Will Iran Follow Iraq In Oil Policies?

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Includes: BP, E, EQNR, JPTXF, LUKOY, OXY, PNADF, RDS.A, RDS.B, XOM
by: Charles Constantinou

Summary

Iraq can reach Saudi Arabia's production levels by 2020.

Iran can increase its exports by 300,000-500,000 b/d with the lifting of sanctions in Iran deal.

Several agreements have been signed and are being executed in Iraq, despite the civil conflict. Examples, such as BP, are given below.

Authored exclusively by the former Chief of Energy Investment Unit, United Nations.

Saudi Arabia has been approaching individual refineries to buy their oil at undisclosed quantities and prices... Not an easy task, it is a fiasco in Saudi.

Introduction

When analyzing oil production, and consequently, world oil prices, particular attention is due to the Middle East countries, including Iran and several Arab countries such as Saudi Arabia, Iraq, Kuwait, and United Arab Emirates, which all together produce more than 20 million barrels per day (b/d), or 2/3rd of OPEC production, and 22.2% of world output. This is due to their vast reserves and incredibly low cost of production as compared to such OECD countries as England and Norway, Canada and the United States and even OPEC members such as Angola. The difference is $5-15 per barrel, as compared to $50-60 per barrel.

In the Middle East, politics, and consequently, the nature of the government regimes have a lot to do with the price of oil.

While Iran has remained independent since the old days of the Persian Empire, its political regime changed fundamentally in 1979 with the ousting of the Shah and the political takeover by a dictatorship of the Shiite clergy, which is mainly anti-Sunni and is followed by the majority of the Arab world.

The Arab world, however, after the collapse of the Ottoman Empire in the first World War (1914-1918), was determined by the United Kingdom and France, especially with regard to Iraq, Syria, Jordan and Lebanon, which became independent states but with a messy mixture of tribes and religious affiliations that led to inevitable internal conflicts and a series of kingdoms and/or dictatorships. Saudi Arabia, on the other hand, became independent in 1932 after a civil war that was won by the current regime which supports a population of 20 million of Sunnis under a kingdom/dictatorship regime

In my paper "The Collapse of Oil Prices: What Led Saudi Arabia to Such Fundamental and Expensive Decision" (April 2015), when that country refused to repeat its usual policy of cutting OPEC oil production, with a consequent drop in oil prices of about 50% and a loss to Saudi Arabia itself of more than $420 million per day (yes, per day!), I came to the conclusion that the country was determined to reduce oil production in non-OPEC countries - especially in the USA shale oil revolution, which many expected to expand to several other countries with considerable shale oil and shale gas resources - and reduce research efforts in reducing oil consumption such as gasoline in cars and gas in trucks instead of diesel, so that the vast proved oil reserves of Saudi Arabia's (the biggest oil reserves in the world at 264 billion barrels) could be marketed for many years to come in order to provide adequate revenue for the enormous subsidies to the Saudi citizens instead of the alternative of inevitable poverty, possible revolution, and, in any case, a change in the regime.

Iraq

Iraq was one of the early oil producers in the Middle East, but its production was under the control of international oil companies (the current BP Plc (NYSE:BP)), which preferred to obtain their supplies from countries such as Saudi Arabia, Kuwait and Iran, which showed much more co-operation rather than the stubborn stance of Iraq. In fact, rumor has it that BP knew there was plenty of oil in Iraq below 2000 ft., but it would drill wells at less depth and report to the government that no discoveries were made.

As shown in Table 1, Iraq increased oil production from 2,030 thousand b/d in 2004 to 3,141 thousand b/d in 2013 and 3,285 thousand b/d in 2014. According to The Wall Street Journal (Saudi Arabia, Iraq Push OPEC Over Its Ceiling, June 10, 2015, pg. C2), Iraq pumped about 3.8 million b/d in May 2015 - a level that, if sustained, would set a national record. Iraq exports 3.2 million b/d, but wants to average 3.3 million b/d this year. Production could reach 6 million b/d by 2020, according to Iraqi government sources.

