Iraq sets bar lower on oil output and looks to attract foreign firms

Iraq aims to avoid a glut of oil supply while improving the terms offered to international oil companies bidding for contracts.

An oilfield in Nassiriya, south-east of Baghdad. Iraq currently produces 3.3 million bpd, of which it exports 2.6 million bpd. Atef Hassan / Reuters

Iraq is looking to reduce its ambitious crude production targets, and is working to improve the terms offered to international oil companies (IOCs) bidding for contracts in the country.

Baghdad was contemplating a target of 9.5 million barrels per day (bpd) of crude by 2020, said a senior government figure, in a significant departure from the previously held ambition of pumping 12 million bpd within the next five years.

The government was considering options ranging from 6 million to 12 million bpd by 2020, laid out in a strategy paper drawn up by the consultancy Booz & Co, said Thamir Ghadhban, the top energy adviser to the Iraqi prime minister.

"If we go to a very high level, there will be redundant capacity, which is very expensive for Iraq," said Mr Ghadhban. "If you go too low, this is not enough for Iraq because of the need for revenues. That's why we choose around 9 million bpd."

The previous target of pumping 12 million bpd by 2017 has proved unrealistic as infrastructure and logistical bottlenecks hamper the development of the sector.

Iraq currently produces 3.3 million bpd, of which it exports 2.6 million bpd, the oil minister Abdul Kareem Luaibi said last week.

Future production capacity could turn Iraq into an influential swing producer, a status currently enjoyed only by neighbouring Saudi Arabia.

"There could be a possibility that this includes surplus capacity that we can use from time to time: [during a] cold winter, [when] geopolitics [leads] an exporting country to produce more," said Mr Ghadhban, a former oil minister.

Saudi Arabia has a total capacity of 12.5 million bpd, and is presently pumping about 10 million bpd. This leaves a spare capacity of 2.5 million bpd, giving the kingdom a huge sway in the oil markets and considerable political leverage.

Saudi Arabia has been using its oil-producing muscle to supply the markets while Iranian exports are being drastically reduced as a result of international sanctions.

Baghdad is also trying to attract investment into its oil sector by sweetening the deal for IOCs at auctions for new contracts.

"So the fifth bid round is expected to have better incentives. The terms will be better than the previous ones," said Mr Ghadhban.

The fourth bid round, held in May, was blighted by a lack of interest from IOCs, which have long complained about the contracts they signed in the past.

The auction also failed to attract interest because it sold off gas-producing rights, which are not considered as lucrative as oil production, said Mr Ghadhban. There will be no shift from the current technical service contract model - which is highly unpopular with IOCs - he added.

The fifth round will likely be held in the the first quarter of next year.

In spite of the urgent need to improve the country's civil infrastructure, the energy sector will receive a huge slice of next year's revenue, said the adviser.

Some 44 per cent of government funds will be allocated to the sector, with an emphasis on storage and transportation infrastructure.

Electricity generation - vital in a country still plagued by blackouts - will also be prioritised.