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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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How The Assassination Of Soleimani Could Crush Iraq’s Oil Ambitions

Iraq protests

Over and above its OPEC+ deal quota – with which it has only ever been marginally acquainted, at best – Iraq’s ambition to dramatically increase its oil production is now at a crucial point. Until only very recently, Iraq was rolling along, merrily breaking its previous and current OPEC+ production quota in producing oil in the 4.5-4.7 million barrels per day (bpd) range as and when it could. Its oil production targets of 6.2 million bpd by the end of 2020 and 9 million bpd by the end of 2023 looked relatively realistic in size, albeit with some slippage on timing, provided that planned infrastructure and field development projects continued to make progress. The recent events before and after the U.S. execution of Iran’s Major General Soleimani – including the siege of the U.S. embassy in Baghdad and the attack on the U.S. Ain al-Assad military base in Iraq – mean that all of this is now in real jeopardy.

Before the negative impact of the recent events were felt, Iraq had been very successful in raising its crude oil production to the 4.5-4.7 million bpd level, despite the ongoing secessionist-related problems with the semi-autonomous region of Kurdistan in the north as well, from an average of 2.07 million bpd from 1973 to 2017 (with a high of 4.83 million bpd in December 2016). Even this figure, though, represents only a small portion of what Iraq could achieve, given both its official level of oil reserves and what many believe to be the real level. Officially, Iraq has 143 billion barrels of crude oil reserves, with lifting costs on a par with Saudi Arabia, at US$1-2 per barrel (excluding capital expenditure). However, according to in-house Ministry of Oil (MoO) figures relayed to OilPrice.com by a senior source there, the country actually has at least 250 billion barrels, a level comparable to Saudi Arabia’s 260 billion-or-so barrels or whatever figure the Saudis dreamt up last night. The higher Iraqi figure is in line with a detailed study conducted in 1997 by an independent U.S. oil services and analytics company, Petrolog, which concluded that Iraq’s undiscovered resources amounted to 215 billion barrels. This figure, though, did not include the parts of northern Iraq in the area controlled by the Kurdistan region or examination of the stratigraphic traps that are numerous in central and western regions of the country. “The U.S. government knows the true figures, and this is one of the key reasons why it removed Saddam Hussein – to ensure ongoing access to the reservoir,” the Iraqi government source told OilPrice.com last week. Related: How Important Is The Suriname Oil Discovery?

Funding was key to the realisation of these dramatic production increases of course, with the real figure required to achieve the initial leap to 5.7 million bpd estimated by the Iraq source to be in the order of US$36 billion – against official MoO estimates of around US$7 billion. This, though, was not a problem up until very recently, with a surfeit of big-hitting suitors including the U.S. itself, Russia, and China ready to open their wallets. Indeed, as exclusively highlighted by OilPrice.com in recent months, China told the MoO that whatever is needed, China would fund it, according to the Iraq source. Iraq’s stalwart Rumaila oil field is a prime example where even a relatively small investment can result in a significant increase in crude oil output. With an estimated 17 billion barrels in proven reserves the current output of around 1.2-1.3 million bpd is nowhere near its optimum production level. The original plan was for BP to add 100,000 bpd every year up to a total of 2.3-2.4 million bpd of production by the original 9 million bpd total target date of 2020.

“The only reason that it hasn’t gone according to the original plan was that Rumaila – like West Qurna – has been one of the fields that the government has looked to when it needs to reduce overall country production,” Richard Mallinson, head of Middle East analysis for Energy Aspects told OilPrice.com. “This has happened to a degree with the OPEC+ deal and before that with the difficulties in paying IOCs [international oil companies] under the technical service contract [TSC] payment structure,” he said. Mallinson added that this had resulted in BP being unwilling to make the extra investments needed in order to meet these incremental output increases, as it did not know whether it would be allowed to pump at these levels on a sustained basis. The same mix of politics and money, although multiplied in effect, is the reason why Kirkuk in the north of Iraq has seen little in the way of production increases for some considerable time and, together, Rumaila and Kirkuk have accounted for around 80% of Iraq’s cumulative oil production to date. Related: China’s Cheap Electric Vehicles Could Disrupt Global Markets

For these two, and most other major fields in Iraq, the lack of progress on the Common Seawater Supply Facility (CSSF) – that would treat seawater and transport it through pipelines to oil production facilities in order to boost reservoir pressures and increase output – as part of the broader Southern Iraq Integrated Project has been critical. “The CSSF was meant to have started in earnest by now but we are still nowhere near seeing construction start,” Mallinson told OilPrice.com. “Although some companies – like ENI for the Zubair field – have built their own mini-facilities, this requires a huge commitment and level of confidence that not every company on every site wants to make,” he added. This has been worsened as well by the endemic corruption in the oil industry in the north and south of Iraq, which, aside from anything else, would open up any participating companies in the CSSF to reputational damage if they took part and if – as happens frequently in Iraq – a new government looked to score political points off their departing opponents.

So risky has the present situation become in Iraq that it prompted the International Energy Agency (IEA) last week to specifically highlight that: “Recent events have shown that Iraq is a potentially vulnerable supplier, just as its strategic importance has grown.” This was particularly in reference to the relatively high amount of oil that Iraq now supplies to major global customers - China and India each receive about 1 million bpd of oil from Iraq and another 1 million bpd goes to various European countries – but there is a longer-term threat as well. “In the medium term, heightened security concerns might make it more difficult for Iraq to build production capacity,[...] In turn, this could make it more difficult to ensure there is sufficient spare production capacity to meet rising global demand in the second half of this decade,” the IEA added.

In particular, any and all efforts that Baghdad was making towards finally persuading the U.S.’s ExxonMobil to make progress on the CSSF – with or without China’s CNPC or other state-owned vehicle – are in jeopardy. According to the Iraq source, a high-level working committee from the MoO, in conjunction with senior representatives from the real power in Iraq – firebrand cleric and ultra-nationalist, Moqtada al-Sadr – had been close to finalising new draft proposals for ExxonMobil that “offers a more balanced risk/reward matrix, especially with regard to eliminating unnecessary bureaucracy – and therefore, corruption – from the contract mix.” This is by far the most important possible downside for Iraq to the heightened risk environment in the country as seen by IOCs currently working there, the source added. “Yes, various companies have taken out some of their people and suspended some operations in Iraq [most notably, the U.S., China, and U.K.] but Iraq is never going to sustainably get and hold oil production through the 5 million barrels per day, never mind any higher, if it does not build the CSSF, it’s as simple as that,” he concluded. 

By Simon Watkins for Oilprice.com


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  • Mamdouh Salameh on January 21 2020 said:
    In my book “Over a Barrel” published in June 2004, I said that with proven, semi-proven and probable crude oil reserves estimated at 330 billion barrels (bb) and the world’s cheapest production cost at less than $ 2 a barrel, Iraq is destined to be the last great oil prize in the 21st century. However, the development of this colossal oil wealth will require both substantial investment and technical assistance and also political stability.

    Realistically, Iraq is capable of lifting its oil production to 6-7 million barrels a day (mbd) by 2023. But I don’t think this is going to happen since Iraq has become a battleground between the US and Iran for influence.

    The most important geopolitical risk to Iraq’s oil ambitions in 2020 and beyond is Iran’s strategy in coming days and months aiming to force the eviction of American forces from Iraq. Losing Iraq will be a significant strategic victory for Iran. This will be eventually followed by the withdrawal of all American forces from the Middle East.

    Another major risk is the rampant corruption which is like a cancer chewing Iraq’s oil industry. Without exterminating this cancer, it will be very questionable if Iraq will ever achieve its oil ambitions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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