Whither Iraqi Oil?

By Julian Murdoch

Iraq - Years Later

Let's cut to the chase: Iraq has the third-largest oil reserve in the world, behind Saudi Arabia and Canada, yet it was ranked only 13^th in the world for crude production in 2008.

Source: EIA Iraq Country Report

The giant plummet from 1989-1991 is completely predictable: After all, there was a war on. Production levels had almost recovered from the 1991 Iraq war when the turmoil of the late '90s and subsequent sanctions, bombings and general unrest radically curtailed production and export, bottoming out with the U.S.-led invasion in early 2003.

Since then, the Iraqi oil industry has struggled to recover. Between infrastructure repairs and modernization - which take money, lots of it - and security problems, increases in production have gone agonizingly slowly. Currently, Iraq produces 2.4 million barrels per day of crude oil, the majority (1.8 million barrels) for export.

The Iraqi government has plans to increase production by 300,000 barrels per day by the end of 2010, and the increases won't stop there. According to the EIA:

"Iraq's 10-year strategic plan for 2008-2017 set a goal of increasing crude oil production capacity by 1.5 million bbl/d within 3-4 years, and by an additional 2 million bbl/d to a total of 6 million bbl/d within 10 years."

That's a tremendous increase in supply in a fairly short period of time. More importantly, there may be even more oil to be discovered. Back in 2001, Iraq's oil reserves were reported to be 115 billion barrels by Oil and Gas Journal, a stale statistic that has not been updated since that time.

Government Re-org

The big breaking news last week was Iraq's announcement of a law that will allow the revival of the Iraqi National Oil Company. The INOC was originally formed in 1964, only to be dismantled by Saddam Hussein in 1987. The INOC as currently proposed would serve as the parent company for three of Iraq's oil companies: South Oil Co., North Oil Co., and Missan Oil Co. Unlike previous legislation, this latest version doesn't detail which oil fields it would control.

Currently, oil firms in Iraq fall under the purview of the Oil Ministry, and control of oil fields is a tricky question because different factions - Shiite, Sunni and Kurdish - control different regions of the country. Each faction is, of course, concerned that they be the ones to benefit from oil revenues. The result is constant and bitter political disputes, the kind that aren't being solved by presidential beers.

If the INOC functions as hoped - running all the various firms as one company, with a united, apolitical front - Iraq hopes to entice more international oil companies to its oil fields. International oil companies can be a little skittish about having their operations interrupted by the latest political power struggle.

First To Test The Waters

On June 30, Iraq tried to auction off contracts to develop eight of its oil fields - but almost no one bit. Only a joint venture between BP and Chinese National Petroleum Corp. won an as-of-yet unsigned contract to develop Rumaila, one of Iraq's most important fields. Right now, Rumaila is producing less than 1 million barrels per day. If BP and CNPC's plan comes to pass, production will climb to 2.85 million barrels per day within six years. That's enough to take Iraq's total production up to around 4 million barrels a day and move it up alongside Iran in the oil production league tables.

Various reasons were supplied as to the lackluster participation in the auction, but No. 1 was that Iraq is exerting a lot of control over the oil fields, and playing hardball. Any oil company that wants to work in Iraq is going to have to do it for less profit than they want (BP wanted $3.99 a barrel; they reportedly got $2). But political and business risks also rank high on the list of concerns.

While some analysts aren't sure BP is going to actually profit from the deal, BP's CEO Tony Hayward told analysts during a call:

"We feel very happy and confident in the position in which we find ourselves."

That position is interesting: one foot with China and its low-cost supply chain, another foot into the heart of Middle East oil. Now they just need to finalize the deal and get down to work.

Ramifications

Other than the possible profit to BP, what does this mean for commodity investors? It's back to supply and demand. If Iraq is able to increase its production as planned, that means a bunch more oil is going to come to market. Or will it?

OPEC, of which Iraq is a member, is still trying to hold production quotas down in order to support oil prices, or as they might put it: to balance out an oversupplied market. The latest information from Platts suggests OPEC is as ineffectual as ever. The 24.845 million b/d target that was set in November of 2008 hasn't actually been hit in a while. June's total OPEC production (minus Iraq, which currently does not have a quota) was 26.040 million b/d. With oil prices at the $68 level, and record- high stockpiles of crude, whispers of further production cuts are starting to circulate.

Unless demand increases dramatically, there is a chance that OPEC won't want to "allow" Iraq to export its "new" oil and set a quota for the country. And if that happens, what are the chances Iraq sees all that much benefit from being part of OPEC in the first place?

Of course, that is a question for a later time - first Iraq has to get the oil out of the ground.

Comments

[A Barrel Full:]

OPEC will have to allow Iraq to increase its quota, for the reason stated. Iraq would leave otherwise.

Given the failing production in other OPEC countries it should not be too much of a problem.

