Baghdad bears the impact

Baghdad bears the impact

Giorgia Lamaro
Iraq failed to obtain to be exempted from the oil output cuts and had to accept a ceiling of 4.35mb. The country avoided completely fulfilling its commitment, remaining at 53 percent of its target on January

Iraq, OPEC’s second largest oil producer, has promised to cut its output by 210,000 bpd according to the agreement signed on November 30, 2016 in Vienna. During negotiations with the exporting countries, the government in Baghdad asked to be exempted from the cuts due to the high costs of its war against the Islamic State (IS) and its difficult internal situation. However, Iraq failed to obtain its desired result and had to accept a ceiling of 4.35mb, compared with October’s production level of 4.7mb. Nevertheless, for now this obligation should not have negative repercussions on the Iraqi oil industry or on revenues derived from crude oil exports.
With an average Brent crude price at $55 per barrel, which, according to some estimates could increase to $60, Baghdad can rely on the high liquidity needed to cover war and reconstruction costs. It is also likely that in coming months, Iraq will continue to be required to reduce its oil production due to contingent factors.

The maintenance of oil fields and the Kurdistan issue

With an average #Brent #crude price at $55/bbl, #Baghdad can rely on the high liquidity

Iraqi crude oil exports in March of this year are expected to fall to their lowest level in the last seven months, due both to planned maintenance work in some of the largest oil fields in the country and to the seasonal physiological decline in production during that period. In the “super giant” oil field of Rumaila, operated by BP, Petrochina and Iraq’s South Oil Company (SOC), maintenance work started as early as January and should be completed in June. Works on the super-giant oil field of Majnoon, licensed to the Anglo-Dutch company Royal Dutch Shell in partnership with Malaysia’s Petronas and Iraq’s Missan Oil, should start in February and end in April. At full capacity, the two oil fields combined produce an average of approximately 1.5 million bpd, an amount that will decrease during this maintenance work.
According to expert forecasts, in March, Iraqi crude oil exports from the terminals of Bassora, in the south of the country, are expected to fall to 3 million bpd from the current level of 3.28 million given this decline in production. Added to this total are the exports from the fields under the control of the autonomous region of Iraqi Kurdistan, regarding which there is still no agreement between the two countries. The agreement reached in December 2014 between Erbil and Baghdad on oil exports has in fact been blocked.
Under the agreement, Iraqi Kurdistan is expected to export 550,000 barrels of oil per day via Baghdad oil marketing company Somo, in exchange for 17% of the federal budget. Currently, however, exports from the Kurdish region and from the oil fields of Kirkuk, which are largely controlled by the authorities in Erbil, flow via the connecting pipeline with Turkey, the Kirkuk-Ceyhan oil pipeline. This change is partly attributable to the closure of a pipeline that travelled to Mosul, a city in northern Iraq still under the partial control of IS, and because of this instability due to war the pipeline has been closed since at least 2014. The government in Baghdad therefore continues to block the allocation of 17% of the state budget destined for the Kurdish region under the Constitution.
Although the lack of an agreement between the federal government and the Kurdish regional government may have consequences for the country’s internal political stability, it is unlikely that this factor will have repercussions on compliance with the agreement signed by OPEC.  Also playing in Iraq’s favor is the fact that to date OPEC has reduced its oil production more than expected, thanks to the contribution of Saudi Arabia which, on November 30, 2016, committed to reducing its output by approximately 500,000 bpd.
According to the International Energy Agency (IEA), in January, Riyadh cut its output more than necessary and data show 90% compliance with the OPEC agreement, the aim of which is to cut average production, in the first six months of 2017 by approximately 1.2 million bpd.  To that can be added an output cut of 558,000 bpd by non-OPEC countries, a group that includes Russia. Therefore, Iraq, at least for now, has been able to avoid completely fulfilling its commitment made under the agreement, remaining at 53% of its target (-0.11% production versus the -0.21% required).

The geopolitical challenges

In terms of geopolitics, despite recent military successes in the war against the Islamic State achieved with the support of the international coalition led by the U.S., Iraq is experiencing challenging times.
The offensive for the liberation of Mosul, the final stronghold of the jihadist group in the north, is almost at an end with the partial liberation of the city center. But once control is regained over the entire province, Baghdad must start a difficult “political reconstruction” task that takes into account the requests and demands of various religious and ethnic groups. It will be necessary to grant an important role to the Sunnite community, including allotting top institutional offices, to avoid once and for all rekindling violence between the country’s various religious groups.
With the Kurds, it will be necessary to find a new balance, since in the war against the Islamic State the autonomous region of Iraqi Kurdistan has taken on a stronger role, both in terms of diplomatic relations, with Turkey and the United States, and from a strictly military point of view. It is reasonable to hope that once the militias of the “Caliphate” have been defeated a period of growth and stability may open up for the country, one that cannot fail to promote its reconstruction.

For now, the obligation undertaken in respect of the other OPEC countries should not have negative repercussions on the Iraqi oil industry or on revenues derived from crude oil exports