Iraq - over the worst
Iraqi oil output has continued to rise despite turmoil in the north. Further growth will be more difficult
On the face of it, Iraq's beleaguered oil industry has braved the worst of the oil-price collapse. Federal production figures showed output to be 4.228m barrels a day in September, while Kurdish Iraq produced 0.546m b/d, giving a total of 4.774m b/d. Those figures are disputed - Opec's own secondary sources put output about 320,000 b/d lower, at 4.455m b/d - hardly a small anomaly and far from indicative of the cooperation Opec needs if it is to implement its much-discussed cuts. If those cuts do emerge in 2017, Iraq will accept a reduction from the upper base-line - it simply doesn't accept Opec's lower number.
As for 2017, absent from an Opec-orchestrated cut in supply my sources at the Ministry of Oil (MoO) say the southern fields could add 5-10%, taking output above 5m b/d. For all the bad news emanating from Iraq's politics, its oil sector is holding on surprisingly well.
But dig deeper and you can see problems ahead. Iraq's projected oil price of $45 for the 2017 budget is optimistic (a trend in Baghdad's accounting). The country's crude sells at a steep discount to Brent, partly to compete for market share. And Brent oil prices in the $40s puts the budget in the fiscal danger zone.
Public-sector reform efforts in Baghdad and Erbil have not been aggressive enough. The fall from $100bn-plus federal budgets has been too steep to adjust to, while Erbil is recovering from a string of energy set-backs, including the downgrade to reserves at Genel Energy's Taq Taq field and infrastructure damage. Adding to the collapse in oil revenue, both Baghdad and Erbil are paying the costs of more than 3m internal refugees and, of course, the war effort against the so-called Islamic State (IS) in the country's north. Assuming IS is defeated, the reconstruction bill will also be hefty.
The only positive development has been a more cooperative spirit between Baghdad and Erbil, marking a change from the budget cuts and lawsuits over exports in the past few years. Without sustainable budgets, though, this cosiness will be strained. To date, the cooperation has taken the form of a 50:50 sharing deal over oil exports from Kirkuk, in effect since August and allowing the federal government to export from Ceyhan. This plasters over the fall in Iraqi Kurdistan's oil exports, which have declined throughout 2016. But even this agreement still needs parliamentary approval.
In the south, the MoO's fortunes have been mixed. The soaring expenses accrued by the international oil companies (IOCs) operating under the technical-service agreements (TSAs) near Basra - expenses which are charged back to the federal government - prompted the MoO last year to call for tighter budgets. It also recently told the IOCs to close the Dubai cost centres they charge to Iraq. Cost-oil expenditure has already risen to $60bn since 2010. Many observers often focus on Iraq's low per-barrel remuneration fee, ignoring skyrocketing development costs. Although the MoO is not willing to renegotiate its existing oil contract, it has reviewed the repayment mechanism. The outcome is that IOC investment in 2017 will fall from $23bn to $7bn. This could delay output growth and threaten the government's production target of 7.1m b/d by 2020. Current spending can already barely sustain the levels now.
Other problems have developed their own vicious cycle. For example, the loss of the Baiji refinery - a casualty of IS in the north - means Iraq's processing capacity is half what it needs. New capacity should eventually come on in Karbala, Nasiriyah and Basra, but Iraq - one of the world's big-gest oil exporters - will still need to import fuel until at least 2020.
New fields would help meet production targets. But much work to prepare the regulatory framework needs to be done. For any new licensing rounds, hybrid contracts could be an answer, offering a mix of TSCs, production-sharing agreements, or generally making them more flexible - and appealing - to investors. The MoO has listed 19 qualified companies to bid for 12 small and midsize fields, and negotiations could make progress in 2017. Several giant and super-giant fields could also be brought to the market, if Iraq decides to maximise production or develop spare capacity.
Above all, though, if the MoO is to generate sufficient interest in these new contracts - for which IOCs might begin discussions as early as January - it must offer fiscal terms that deal with low oil prices. Now that Iraq is discussing a potential Opec output cut - which, even if agreed at the November 2016 meeting, would only start to affect physical flows in January - the MoO will also need to find a way to compensate producers for any impact on their fields' output.
In 2017, if not by the end of this year, the MoO will also need to consider different commercial terms for planned integrated projects (such as the refinery one at Nasiriyah). That's crucial to developing the downstream sector and cutting costly product imports. Even if the MoO starts licensing all this in 2017, though, the projects will only start to yield fruit after 2020, even under the smoothest conditions with uninterrupted development. Any MoO contracting in 2017 or after must put realistic schedules in place this time - avoiding the mistakes made in earlier licensing rounds.
Next year won't make or break Iraq, despite what looks to be a very difficult period. Iraqi production between 2017 and 2020 should continue to rise incrementally. It's the more distant outlook that appears much more promising. The unlicensed brownfield and greenfield assets being considered for mid- to long-term development from 2020-30 offer huge potential and give Iraq the opportunity to get the contracts that govern them in good shape.
Some other features point to progress in 2017. The adversity of recent months has forced the MoO to become more responsive to investor needs.
Progress should at last be made on gas flaring in the south of Iraq too: the volume wasted could be cut by a fifth as part of new minister Jabar Ali al-Luaibi's plan to use association gas for power generation. This should, when Basra Gas Company's costs are paid, ease the pressure on the budget, cutting into the need for Iraq to import fuel to fire its electricity.
This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here