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Iraq Boosts Oil Output In Face Of Security Problems

Iraq Boosts Oil Output In Face Of Security Problems

Defying the odds, Iraq has managed to increase its oil exports to the highest level in more than 35 years.

The war-torn country is dealing with an array of challenges that have threatened to derail the resurgence of its oil industry. The Islamic State has ripped apart the midsection of the country since its initial onslaught in June 2014. The militant group has seized oil fields, refineries, and attacked oil infrastructure. The violence has scared away international oil personnel and investment. Related: Is Warren Buffett Wrong About Oil Stocks?

While ISIS burst onto the scene only recently, the fraught relationship between Baghdad and the semi-autonomous region of Kurdistan has bedeviled the country’s ability to revive its oil industry after years of war. A political impasse kept Iraq in a state of limbo.

But while Iraq’s problems are deep, its potential is just as vast. Iraq has 144 billion barrels of oil reserves, the fifth largest in the world. Even that prodigious figure understates Iraq’s importance to oil markets. Iraq is one of the few countries in the world that has a massive level of latent oil potential. With ample reserves at low production costs, there are few other places on the planet that could theoretically ratchet up their oil production to the extent that Iraq could, assuming it can overcome its challenges.

In a special 2012 report on Iraq’s energy sector, the International Energy Agency predicted that Iraq would double its output to 6.1 million barrels per day (bpd) by 2020, and nearly triple it to 8.3 million bpd by 2035. But since then, the IEA’s tone in regards to Iraq has changed from bullish to one of great concern. The IEA’s Chief Economist Fatih Birol has repeatedly voiced his fears that the Middle East generally, and Iraq in particular, are in danger of falling far short of what the markets are expecting. Iraq is expected to account for half of the growth in supply from the Middle East over the next decade, but due to security concerns, may not live up to those expectations. With that future production already baked into global supply projections and thus the price of oil, the consequences of Iraq disappointing could be huge. Related: Creditors Pulling The Rug From Under U.S. Shale Sector

With that said, Iraq is making strides that were all but unimaginable last year at the height of the Islamic State’s expansion.

In March, Iraq’s oil exports reach 2.98 million bpd on average, a jump of nearly 400,000 bpd over February’s numbers. For 2014, Iraq produced 3.3 million bpd on average, the highest level since 1979.

March’s total included 268,000 bpd from the Kurdish pipeline to Turkey. A political deal struck between Baghdad and Kurdistan has improved political stability and allowed more exports to the north. With a Kurdish push for independence on hold for now, and a fragile oil deal improving cooperation between Erbil and Baghdad, a flood of new investment could eventually come to Iraq if the security situation can improve.

Still, massive obstacles remain. Iraq has been burned by the collapse in oil prices. Despite ramping up production and exports, Iraq earned just $4.4 billion in revenues from oil, half of what it earned in May 2014 despite lower levels of output. The sharp drop in revenues has caused the Iraqi government to lapse on its payments to private oil companies as its coffers have been emptied out. It now owes around $18 billion to international oil companies for work they have done this year, which comes on top of an additional $8 billion owed for 2014. Related: Oil Rebound May Come Sooner Than Expected

But the Iraqi government wants to focus on the things that are within its control. That includes a push to revise contracts with international oil companies. Baghdad wants to change the contracts to provide a greater upside to companies when oil prices go up, but also reduce the risk to the government’s take when oil prices drop. Once seen as a coup by the Iraqi government because of the seemingly tough terms it imposed on oil majors when oil prices are high, the contracts – which involve fixed fees – are much less lucrative when oil prices tank.

Similarly, the other major front on which the government can make progress is with internal security. Iraqi forces backed by the U.S. and Iran, recently retook Tikrit after 10 months in IS control. Tikrit, like much of Iraq, has been devastated by violence, but if IS can be rolled back, Iraq can continue its progress on reviving its oil sector.

By Nick Cunningham of Oilprice.com

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