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Iraqi crude production targets extraordinarily ambitious

IHS sheds doubt on Iraqi production ambitions

IRAQ IS unlikely to achieve its ambitious target for oil-production growth, says IHS Cambridge Energy Research Associates (IHS Cera). Political, security, operational and infrastructure problems will stand in the way of its "highly ambitious" upstream plans, according to a report, Fields of Dreams: The Great Iraqi Oil Rush – Its Potential, Challenges, and Limits.

The country plans to expand oil production to as much as 12m barrels a day (b/d) in the next six to seven years. Achieving levels "around half that in the next decade would be more likely", says the consultancy. That, however, would still constitute "a significant expansion": 4.3m b/d in 2015 and 6.5m b/d in 2020, compared with 2.25m b/d in March, according to the International Energy Agency (see Figure 1).

"Iraq's expansion timetable appears extraordinarily ambitious in comparison with the recently completed capacity increase in Saudi Arabia," says Bhushan Bahree, a Middle East analyst. "Saudi Arabia has significant security and infrastructure advantages, yet it took Saudi Arabia between four and five years to expand its net output capacity by some 2m b/d. Iraq will certainly be challenged to match this pace, much less exceed it."

Infrastructure and logistics are significant challenges, the report says. Iraq must provide the infrastructure needed to receive the extra oil, but its plans for developing ports, roads, and power and water facilities are unknown. In addition, Iraq's recent elections and efforts to form a new government could exacerbate existing sectarian and other tensions in the country. It is also "unclear" what form oil contracts will take. And security remains poor.

However, while Iraq probably will not reach its 12m b/d target by 2016-17, upstream expansion in the country will have important implications for Opec and the regional balance of oil flows, the report says. For now, Iraq remains outside Opec's output-quota system, but other members will encourage it to return as soon as its capacity begins to grow significantly. That, however, could take years, says Cera: the Opec issue will not arise until Iraqi output begins to approach Iran's quota level – 3.336m b/d – the share Iraq negotiated in 1988.

Bahree adds that "expansion beyond parity with Iran is likely to generate a strong reaction from the government in Tehran, which views parity as one of the concessions that it had to make for peace with Iraq in the late 1980s. Equally important will be the conflicting oil strategies that the two countries are pursuing. Iran, unable to raise its own output, is pursuing a strategy of maximising oil revenues through higher prices. Iraq's unfolding strategy is just the opposite – expanded volume to increase revenues."

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