Forbes: Iraq Doses The Market With Oil

MAY 27, 2015 @ 7:40 AM                                           Click to Read Story Here
Iraq has announced a shipping schedule next month that implies an increase in exports of 800 tb/d, an amount that only the Saudis have been able to match historically. Markets appear to be skeptical, and a degree of caution is certainly in order, but this is certainly a reminder of a looming challenge for OPEC, one that could be as difficult as the shale oil boom in the US.

That is especially true because of the extremely low cost of producing oil in Iraq, thought to be the cheapest in the world and usually put around $5 a barrel. Even peak oil advocates have tended to see Iraq as having the potential to increase production, and they are notoriously pessimistic. Of course, plans to raise production to 12 mb/d by 2020 were never realistic, but some confused an overly optimistic plan with an inability to perform at all.

The political instability in Iraq, and particularly the advances made by ISIS in the past two years, have worried markets sporadically, but not significantly affected production. This is because the country is really three separate entities when the oil resource is considered: the Shia south has the bulk of reserves and is politically stable, the Kurdish north has moderate resources but export constraints and faces problems from ISIS, while the Sunni areas, now in turmoil, have no significant developed reserves. Thus, fighting in Anbar province is well removed from the country’s oil industry.

Needless to say, the long delays in establishing contracts with foreign oil companies reinforced the belief that Iraq’s sector would never be able to increase production beyond historical highs. Some analysts pointed to both Iran and Venezuela as suggesting that oil production never really recovered after a country underwent a politically inspired collapse, but that was always a bit simplistic. Iraq’s underexploited reserves are massive, and the technical challenges trivial compared to the political ones.

The long delay in raising production has resulted mainly from the foreign companies’ decision not to rush, but to work at a deliberate pace, studying the fields intensely to optimize production and recovery, while building up the infrastructure, including a pipeline to bring in water for injection, but especially the export capacity.

Quite possibly, Iraq will not meet next month’s target for shipments, but it is likely to see continuing and robust increases in its production capacity. At the least, Iraq’s increased production will mean that there is little or no room for other OPEC members to increase their sales over the next few years, and at most, it will be necessary for someone to cut their exports. In the late 1980s, when the Iran-Iraq war ended, Saddam Hussein took the short-term step of demanding a higher quota and, when refused it, simply produced as much as he wanted. OPEC yielded and raised his quota. If not for the Gulf War, there would undoubtedly have been a continuing conflict over Iraqi quotas, but Hussein postponed the issue with his invasion of Kuwait.

Later this year, since the call on OPEC is projected to be flat, expanded Iraqi production will translate into higher inventories, something the industry very definitely does not need. If Libyan production also recovers modestly, and Iranian negotiations allow then to export some additional barrels, the market could be seriously oversupplied. The current $60 WTI price would prove to be a fading memory, and earlier predictions of a collapse below $40 could prove prescient after all