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Currency News

Iraq’s faltering oil resurgence raises price fears

By Ajay Makan in London

When Iraq surpassed Iran last year as the second-largest Opec producer for the first time since the late 1980s, it was heralded as a sign of the recovery of Baghdad’s energy industry a decade after the US-led invasion.

But less than 12 months later, Iraq has gone from being a leading source of growth in global oil supplies to an uncertain one – a development that is putting pressure on prices and posing challenges for policy makers in Baghdad, Washington and Riyadh.

Iraq, which joined an elite group of countries last year producing more than 3m barrels per day (b/d) of oil, saw the figure slip back to 2.96m in June, according to Reuters data. This compares with an initial government target for this year of 3.7m b/d.

Along with surging North American supplies from US shale and Canada’s oil sands, rising Iraqi output was expected to cushion the oil market from the impact of tighter sanctions on Iran. However, Richard Mallinson, chief policy analyst at Energy Aspects consultancy, said: “Iraqi supply is going backwards this year, when a lot of the market expected it to be delivering the biggest growth outside the US. That’s a big shock.”

Growing violence, political paralysis and lingering infrastructure problems have thwarted Baghdad’s plan to raise oil production. Last month was the bloodiest in Iraq for five years, according to the UN, and mounting violence has taken its toll on the oil industry.

A series of bomb attacks reduced flows to a trickle last month on the 300,000 b/d Kirkuk-to-Ceyhan export pipeline in the north. A further 150,000 b/d of output has been lost from Iraqi Kurdistan since the start of the year because of a revenue-sharing dispute between Baghdad and the regional government.

The biggest headaches are technical. International oil companies complain that Iraq’s creaking pipeline infrastructure is unable to absorb increased production. When weather disrupts shipments from ports in the south, production has to be shut down because of limited storage capacity.

The government plans to upgrade its southern export terminal, but the work is set to reduce exports by up 500,000 b/d for at least a month from September, to the frustration of international oil companies.

“The focus should be on building more storage, not on increasing export capacity,” said one company, adding: “Even if we produce more oil, once it gets in to the government infrastructure things break down and you often find you can’t get it out of the country.”

Investment has also slowed because of protracted negotiations between Baghdad and international oil groups that manage the big oilfields about future production targets.

The government remains optimistic. In an interview with Reuters news agency this week, Asim Jihad, an oil ministry spokesman, said production would grow by 400,000 b/d by the end of the year thanks to the start-up of the Shell-operated Majnoon field – one of three large fields whose openings have been delayed this year.

Many analysts are less hopeful. Energy Aspects forecasts a year-on-year decline in production, JBC Energy consulting forecasts average daily output to be flat at 2.96m b/d, while Wood Mackenzie expects a fractional increase this year.

The consequences for Iraq are potentially huge. At $94bn last year, according to data from the Opec producers' cartel, petroleum export revenues were almost equal to the central government’s $100bn budget, while a growing population is putting upward pressure on state spending.

“Iraq is a rentier state,” says Luay al-Khateeb, head of the Iraq Energy Institute. “Any decline in exports during 2013 will lead to a major deficit in the federal budget of 2014.”

It will also have repercussions for global supply. Faltering Iraqi production comes on top of unexpected outages in Libya, Nigeria and South Sudan. When Iraq’s southern exports are interrupted in September for the work on the terminal, 3.4m b/d of production will be involuntarily offline globally, almost 4 per cent of world demand. That is the largest amount since the invasion of Iraq in 2003 and more than at the height of the Arab Spring uprisings, according to Energy Aspects.

These outages and Iraq’s problems have shattered hopes that prices could fall this year as more US shale oil came online. Brent crude oil has risen from less than $100 a barrel in mid-April to touch $110 last week, despite economic concerns in China that have weighed on other commodity prices.

Saudi Arabia has already increased output to close to 10m b/d to meet demand. It has also been steadily increasing the price of exports to Europe and Asia.

“People are starting to wake up and smell the coffee and see that the US shale oil boom is not putting the Saudis out of business,” said Robert McNally, a former White House official who now heads the Rapidan Group energy research.

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