Iraq oil pipeline to Turkey reopens but outlook remains volatile

A worker checks the valve gears of pipelines linked to oil tanks at the Turkish port of Ceyhan. Umit Bektas / Reuters

One of Iraq’s main oil export routes reopened over the weekend, but the outlook for the country’s lifeblood industry remains murky after the political agreement between its two main oil-producing regions frayed in recent weeks.

Iraq continues to be one of the key supply variables behind the oil market’s volatility.

The world benchmark North Sea Brent crude futures declined from above US$60 per barrel early last month to below $50 in the first few days of this month.

They were trading at about $49 yesterday, up from a six-month low closing price of $48.61 the previous day.

The oil price slump since last summer’s high of about $115 per barrel has many factors, including weakening demand in China. But the supply glut is mainly down to the failure of Opec to act to balance the market in the face of rising production in North America, which reached a tipping point last year.

Within Opec, the two main wild cards are Iraq and Iran, which both have the potential to produce far above current levels but face deep security, and political and technical challenges that make forecasting their actual output extremely difficult.

Iraq’s situation is the more challenging of the two, as underlined by the recent trouble with the pipeline that brings crude from the Kurdish region and the bordering giant Kirkuk oilfield north to the Turkish port at Ceyhan.

The pipeline was bombed by the PKK, a radical Kurd separatist group, at the end of July, in part to protest against Turkey’s ambiguous position on the religious extremists who control swathes of Syria and Iraq and have been targeting Kurdish territory.

But the Kurdish regional government (KRG) opposed PKK’s action and the pipeline – which moves an average of 600,000 barrels per day – was reopened over the weekend, according to Turkish officials.

Iraq's deeper problem, however, is the breakdown in recent weeks of the revenue-sharing agreement between the KRG and the central government. In May, several senior Iraqi officials had voiced optimism that difficulties with the deal could be hammered out after Ramadan, but that hope seems to have been misplaced as the KRG has moved to market its oil exports directly, rather than through the government's oil market arm (Somo), protesting that they have not received the promised 17 per cent of central government revenues.

The dispute is itself indicative of the severe financial problems that Baghdad and the KRG face.

Both have fallen deeply behind in payments to international oil companies, on which they rely to restore oil infrastructure and boost production. The main fields in the Kurdish region rely on UAE-linked companies, including Crescent Petroleum, Dana Gas and RAK Petroleum-controlled DNO, all of which have said no new investment will be forthcoming until arrears are paid.

In the south, “the Iraqi government owes close to $20 billion to international oil companies and the latter are cutting investment in Iraq as projects in the country are less profitable – international companies get paid a small fee per barrel – and riskier than in some other parts of the Middle East”, according to a report by BMI Research.

Iraq’s northern exports may have resumed and exports from its southern region may have hit record levels above 3 million barrels per day in June and July, but its internal difficulties make future progress hard to predict.

Fitch, the debt rating agency, last week gave Iraq its lowest sovereign rating of B-, saying it expected production to rise only to 4.7 million bpd by the end of 2017. Indeed, the International Energy Agency – the rich developed countries’ main energy watchdog – expects Iraq’s production capacity to be no higher than that by the end of the decade, a far cry from Iraq’s recent ambitions to be able to produce 9 million bpd by then.

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