Aug 03 06:30 AM

[Ferdinand E...:]

Unless I'm mistaken I think that I put on my 'leading academic energy economist in the world' hat one day, and explained to a couple of conferences that Iraq was NOT going to produce 6 mb/d of oil in the near or perhaps even the distant future. I think that some secondary school algebra was involved, which caused a problem, however it reduces to the following: IT WOULDN'T PAY THEM TO DO SO.

It took the OPEC countries about 30 years to understand the underlying logic here, but now it seems to be clear. Of course, if all the oil in Iraw does not fall under the authority of the government of that country, the resulting output might be larger than in the OPEC scenario, but that cannot be determined now.

About Canada. They have a nice reserve figure as a result of the oil sands, but according to estimates of future production, they are not going to be especially significant in driving the oil wolf away from our doors.

Aug 03 09:14 AM

[The Greates...:]

And there in lies the reasons for the Iraq war.

Aug 03 09:53 AM

[User 353732:]

It is possible that Iraq will fragment and its oil and gas production wll languish or even decline. This scenario was very popular in the Western MSM (but nowhere else) about 3 years ago. It has not transpired and the odds now no longer seem to be in its favor but..... neither have the odds diminished to irrelevance.
In my view, the scenario that Iraq retains its geographic integrity in a functioning federation with a working civil society is more persuasive. In that case, the big increase in production depends on motive( Iraq needs the money), means(huge very lost oil and gas reserves that are probably understated by a hundred billion bls of oil equivalent because there has been no real exploration for a generation in Iraq) and opportunity.
The opportunity entails talent, technology and capital. The Iraqi's are desperately short of all 3. If, however, Iraq is willing to ensure property rights and the enforceabilty of contracts in ways acceptable to both foreign and local investors then each critical constraint can be addressed.
The(expatriate) talent will come from Asia(India, Indonesia, China), Latin America(Venezuela, Brazil, Argentina) , the US Gulf Coast and perhaps Australia, UK and Norway;
The techology will come from the emerging oil and gas companies of the Global South(certainly China, India, Brazil), Russia and those global majors, mini majors and large indepenents with the fortitude to invest in Iraq(despite the best efforts of the US Congress to impede this....)
The capital will come from multiple sources but China, India, Japan, Russia together with the majors and mini majors as well as private MidEast investors will be important sources.
Should this transpire Iraq may well emerge as the second largest oil exporter in a decade or so.

Aug 03 10:05 AM

[satchv2:]

If one assumes political and security risks become"normal" during next 12-18 months Iraq oil production will ramp up quickly.

The current financial requirements of three deep offshore platforms for Brazil would fund up all development costs for increasing Iraq production in-excess of 4,000,000 barrels per day in a 36 month period. The cost of production of Iraq crude is 4-6.50 a barrel so they can afford to ramp up production and not worry about quota's because they can leave OPEC and still sell all the crude needed to really develop the country of Iraq for its people.

Aug 03 11:43 AM

[Alan von Al...:]

Sorry, I think this author is poorly informed. Ferdinand is correct re Canada. 'Technology' (whatever that means) is not an issue in Iraq. The monopoly labor union is. The joke legislative assembly is. Graft and corruption is. Kurds wheeling-and-dealing like a separate state is a problem -- not technical knowhow.

Best guess is that Iraq will blow up again, and production will barely supply domestic consumption. No net foreign investment, not even the Chinese.

Aug 03 11:44 AM

[Turnipseed:]

When I reviewed the geology of Iraq about 15 years ago, it obviously had hugh petroleum exploration potential. Furthermore, these resources likely can be developed and exploited at far lower costs than say offshore Brazil or the Canadian tar sands. All Iraq needs to do is attract capital, and as others have said, that's not going to happen in a big way until political and legal matters are resolved.

Aug 03 02:20 PM

[adamnb:]

Good point. Somehow there is a widespread belief that oil producers are in a mad rush to produce more oil before the world runs out, as if they cared.


On Aug 03 09:14 AM Ferdinand E. Banks wrote:

> Unless I'm mistaken I think that I put on my 'leading academic energy
> economist in the world' hat one day, and explained to a couple of
> conferences that Iraq was NOT going to produce 6 mb/d of oil in the
> near or perhaps even the distant future. I think that some secondary
> school algebra was involved, which caused a problem, however it reduces
> to the following: IT WOULDN'T PAY THEM TO DO SO.
>
> It took the OPEC countries about 30 years to understand the underlying
> logic here, but now it seems to be clear. Of course, if all the oil
> in Iraw does not fall under the authority of the government of that
> country, the resulting output might be larger than in the OPEC scenario,
> but that cannot be determined now.
>
> About Canada. They have a nice reserve figure as a result of the
> oil sands, but according to estimates of future production, they
> are not going to be especially significant in driving the oil wolf
> away from our doors.

Aug 04 05:32 PM