Iraq has no problems anymore with adequate discoveries and reserves as in the pre-1970 days of BP control. In fact, as shown in Table 2, the country's proved reserves have increased from 100 billion barrels in 1994 to 150 billion barrels in 2014 - just below that of Iran, and considerably higher than those of both Kuwait and the United Arab Emirates.

Iraq's ambition to increase oil production in is quite big, with one report (Financial Times, November, 2010, Pg.2) reporting that it's inviting foreign oil companies to participate on a grand scale, and government officials were aiming at 12 million b/d by 2020. At present, production is from about 60 fields, but many experts believe these are bright prospects for new huge discoveries.

Several agreements have been signed and are being executed despite the civil conflict. Some examples are given below:

A) Rumaila Field: BP and Chinese National Petroleum Co. to boost production from about 1 million b/d to 2.85 million b/d, for a fee of $2/b.

* Located in southern Iraq, approximately 20 miles (32 km) from the Kuwaiti border.

B) West Qurna Field: Statoil (STO) and Lukoil (OTCPK:LUKOY), for a fee of $1.15/b

* West Qurna is one of Iraq's largest oil fields, located north of Rumaila field, west of Basra. West Qurna is believed to hold 43 billion barrels.

C) Az Zubair Field: ENI (NYSE:E), Occidental Petroleum (NYSE:OXY) and Korea Gas Corporation - Contract for 20 years, aimed at 4 billion barrels, with the consortium to invest $20 billion, for a fee of $2/b and taxes at 35% of profits.

* The Az Zubair Field, also known as Az-Zubayr, is an oil field located in southern Iraq, west of Basrah. It is one of the largest fields in the world

D) Majnoon Field: 12.8 billion barrels.

E) Carral Fields: Petronas (OTC:PNADF) and Japan Petroleum Exploration Co. (OTC:JPTXF)

F) West Qurna 1 Field: ExxonMobil (NYSE:XOM) and Royal Dutch Shell (RDS.A, RDS.B), for a $1.90/b fee.

ExxonMobil expects to boost production to 2.3 million b/d from just 260,000b/d. The field has estimated reserves of 8.7 billion barrels.

One of the main benefits for Iraq in inviting and entering into long-term contracts with major foreign oil companies in the current market is the ability of these companies to help the exports of crude oil to their affiliates, which are spread throughout the world. On the contrary, countries such as Saudi Arabia have been approaching individual refineries to buy their oil at undisclosed quantities and prices - not an easy task.

Iran

As shown in both tables, Iran has a little more in proved oil reserves than Iraq, and its production is about the same as Iraq. Of course, Iran has been hurt by the USA and other sanctions, but its main shortcoming is a lack of foreign oil companies. Whether Iran follows the Iraqi example remains the big question. Current estimates are that the country could increase its exports by 300,000-500,000 b/d with the lifting of sanctions. We shall see.

Table 1: Oil Production

(Thousand b/d)

 

2004

2008

2010

2013

2014

Iraq

2,030

2,428

2,490

3,141

3,285

Iran

4,201

4,396

4,352

3,525

3,614

S. Arabia

10,458

10,663

10,075

11,393

11,505

Source: BP Statistical Review of World Energy 2015

Table 2: Oil Reserves

(Billion Barrels)

 

1994

2004

2013

2014

Saudi Arabia

261.4

264.3

265.9

267.0

Venezuela

64.9

79.7

46.6

298.3*

Iran

94.3

132.7

157.8

157.8

Iraq

100.0

115.0

150.0

150.0

Kuwait

96.5

101.5

101.5

101.5

UAE

98.1

97.8

97.8

97.8

Source: BP Statistical Review of World Energy 2015

*Mostly very heavy oil


Disclosure: I am/we are short OIL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.