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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Iraq's Return To Oil's Top Table

Iraq has been at the center of many a Middle East conflict in the region’s contemporary history. The country has endured years of violence since the U.S. led invasion in 2003, which caused hundreds of thousands of casualties and severely damaged its infrastructure. The war against ISIS was the most recent conflict, a conflict that ruined historical cities such as Mosul. However, Iraq’s natural wealth in the form of oil provides the necessary income to rebuild the country. Its energy sector is one of the few bright spots, and oil production has increased significantly over the years despite internal divisions between Sunnis, Shi’as and Kurds.

Iraq’s oil industry has significantly benefitted from the relative stability in the south where the bulk of its oil is produced. Production reached almost 5 million barrels per day in 2018. Also, Baghdad received quota exemptions from OPEC, while most of the member states had to curb their oil output to increase prices. As as a result, Iraq’s influence and position within the oil cartel have improved due to the significant increase in production.

When it comes to being influential within OPEC, size matters, and the more a member state can produce, the more influence it has in decision-making procedures. Iraq’s production has become large enough to swing markets which gives it a voice in debates. The country has, among others, joined the committee that monitors compliance and has shown an eagerness to increase influence within the organization. 

According to Riccardo Fabiano, an analyst at Energy Aspects, "increasing capacity means you can renegotiate your production quota within OPEC and Iraq is also trying to gradually position itself as the second-most-influential producer". Saudi Arabia, with a production capacity of almost 12.5 million barrels per day, is the largest and most influential producer within OPEC due to its size and massive spare capacity. Related: There’s Tremendous Room For Growth In Offshore Oil & Gas

Therefore, the Kingdom is the de facto leader of OPEC. Saudi Arabia’s influence was highlighted by its ability to strike a deal with Russia in what has been known as the OPEC+ agreement - am attempt to curb production despite opposition from founding members Iran and Venezuela.

Iraq’s weakness lies in its dependence on foreign companies which produce almost two-thirds of the country's oil. After years of war, its energy infrastructure has been significantly damaged. Foreign capital was necessary to rebuild much of what was destroyed. Furthermore, without the drilling technology provided by oil majors such as Shell and Exxon and Russian firms such Lukoil and Rosneft, it wouldn’t have been possible to increase production to its current level.

The country’s ambition to ramp up production doesn’t end here. Iraq aims to increase production even further. Most of the oil is already headed towards Asian countries such as India and China, which will be the most significant contributors to global crude demand growth in the coming years. Baghdad has the ambition to increase production from its current level to approximately 8.5 million barrels per day in 2025 after infrastructure has been upgraded. The expansion would include 6.5 million bpd from southern oilfields, and another 1 million bpd from Kirkuk after a new pipeline to Turkey's Ceyhan port on the Mediterranean has been constructed.

(Click to enlarge)

Next to the Kirkuk-Ceyhan pipeline, the rumor is spreading that policymakers are looking to revive the long-discused pipeline from northern Iraq into Syria and Lebanon, which was shelved after the First Gulf War. Russia, which has an active military and economic presence in Lebanon, Syria, and Iraq, has facilitated talks between the Middle Eastern countries. Although these plans are still at an early stage, it goes to show that Iraq is serious about building out its export infrastructure in order to meet the abovementioned production goals.

According to some analysts, it is highly likely that Iraq will not reach its 8.5 million bpd target, but 'merely' grow its production to 6 million bpd. Although Bagdad's plans have been met with some skepticism, the signal is clear: Iraq’s importance in the world’s oil market is growing fast.

By Vanand Meliksetian for Oilprice.com

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