Iraq's excessive oil output poses challenges for Opec

Iraqi oil has fallen short of its potential so many times that it has become easy to overlook its impact. But on Thursday, Opec decided to pause its planned production increase, and one major factor was Iraq’s overproduction. With new projects on the way, the future of the nation’s oil output is crucial for the group’s strategy. Three countries have submitted compensation plans to Opec to deal with their past overproduction: Russia, Kazakhstan and Iraq. The latest two-month delay in reducing overall cuts makes this more difficult. Russia’s July output was 9.089 million barrels per day, higher than its Opec target of 8.978 million bpd. Short-term production depends on access to markets under sanctions, and damage from a possibly intensified Ukrainian drone and missile campaign. The medium-term depends on domestic finance and technology for new, more challenging fields as traditional operations in the Volga-Urals and West Siberia deplete. By 2030, it may be producing 8-10 million bpd of crude oil. This compares to the level of about 10.5 million bpd in the last pre-pandemic year, 2019. Kazakhstan produced 1.545 million bpd in July, above its target of 1.468 million bpd. It plans to boost its capacity to about 2.11 million bpd by 2027 through the further development of its three main fields, Tengiz, Kashagan and Karachaganak. Without significant new discoveries, its output will peak in about 2030. Finally, Iraq’s production was estimated by Opec’s secondary sources at 4.251 million bpd in July, compared to its target of 4 million bpd. It is thus by some way the leading offender in exceeding its limit. On Saturday, Iraq’s oil ministry announced it plans to produce 6 million bpd by 2028. Its compensation plan says it should be cutting output by about 100,000 bpd below target for the rest of the year. Its compliance has been complicated by the shutdown of the Iraq-Turkey pipeline since March last year, after an arbitration judgment. Baghdad had complained that Ankara breached the treaty governing the pipeline by allowing the semi-autonomous Kurdish region to use the pipeline for its own oil exports. Although Turkey has said for some time that it is ready for operations to resume, intense negotiations between the Kurdish regional government and Iraqi federal authorities have not resulted in a final deal. When the pipeline was closed, most of the Kurdish region’s production was shut down, almost 400,000 bpd. The federal government boosted its output to make up. But most of that Kurdish production has now resumed, and is either refined locally or smuggled by lorry to Turkey or Iran. That accounts for Iraq’s substantial overproduction, but Baghdad points out to Opec the difficulty in keeping to its commitments when it doesn’t control Kurdish output. The federal ministry of oil has now said that it will put pressure on the Kurdish region to limit its production, with the government potentially withholding the region’s share of the national budget. For all Iraq’s persistent problems, the government of Prime Minister Mohammed Shia Al Sudani has been rather more effective than its predecessors in advancing projects. It is under pressure from a wiretapping scandal, which might bring it down, and elections are scheduled for next October at the latest. But in July, it finally signed with TotalEnergies on a long-negotiated deal for oil, gas, water and solar power development. This should add about 150,000 bpd of capacity at the Ratawi field. In March, it approved the development plan for Lukoil’s Eridu discovery, the largest field found in the country for decades, with a target of 250,000 bpd. And the Faihaa field , which features as one partner Dubai-based Dragon Oil , a subsidiary of Emirates National Oil Company, is also being expanded. In February last year, the oil ministry concluded the 2018 fifth licensing round for a number of oil and gasfields and exploration blocks. In May, it held an auction for the remainder of the fifth and a new sixth round, awarding ten areas, mostly to smaller Chinese companies. Both these rounds featured a new profit-sharing model, which should prove more attractive to investors than the previous per-barrel fixed fee. Last month, it was announced that the oil ministry was in discussions with long-time partner BP for redevelopment of the Kirkuk-area fields , Iraq’s oldest, also under the profit-sharing system. When BP was last reported to be studying the fields, in 2012, it envisaged adding about 300,000 bpd of capacity. The TotalEnergies integrated project should ease one constraint, the lack of treated water to inject to maintain reservoir pressures. A string of recent contracts has gradually improved Iraq’s dismal situation on the wasteful and polluting practice of flaring associated gas – a by-product of oil production. These projects, along with expansions at existing workhorses, are in theory enough to achieve the 6 million bpd goal. The main limitation, then, would be Iraq’s oil export capacity. New and expanded refineries soak up some of the crude domestically. Various plans are under way to reactivate the pipeline from Kirkuk to Turkey, destroyed by Isis, to boost capacity from the ports at Basra, and to rebuild a north-south pipeline to give flexibility. Some studies have restarted on a new pipeline to Aqaba in Jordan, but this faces political opposition over Amman’s relations with Israel. The UAE, of course, plans to boost capacity to 5 million bpd by 2030, compared to its current production target of 2.91 million bpd, which is set to increase next year. So, depending what Russia does, Opec may by late this decade have to plan for additional capacity of anywhere from 3.7 million to 5.7 million bpd over current targets. If oil prices remain at current somewhat depressed levels, or decline further, Iraq’s budget will be in trouble. At $71 a barrel for Brent crude, it is below the budgeted price of about $80 a barrel. That could slow some of the key infrastructure projects, but it could also spur Baghdad to export more to make up the deficit. Regardless, it’s unlikely that Iraq will meet its short-term compensation commitments. Its Opec colleagues will have to find a quick compromise for now, or apply pressure. Unless demand surges or production stoppages elsewhere bail out the organisation, Iraq’s desire to sell more barrels will be a persistent headache. Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Iraq's excessive oil output poses challenges for Opec

Three countries submit compensation plans to deal with past overproduction