Political problems threaten Iraq's oil industry
Renewed war in northern Iraq leaves Baghdad desperate to expand exports in the south. It may also lead to a deal with the Kurdish Regional Government – but rejoining Opec’s quota system is not on the cards, writes Gerald Butt
Under different circumstances, Iraq today would have been celebrating an all-time record for oil exports of 2.8 million barrels a day (b/d). Federal exports from southern Iraq in September topped 2.5m b/d, and were it not for the seizure of large areas of territory by Islamic State (IS), exports from federal fields in the north would have averaged around 300,000 b/d.
But the circumstances in Iraq are anything but normal. Since early March, pipeline sabotage has prevented oil being pumped from northern federal fields through the Iraq-Turkey Pipeline (ITP) to the Ceyhan export terminal in Turkey. At the same time, Baghdad continues to challenge the legality of oil production and exports from fields within the territory governed by the Kurdish Regional Government (KRG). Kurdish oil was pumped through the ITP at a rate of 170,000 b/d in September, up from 117,000 b/d in August.
As the Baghdad authorities rue what would have been a golden moment in the revival of the energy sector in the post-Saddam Hussein era, they might consider that the clouds of the latest crises contain a silver lining of sorts. For the various challenges facing the country will postpone further the day when Iraq’s fellow
Opec members insist that it takes part once more in the organisation’s quota system. The country’s new oil minister, Adel Abd al-Mahdi, will argue strongly that Iraq has two solid reasons why it should be allowed to produce and export as much oil as possible. First, it needs maximum revenue to rebuild the country after decades of war and sanctions. Second, Iraq has lost its northern production and export routes, and therefore depends totally on its southern oil trade for national revenue. So vital is this source of income that Iraq will continue to discount sales in order to ensure that customers are found for its oil – again justifying its action to its Opec partners on the grounds of exceptional circumstances. If conditions are dire in central and northern areas of Iraq, the opposite is the case in the Shia-dominated south, which has remained isolated from the violence and disruption to daily life elsewhere. International oil companies (IOCs), while downsizing the presence of foreign personnel, continue to operate in the south. In a boost to IOCs there at a time when the country as a whole has become part of the battleground in the international military campaign against IS, the operators of the Rumaila and Halfaya oilfields, BP and PetroChina respectively, recently agreed substantial changes to technical service contracts. In both instances, the changes favour the IOCs, with the Ministry of Oil making substantial cuts in its share of the projects and the international companies set to receive a major boost in remunerations. Assuming that IOCs can continue to operate in southern Iraq, then the various field development and expansion plans can proceed. The only foreseeable obstacles in the way of a continued rise in oil production result from the slow expansion of export infrastructure at Basra port and delays in implementing a major oilfield water-injection scheme. An indication of the bottlenecks at the Basra export terminal is that while exports over recent months have been steady in the 2.4m-2.6m b/d range, some 200,000-400,000 b/d of production has been shut in. Plans to install more oil storage tanks at Fao and a gas turbine-driven pumping system linking them to single point moorings will not be complete until 2017 at the earliest. Water injection, to maintain reservoir pressure ignore needed to meet and sustain production plateaus, is another major problem in the near and mid-term future. The planned Common Seawater Supply Project is essential for the continued expansion of the Rumaila, Zubair and West Qurna 1 fields. Failure so far to agree the scope of the $5bn first phase of the scheme leaves its future uncertain, with start-up not envisaged before at least mid-2018. The result is likely to be a flat-lining of production from these three fields from early 2016 until the water supply project finally comes on stream. Other fields, notably West Qurna 2, Majnoon and Gharraf, will need water injection at the end of the decade when they approach plateau output.
These restrictions mean that estimating Iraq’s production and export capacity in the coming years is difficult. The Iraqi government in mid-2013 published its
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