Iraq Oil Is ‘Game Changer’

OCTOBER 13, 2010

Production Revival Will Challenge Big Suppliers Like Saudis, IEA Chief Says

Reuters: Iraqi police check oil pipelines during a patrol at the Shueiba refinery in the country’s southern province of Basra in August.

By GUY CHAZAN

The revival in Iraqi oil production will be a “game-changer” for global oil supplies and a challenge for other big oil producers like Saudi Arabia, the International Energy Agency said Tuesday

Fatih Birol, the IEA’s chief economist, said in an interview that 20 years from now, Iraq could be pumping two to three times more than the 2.5 million barrels a day it currently produces—”comforting” oil markets worried about shrinking supplies, and possibly buffering against price spikes.

To achieve those levels, Iraq needs to repair its infrastructure, overcome a water shortage and improve its parlous security situation. “If Iraq addresses all these problems … it could be one of the few provinces where we’ll see net growth in oil production,” Mr. Birol said.

He was speaking a week after Iraq’s oil ministry raised the country’s proven oil reserves by around a quarter to 143.1 billion barrels. If the figure is confirmed, Iraq would overtake Iran to become the world’s second-largest holder of crude resources after Saudi Arabia.

The birthplace of the Organization of Petroleum Exporting Countries—formed in Baghdad in 1960—Iraq was once a titan of the oil industry, but its output and exports slumped as decades of war took their toll.

Optimism about Iraq’s prospects has increased significantly over the past year, however, following two licensing rounds that resulted in a string of service contracts aimed at unlocking the vast potential of some of its largest oil fields with major international companies such as BP PLC and Exxon Mobil Corp.

Officials say the deals will boost Iraq’s oil-producing capacity to around 12 million barrels a day by 2017, putting it on a par with Saudi Arabia. That, said Mr. Birol, “may be a challenge to the other oil producers.”

Iraq will be a “very important element for future [oil] supply,” said Nobuo Tanaka, head of the IEA.

Peter Voser, chief executive of Royal Dutch Shell PLC, which was awarded one of the Iraqi contracts last year, said Tuesday that Shell has already increased production from Iraq’s Majnoon field to 70,000 barrels a day from 45,000 barrels a day. The world “will need Iraq,” he said, to offset declining production from mature oil fields.

Others have poured cold water on Iraq’s rosy projections. Shokri Ghanem, chairman of Libya’s national oil company, said Iraq’s oil output would likely only reach 7 million barrels a day by the middle of this decade—not enough of an increase to affect world crude prices.

However, the increased reserves and forecasts of higher output could strengthen Iraq’s position in OPEC. Iraq is currently exempt from OPEC’s system of production quotas as it rebuilds its battered economy. But it has said it would rejoin the quota system once it hits output of 4 million barrels a day.

Analysts say that by upgrading its reserves estimate, Iraq is ensuring that the quota it is awarded by OPEC is as high as possible. Mr. Ghanem appeared to endorse that aspiration Tuesday, saying that Iraq had “the right to have quite a good size of production.”

Yet the challenges Iraq faces in reviving its oil industry remain huge. Tensions are simmering between some Iraqis and foreign oil companies operating in the country. Last month, officials backed by local police in Wasit province raided the al-Ahdab oil field, which is being developed by China National Petroleum Corp. They demanded to see contracts signed by CNPC and the oil ministry in Baghdad, but were turned away.

Shell’s Mr. Voser emphasized that the situation in Iraq was still precarious. “The risk profile has increased over the last weeks and months,” he said, amid “uncertainty on the political front.”

Write to Guy Chazan at [email protected]

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