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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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Why Iraq Can, But Won’t, Reach 8 Million Bpd Of Oil Production

  • Iraq is perfectly capable of producing 8 million bpd of crude oil, or even its original figure of 12 million bpd
  • Officially, according to the EIA, it holds a very conservatively estimated 145 billion barrels of proved crude oil reserves
  • Baghdad’s unstable relationship with the semi-autonomous Kurdistan region has proven to be a major obstacle
  • Endemic corruption across the country is particularly prevalent in the sector where there is most money – oil

Given that no real change has resulted from last week’s elections in Iraq – the fervently anti-US radical cleric Moqtada al-Sadr is still the de facto leader – its latest crude oil production ambitions should be considered as they always were: that is, by looking at theoretically what could be achieved, and that at practically what is likely to happen. The target announced last week – although it has been mooted a number of times in the past year or so (and then before that, albeit with a gap) is for 8 million barrels per day (bpd) by the end of 2027, according to the country’s Oil Minister (at least for now), Ihsan Ismaael. Discussions to achieve this figure by that point, he added, are ongoing between a number of international oil companies (IOCs), including several from the West. The first point to make is that Iraq is perfectly capable of producing 8 million bpd of crude oil, or even its original figure of 12 million bpd. As highlighted in my previous book on the global oil markets, even more so than Iran, Iraq remains the greatest relatively underdeveloped oil frontier in the Middle East and therefore in the world. Officially, according to the EIA, it holds a very conservatively estimated 145 billion barrels of proved crude oil reserves (nearly 18 percent of the Middle East’s total, around 9 percent of the globe’s, and the fifth-biggest on the planet). Unofficially, it is extremely likely that it holds much more of both than this. In October 2010, Iraq’s Oil Ministry increased its own figure for the country’s proven reserves to 143 billion barrels, almost 25 percent more than the previous 115 billion barrels, virtually where we are now and this increase – unlike those notably seen in Saudi Arabia in recent years – was absolutely reflective of reality, albeit at the low end. 

Related: The Battle For Oil Market Share Heats Up Within OPEC In fact, at the same time as producing the official reserves figures, the Oil Ministry stated that Iraq’s undiscovered resources actually amounted to around 215 billion barrels. This was also a figure that had been arrived at in a 1997 detailed study by a respected oil and gas firm, Petrolog. Even this figure, though, did not include the parts of northern Iraq in the semi-autonomous region of Kurdistan. This meant, as highlighted by the IEA, that most of them had been drilled during a period before the 1970s began when technical limits and a low oil price gave a tighter definition of a commercially successful well than would be the case now. In sum, the IEA underlined that the level of ultimately recoverable resources across all of Iraq (including the semi-autonomous region of Kurdistan) at around 246 billion barrels (crude and natural gas liquids).

As it stands, Iraq’s crude oil production increased from 2.4 million bpd in 2010 to around 4.5 million bpd on average (excluding the OPEC+ mandated quotas) in 2020, and its true level of production capacity has continued to hover around that level, making it the second-largest crude oil producer in OPEC. This trend prompted many market players to believe that Baghdad’s much-vaunted ‘realistic’ production target of 9 million bpd may again be attainable. This is despite comments in 2018 and 2019 from the then-head of Iraq’s State Oil Marketing Organisation (SOMO), Falah Alamri, that the country had temporarily slashed its oil output targets for the end of 2020, from 8.4-9.0 million bpd to 5.4-6.0 mbpd. Later in 2020, though, Iraq’s then-new Oil Minister, Ihsan Ismaael, stated that the country was targeting an oil production capacity of 7 million bpd by 2025 and, by the same year, targeting oil export capacity of up to 6 million bpd (from the 2020 level of around 3.8 million bpd). 

All of these figures fall within the parameters of the government-sponsored report - the Integrated National Energy Strategy (INES), launched in 2013 – which formulated the three forward oil production profiles for Iraq. The INES’ best-case scenario was for crude oil production capacity to increase to 13 million bpd (at that point by 2017), peaking at around that level until 2023, and finally gradually declining to around 10 million bpd for a long-sustained period thereafter. The mid-range production scenario was for Iraq to reach 9 million bpd (at that point by 2020), and the worst-case INES scenario was for production to reach 6 million bpd (at that point by 2020). Consequently, the current target of 8 million bpd looks like a relatively reasonable-case scenario.

Related: Hedge Funds Cut Bullish Bets On Oil Amid Profit-Taking

So, why will it not happen? As highlighted repeatedly in OilPrice.com for years, the country faces two key problems. The first – underlined initially here – is the ongoing disagreement between the semi-autonomous government of Kurdistan in the north and the government of the rest of the country, centered in Bagdad, over how oil from the north and budget revenues from the south are apportioned. Suffice it to say at this juncture that despite an agreement in 2014, no workable solution appears to have been found as yet. The second problem remains the endemic corruption across the country that is particularly prevalent in the sector where there is most money – oil. As highlighted initially here by OilPrice.com, according to a statement made in 2015 by then-Oil Minister – and later Prime Minister of Iraq – Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” from the beginning of 2011 up to the end of 2014 as cash “compensation” payments to international oil companies and to other entities. The precise way in which such a staggering sum was lost is fully analyzed by OilPrice.com here, but in basic terms, it related to the way in which gross remuneration fees, income tax, and the share of the State partner was deducted and accounted for in the compensation paid out relating to reduced oil production levels. Even without the very recent resuscitation of Iraq’s National Oil Company – which the cynically-minded might regard as essentially an organized graft mechanism - the sheer scale of theft of public money that can result from such structures in Iraq is mind-boggling. 

This throws up one very specific – but huge - practical problem for Iraq’s ability to achieve any meaningful increase in its oil production, and this is the build-out, finally, of the Common Seawater Supply Project (CSSP). The CSSP involves taking and treating seawater from the Persian Gulf and then transporting it via pipelines to oil production facilities for the purposes of maintaining pressure in oil reservoirs to optimize the longevity and output of fields. It was intended to be used initially to supply around six million bpd of water to at least five southern Basra fields and one in Maysan Province, and then built out for use in further fields. To reach and then sustain Iraq’s future crude oil production targets over any meaningful period, the country will have total water injection needs equating to around two percent of the combined average flows of the Tigris and Euphrates rivers, or six percent of their combined flow during the low season. The only company with all of the facets required to put the entire CSSP together in a fully functioning and sustained fashion - which the company itself knows, Iraq knows, China knows, and anyone who knows what the CSSP actually involves knows – is ExxonMobil. However, as it stands, ExxonMobil is out for precisely the reasons mentioned above and reiterated in full here

By Simon Watkins for Oilprice.com

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