Iraq's oil industry is on the mend
Besides US, the Opec producer made most gain in oil output between 2011-2016
Iraq’s problems in recent years have been so dramatic as to obscure all else: the war against ISIL, the Kurdish struggle for independence, and a severe budget squeeze. Yet among all this, since 2011 and the Libyan revolution, Iraqi oil output has gained more than any country besides the US. The excellence of the country’s geology, the contribution of international oil companies, and gradual gains in national capabilities, have managed to outweigh insecurity, bureaucracy, corruption and logistics.
From 2011 to 2016, Iraq’s output rose by almost 1.7 million barrels per day and it became the second-largest producer in Opec, and the fourth-largest in the world. It is still far short of 2009’s dreams of reaching 12 million barrels per day by now, and a long way behind Saudi Arabia’s 10 million bpd, but it has growing weight within the organisation. The International Energy Agency sees it growing another 0.7 million bpd by 2022, the biggest gain within Opec.
Iraq’s southern oil exports reached a record in January. According to Opec’s secondary sources, Iraqi production was at 4.405 million barrels per day in December, somewhat above its Opec target of 4.351 million bpd – it has been the least compliant country to the agreed cuts.
Continuing field developments could add another 270,000 bpd of capacity this year, mostly from the Halfaya field operated by Malaysia’s Petronas. Kuwait Energy, in partnership with ENOC subsidiary Dragon Oil, is hoping to double production at its Faihaa field to 30,000 bpd. Iraq’s 2018 budget seems to expect exports to gain about 100,000 bpd on last year, putting further strain on the Opec deal.
But Baghdad’s plans suffered a significant blow when Shell and Petronas withdrew from the giant Majnoon field, part of a complex that includes Faihaa and two giants in Iran, Azadegan and Yadavaran. They are not the first companies to leave big projects in Iraq because fiscal terms were too tight and inflexible. Majnoon, whose 220,000 bpd output was supposed to reach 420,000 bpd by 2020, is a vital part of anticipated production growth.
In the longer term, Baghdad is hoping to boost output further from other fields under current development by international oil companies. A revised contract model, still under discussion, needs to sweeten the deal for newly-offered exploration blocks along the Kuwaiti and Iranian borders. The bid deadline is just before the national elections on May 12.
Since the central government retook control of the important city and giant oil-fields of Kirkuk in October, its exports via Kurdish Regional Government territory have been cut off. If Kirkuk had access to export routes, another 280,000 bpd or so of production could return. Iraq has agreed to truck 30,000-60,000 bpd of Kirkuk crude for refining in Iran, but really unlocking it will depend either on rebuilding the pipeline to Turkey destroyed by ISIL, which would take a couple of years, or reaching a deal with the Kurds. BP, which was part of the consortium that discovered the field back in 1927, recently signed a preliminary deal to restore the Kirkuk area’s production to 700,000 bpd.
Baghdad has plenty of leverage with Erbil, given the autonomous Kurdish region’s debt crisis: it has no way of repaying the $22 billion it owes to a number of creditors, of investing further in boosting its own production, and of paying government salaries and social benefits. The federal government is demanding control over the Khurmala field, the northern end of Kirkuk, operated by the Kurds since 2009, which yields a third of the Kurdistan region’s remaining output.
The elections will reshuffle the pack again. Current prime minister Haider Al Abadi gained great credit for defeating ISIL and even more in the Arab parts of Iraq for regaining territory from the Kurdish authorities. But he was then embarrassed when an electoral pact with militias close to Iran immediately fell apart, while his predecessor Nouri Al Maliki is angling for a comeback. Possible violence around election time, followed by protracted coalition-building and political manoeuvring after it, will delay the next phase of oil projects.
With some optimistic assumptions, the World Bank sees Iraq’s budget deficit falling next year, but this excludes any of the gigantic rebuilding costs for the areas liberated from ISIL. Mr Al Abadi has put reconstruction needs at $100 billion, but it appears that the US will not make any financial contributions at a conference held in Kuwait this week.
Once again, it will be up to the oil sector to shoulder the burden. The draft budget has a $19bn deficit, almost 11 per cent of GDP, which will come down a little allowing for higher oil prices, but continuing Opec limits on output. Bringing back Kirkuk and boosting production elsewhere as planned would virtually eliminate the deficit – but cannot be done without blowing the Opec deal apart and likely bringing down prices.
This tension can only be managed, not resolved. The country’s corruption, mismanagement and conflicts slow progress, but still advance is apparent. Iraq needs a long-term vision for where its oil sector is going; the rest of Opec needs a plan for how to respond.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
Published: February 11, 2018 05:26 PM