Low oil prices limit Iraq's output growth

Low oil prices have hurt production everywhere – including Iraq, where oil revenue is needed to help rebuild after years of turmoil.

Iraq, still reeling from the US invasion and now fighting ISIS, has been trying to increase its oil output. But two energy giants – Britain’s BP and Russia’s state-owned Lukoil – say the persistent low price of oil has limited the country’s wealth, making it difficult to attract international oil companies to help it produce its most valuable commodity.

Michael Townshend, BP’s regional president for the Middle East, says his company’s plan to achieve its production goals relies entirely on the Baghdad government’s approval of its investment plans. Likewise, Gati Al-Jebouri, the senior vice president of Lukoil Overseas, expects a “significant reduction” in Iraq’s production growth in 2016 and 2017 because of the low price of oil.

Further hindering the Iraqi government is its battle with the Islamic militants of ISIS, also called ISIL, who have seized parts of the country, with special attention often given to lucrative oil fields. (Related: A Plot To Hold Down Oil Prices Or Just A Happy Coincidence?)

Iraq, OPEC’s second largest producer after Saudi Arabia, produced about 2.4 million barrels of oil per day by the end of 2010 and 3.34 million barrels per day last month, according to Iraq’s state-run Oil Marketing Co. Iraq plans to increase its output to 6 million barrels per day by 2018.

The question is whether Baghdad can afford to pay the oil companies needed to pump the oil.

Townshend, who with al-Jebouri spoke at the Middle East Petroleum & Gas Conference in Abu Dhabi on Monday, said these companies are studying their contracts with the Iraqi government to make sure they will be paid. Even that review “will lead to postponement in production growth,” Al-Jebouri said. (Related: How The Majors Are Playing The Oil Price Slump)

Already, Iraq owes BP and Lukoil about $9 billion for work performed last year and about $18 billion for work so far this year, according to a report issued last week by the International Energy Agency. But Townshend said Iraq’s payments to BP have been “picking up over the last couple of months,” and the British oil company often accepts payment in barrels of oil, not currency.

 

Iraqi production has also been limited because of snags in developing oil blends. Lukoil hopes to increase output at the West Qurna-2 oilfield in southern Iraq, which produces heavy oil. Iraq’s chief oil export is Basrah Light, a crude blended from both heavy and light oils. Lukoil, which owns 75 percent of West Qurna-2, wants to include crude from that well in the blend, which would make it too heavy.

The addition of West Qurna-2 oil “is making the overall blend a little bit heavier,” Al-Jebouri said on the sidelines of the Abu Dhabi meeting. “As a result, to maintain the stability of the export blend, at the moment they are curtailing production at a number of fields, not only West Qurna-2." (Related: A Closer Look At The World’s 5 Biggest Oil Companies)

Somo, Iraq’s state oil-marketing office, is addressing the problem, temporarily at least, by promoting Basra Heavy, a new blend, along with its traditional Basra Light crude.

And yet, although industry sources and loading data show that Iraqi oil exports have declined in April to 2.92 million barrels per day, its output remains robust despite the decline in oil prices and the threat from ISIS. In fact, if these sources are correct, by April 30 exports will be close to the record 2.98 million barrels of oil per day set only last month.

“Iraq’s exports are marginally down in April,” one industry source told Reuters. “But it is still very impressive.”

By Andy Tully of Oilprice.com

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