Challenges ahead for Iraqi oil capacity growth

Friday 23/10/2015
Iraqi fighters from the Popular Mobilisation units drive at the petrochemical plant in the town of Baiji north of Tikrit, after they retook the industrial area from ISIS, on October 16th.

Beirut - Iraq’s oil production capacity has expanded over five years from 2.4 million barrels per day (bpd) to around 4 million bpd. The rapid rise is attrib­uted to the development of giant southern fields and the expansion of southern export infrastructure.

Special facilities were construct­ed in 2015 to export more than 200,000 bpd of Basra Heavy crude oil, separate from the Basra Light oil, as separation of crude is re­quired by refineries. New pipelines and tank farms were constructed to meet increasing southern oil supplies. Southern production is around 3.2 million bpd. It is project­ed that incremental supplies during 2016 will be around 200,000 bpd.

Exports from northern Iraq have also increased, both from the Kurd­ish Regional Government (KRG) oil fields and the federally owned but KRG-operated Kirkuk fields. Pro­duction is 600,000-800,000 bpd.

The rapid rise of Iraq’s produc­tion capacity is projected to slow in 2016. Challenges to the indus­try include the usual problems encountered since 2003: political insecurity, sectarian conflict, rise of militia powers. New projected problems could include a financial crunch, internal conflicts among the Kurds and the long-promised campaign to liberate the province of Nineveh from Islamic State (ISIS) occupation.

Financial crunch: In August, Fitch Ratings assigned Iraq a long-term foreign currency Issuer De­fault Rating (IDR) of “B-minus” with a “stable outlook”. The agency has long assigned Iraq a country ceiling of “B-minus” and a short-term IDR of “B”.

In mid-August, Oil Minister Adel Abdul Mahdi wrote in Iraqi news­paper Al-Adala that the country’s oil revenue from 2003-15 totalled about $800 billion.

Approximately $830 billion is “missing”, he added. It is assumed that “missing” means the money was used for corruption, briberies and laundering. Iraqi Prime Minis­ter Haider al-Abadi has made simi­lar accusations against the regime of former PM Nuri al-Maliki.

Commodity dependence in Iraq is among the highest of all rated-sovereigns. Oil accounts for about 40% of gross domestic product (GDP) and more than 90% of fiscal and current external receipts.

Iraq is showing financial strains. The government has cleared $9 bil­lion of payment arrears to interna­tional oil companies that were run up in 2014. Scores of construction companies and consulting firms have not been paid. The big crunch threatening the country is the gov­ernment’s lack of sufficient finan­cial liquidity to pay the 8 million civil servants and government re­tirees their salaries. Government’s debt is about 51% of GDP.

Kurdish conflict: The political situation with the KRG has dete­riorated rapidly in the past few months, with no resolution in sight. Turkey’s Kurdistan Workers’ Party (PKK) is fighting both Turk­ish authorities and the KRG. The PKK is reportedly sabotaging pipe­lines from northern Iraq to Turkey, supplies that include oil from KRG and Kirkuk fields. Northern oil ex­ports will not be a secure oil sup­ply to customers. Baghdad is also challenging KRG exports as being “smuggled” oil. US courts have forbidden KRG oil delivery to the United States.

The KRG does not have a presi­dent; Masoud Barzani’s term has ended. There is no agreement among Kurdish parties on a suc­cessor. Skirmishes occur daily in northern cities among supporters of the various Kurdish parties. One of the major complaints by the op­position is the corruption in the KRG-run oil sector.

Military campaign to liberate Mosul: The long-awaited military offensive to liberate the province of Nineveh from ISIS occupation is approaching. The campaign will tax Baghdad’s coffers and cause politi­cal havoc. Baghdad is coordinating military plans with Russia, Syria and Iran. The Kurdish peshmerga, a major force in the Mosul campaign, coordinates with the United States.

ISIS occupied provincial capital Mosul in June 2014. The liberation of Nineveh will not be easy and is expected to take a long time, as the liberation of the Anbar province has demonstrated. The Mosul fighting will slow activities in KRG oil fields as expatriate workers and engineers may be evacuated, as happened in June 2014.

Iraq’s fiscal position has deterio­rated rapidly since 2013, owing to mismanagement, deterioration of oil prices, higher military spend­ing and costs associated with civil conflict.

Iraq is among the world’s top five oil reserve holders, with more than 150 billion barrels, with significant amounts of natural gas. Production costs are low.

The oil infrastructure lacked the necessary maintenance during in­ternational sanctions imposed on Iraq following the August 1990 in­vasion of Kuwait. Much of the infra­structure was destroyed in the wars and domestic conflicts since 1980.

The bulk of oil production fa­cilities and infrastructure are away from areas of domestic insecurity but they are in dire need of mainte­nance and expansion. This requires much funding and time, particular­ly as oil exports rise. Infrastructure bottlenecks remain a constraint to Iraqi exports and could be set back by payment arrears.

Iraq is the second largest oil pro­ducer of the Organisation of the Petroleum Exporting Countries (OPEC). The rise in its capacity is significant in both providing more supplies to world oil markets and in determining OPEC’S quota system.