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ANALYSIS

Iraq ‘could hike oil income by $100bn per year’

Kuwait, August 21, 2013

Higher production of oil at $100 per barrel could generate an additional $100 billion per year income to Iraq by the end of the decade, providing crucial support to the country’s fiscal position, a report said.

Using IMF projections for government spending, production of 6 million barrels per day (mbpd) would see the fiscal surplus rise to 4 per cent of GDP by 2020, from 0 per cent in 2013, added the latest Research Note on the oil sector released by the National Bank of Kuwait (NBK).

The lower-case production scenario, on the other hand, would imply a fiscal deficit of around 7 per cent of GDP by 2020. The latter would surely require lower spending in order to achieve fiscal sustainability, said the report.

Over the past four decades, multiple military conflicts have taken a severe toll on the Iraqi oil sector – including the Iraq-Iran war (1980-1988), the Gulf war of 1991, and the 2003 US-led intervention in Iraq, the NBK research said.

Furthermore, vast under-investment in Iraq’s oil sector has further prevented production from meeting its potential; prior to 2008, all activity in the oil sector was controlled by the government with limited foreign involvement.

Iraq’s massive oil resources hold immense potential. It possesses the fifth-largest proven oil reserves in the world, at an estimated 140 - 150 billion barrels. The vast majority of these resources lie in the south of the country, which accounts for over 70 per cent of total production.

The less-endowed north includes the semi-autonomous Kurdish region and the non-Kurdish, Baghdad-controlled areas.

Ambitious development plans, supported by growing involvement of international oil companies (IOCs), are already in place to sustain a major and rapid expansion in Iraqi oil production. Since 2008, Iraq has engaged in multiple joint-ventures with IOCs – including BP, ExxonMobil and Shell – in an effort to renovate and expand its oil sector. This has certainly yielded results, according to NBK.

Over the past five years, Iraqi oil production has increased by almost 40 per cent, driving output to a new modern-day high of 3 million mbpd. In 2012, Iraq became Opec’s second largest producer, surpassing production levels of Iran, Kuwait and the UAE.

The semi-autonomous Kurdistan Regional Government (KRG) has also sought to develop its own oil fields, engaging in numerous agreements with IOCs independent of the central government in Baghdad.

This has added further tension to the Irbil-Baghdad relationship, which had already been strained by an ongoing payment dispute regarding Kurdish oil exports flowing through a Baghdad-controlled pipeline.

Political instability, a long-delayed hydrocarbons law, and infrastructure bottlenecks all pose crucial impediments to sector expansion plans. A regulatory framework for investment in the hydrocarbon sector has been stuck in parliament since 2007. Meanwhile – despite some recent progress – Iraq’s transport, storage and export infrastructure remains either damaged or inadequate.

Under reasonable assumptions, Iraqi oil production could rise by 1.5 – 3.0 mbpd by 2020, and further thereafter, representing a major source of global oil supply growth. The International Energy Agency, for example, sees production doubling to 6 mbpd by 2020, with a longer-term projection of 8-plus mbpd by 2035.

Yet, given slow progress on the political, logistical and institutional front, a lower-case scenario looks plausible. Meanwhile, the Iraqi government’s ambitious output target of 9 mbpd by 2020 looks very unlikely, the Research Note said.

Even as its capacity rises, Iraqi oil output could still be restricted by the production limits set courtesy of its membership of Opec. At the moment, Opec’s aggregate production target implies that rising Iraqi output will need to be offset by reduced production by other members if overall output is to remain unchanged.

But this risks disharmony within the group, and is surely unlikely to last, said NBK in the Research Note. How Opec handles this issue will be a major challenge for the organization going forward, it added.

Rising Iraqi production is likely to be the largest single source of global oil supply growth over coming years – easily outstripping projected gains from US shale oil. The 6 mbpd production target by 2020 would imply output gains of around 0.4 mbpd per year.

To put this into perspective, it would have been enough to cover the vast majority of China’s explosive oil demand growth over the past decade by itself. As such, the successes and failures of the Iraqi oil sector will have a profound impact on global oil markets in the years ahead. – TradeArabia News Service




Tags: Opec | Iraq | research | NBK | oil production | Shale oil |

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