s total proven reserves. Rights to develop some of these fields were awarded to international oil companies in two tenders, in 2009 and 2010. Output rose by a total of nearly 1.5Mb/d between 2010 and 2015, clearly showing the contribution that international firms can make to a country’s oil sector. Few countries can compete with Iraq in terms of reserves and production costs. With 150 billion barrels of proven oil reserves, the country ranks fifth in the world after Venezuela, Saudi Arabia, Canada and Iran, according to the BP Statistical Review of World Energy. It also ranks third lowest in terms of production costs at $10.50 per barrel, behind Kuwait ($8.50) and Saudi Arabia ($9.90), according to research and consulting firm Rystad Energy. From an investor’s perspective, these advantages must be weighed against some counterbalancing factors. Since the reopening of the oil sector in the post-Saddam era, several obstacles have emerged. These include relatively tough contractual arrangements, cumbersome bureaucracy and a slow approval process, as well as a tangled web of political, social, religious and security issues. The security situation worsened with the appearance of Daesh (also known as Islamic State), which remains active in the northern parts of the country. Security risks have increased the cost of doing business and strained the state budget, which must now finance an army offensive to eject Daesh from the Euphrates Valley and Mosul. Falling oil prices have exacerbated the situation. Iraq cannot ignore the reemergence of Iran – another major oil producer at its doorstep. According to the International Energy Agency (IEA), these two countries will lead output growth among OPEC countries for the rest of the decade. This year, however, Iran’s production has started to rise just as Iraq’s began to fall because of disruptions in the northern areas. In a noteworthy coincidence, Iranian oil production increased by 220,000 barrels per day in February 2016, while Iraq’s daily output dropped by 210,000 barrels during the same month, according to the IEA. In February 2016, some OPEC countries, including Saudi Arabia, Venezuela, Qatar and Russia, tentatively agreed to freeze production at January 2016 levels. This decision was contingent on other OPEC countries, including Iraq, joining the call as well. Iraq has sent noncommittal messages, saying it was ready to sign on, but only if OPEC reaches a “complete agreement,” referring to the need for all member countries to come on board. Meanwhile, Iran announced it would not consider any freeze before production reaches its pre-sanctions level. If Iraq decides to commit, it would freeze output at 4.38Mb/d, the level reached in January 2016. That would mean halting further declines and restoring existing capacity. Iraq’s oil production fell to 4.22Mb/d in February. In principle, going back to 4.38Mb/d should not be a difficult task. Six years ago, Iraq was adamant about expanding its share of the global oil market. Hussain al-Shahristani, Iraq’s energy minister at the time, stated repeatedly that his country would consider abiding by OPEC quotas only when its crude production reached 4Mb/d. Any talk of a specific limit before then would be premature, he said. Iraq now has to weigh its objectives for market share against the risk that oil prices may fail to rebound if it does not join the production freeze. It will also have to consider the possibility that some countries may fail to keep their promises to hold output steady. For a more in-depth look at this subject with scenarios looking to future outcomes, go to our sister site: Geopolitical Information Service. Sign in for 3 Free Reports or Subscribe.

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