x Abu Dhabi, UAEWednesday 26 July 2017

Iraq weighs up lower target for oil output

Baghdad is moving towards an output target that falls short of overtaking Saudi Arabia as the biggest Opec producer, and increases the pressure to improve the terms for international oil companies in Iraq.

Baghdad is moving towards a new oil output target that falls short of overtaking Saudi Arabia as the biggest Opec producer, and increases the pressure to improve the terms for international oil companies operating in Iraq.

The government, under the prime minister Nouri Al Maliki, has developed what it calls the Integrated National Energy Strategy (Ines), which recommends a production plateau of 9 million barrels per day (bpd).

Iraq's post-war production targets had already been revised down to 12 million bpd by 2020 - about the same as Saudi Arabia's total capacity. Now the officials behind Ines propose the median option of three scenarios ranging from 6 million to 12 million bpd.

"Ines recommends that we should look at the medium profile," said Thamir Ghadhban, the chairman of the influential prime minister's advisory commission that has been working on the strategy.

The commission is now seeking to adopt the strategy as the new framework for developing the country's energy sector.

"[Next month] we are going to take it to the council of ministers. We have already taken it to the energy committee, they have accepted our recommendation," said Mr Ghadhban, speaking at the Meed Iraq Energy Conference in Dubai yesterday. Should the ministers endorse the strategy, it will be put to parliament, he added.

In the aftermath of the second Iraq war, which removed Saddam Hussein and the sanctions that crippled oil production, Iraq adopted an optimistic production target of 16 million bpd.

Such ambitions immediately put it at odds with other Opec producers, and Saudi Arabia in particular, as they would have required severe cuts by other members of the cartel to keep the market balanced. They also soon proved unrealistic, as production increases were hampered by a precarious security situation and insufficient infrastructure.

After signing a host of contracts with international oil companies (IOCs), production in Iraq has increased steadily, last year surpassing the 3 million bpd mark, and the government is bullish that strong growth is possible. Mr Ghadhban is keen to see output raised quickly.

"We set a number of strategic objectives. We must ensure a production rate between the medium and high profile by the end of 2014. We mean by that it should be in excess of 4.5 million bpd," he said.

Outside observers have adopted a more cautious outlook than Baghdad, and the International Energy Agency is predicting that Iraq will merely double its output to 6 million bpd by the end of the decade.

Iraqi parliamentarians are anxious that legislative obstacles will stand in the way of an oil windfall, as the government has yet to adopt an oil and gas law that will facilitate the development of the sector and end a long-standing dispute between the central government and the Kurdish Regional Government (KRG).

"We need the oil and gas law, we need to reinstate a national oil company, we need a legislation for revenue sharing also. Without these institutions, we cannot really move with the targets mentioned to us," said Adnan Al Janabi, the chairman of the parliamentary oil and gas committee.

The KRG has signed contracts with IOCs that Baghdad considers illegal, and exports from the autonomous region are frequently disrupted as a result.

The central government has threatened to terminate contracts with oil companies that have struck deals with the Kurds, which could delay production increases further.

But companies such as ExxonMobil have defied Baghdad, as their operations in the south are not lucrative at present production levels. If the government adopts its new target of 9 million bpd, Iraq becomes even less appealing to the IOCs.

The last auction for acreage in Iraq already failed to attract any of the oil majors.

The government has already renegotiated terms with Russia's Lukoil, and it may be forced to do the same with other companies.