Iraq struggles with dual objectives of raising production and sticking within OPEC targets

• DOI: http://doi.org/10.1111/oet.12734
• Date: 01 October 2019
• Published date: 01 October 2019

FOCUS

Iraq struggles with dual objectives of raising production and

sticking within OPEC targets

OPEC quotas and insufficient export infrastructure is

slowing Iraq's plans to expand production to 7.5 mn bpd by

2025. Most recently, it has given commitments to bring out-

put back within quota, while at the same time driving for-

ward with massive engineering schemes to expand export

capacity and bring on new supply.

In August, Iraq pledged to rein in its oil production this

autumn to comply with its OPEC quota, after producing

4.65 mn bpd in August (see Figure 1), which was 140 000 bpd

more than its OPEC quota of 4.51 mn bpd

1

, and the highest

since December 2016—according to official figures. Production

normally rises in the summer to meet higher domestic power

demand for cooling, but exports also rose in August, climbing

to 4.05 mn bpd from 4 mn bpd in July and 3.95 mn bpd in

June. The August total comprised 3.603 mn bpd in exports from

federal Iraq and 474 000 bpd of oil exports from Kurdistan.

The seasonal fall in crude output as cooler autumn tem-

peratures cut cooling demand and both field and refinery

maintenance begin, should help Iraq meet its lower export

target. But Iraq has always pumped more than its commit-

ment to the cuts, and third-party assessments suggest its

overproduction is higher than official figures. S&P Platts,

for example, estimates the August figure 230 000 bpd higher

than the official figures at 4.88 mn bpd—a record high and

up 100 000 bpd from July; with exports at 4.08 mn bpd.

1|DESERVING CASE

Iraq has a good case for overproduction—as can be seen,

much of the extra went to domestic use in the summer

months. In addition, Iraq justifiably argues that it needs to

rebuild its oil and energy infrastructure and production after

recent wars destroyed much of the country's infrastructure.

The funds earned from the subsequent exports are the main

source of government income, and are crucial to the rebuild-

ing effort.

Iraq's crude oil production grew by an annual average of

about 300 000 bpd from 2013 through 2017, when it aver-

aged 4.4 mn bpd—about 400 000 bpd below current levels.

Exports rose steeply in line, but recent growth has been lim-

ited. In addition, Iraq has no oil product or NGL exports,

unlike some Mideast Gulf OPEC members.

Nevertheless, recent price weakness and slowing global

demand growth mean Iraq and other overproducers, such as

Nigeria, are coming under increased pressure to stay within

quota limits from other OPEC members—especially Saudi

Arabia, which is keen to see prices supported in the run up

to its Aramco IPO.

Another factor pushing higher output is the popularity of

Iraqi crude among refiners. Despite their high sulfur content,

its main Basrah Light and Basrah Heavy grades can be

processed into a relatively high margin refinery yield. Iraqi

crudes can also be blended with lighter and sweeter grades

to make a wide range of products. Currently, almost 70% of

Iraqi crude goes to Asia, with China and India being its two

largest customers. Europe is also a key buyer of Basrah

Light.

Following complaints over quality from customers, Iraq

also plans to offer a new range of grades, including new

Basrah Super Light at up to 38 API. This would be depen-

dent on the development of the country's southern fields,

specifically the Yamana field in West Qurna, which is

earmarked to produce up to 700,000 bpd. Iraq is also plan-

ning to offer Basrah Medium, which would have an API

gravity of 29 to 30 and 2% sulfur and is dependent on refur-

bishments to Iraq's southern export and storage terminals

(see below).

2|CUTS RESTRICTED TO STATE-

RUN FIELDS

Iraq's response to OPEC's quota has been to concentrate any

restrictions on fields operated by state-owned companies, in

order to avoid the risk of financial penalties in its contracts

with foreign companies.

But it has been fairly relaxed so far this year, and much

of the increased output is coming from the formerly Shell-

operated Majnoon oil field (now state operated) in the south,

DOI: 10.1111/oet.12734

Oil and Energy Trends. 2019;44:3–15. wileyonlinelibrary.com/journal/oet © 2019 John Wiley & Sons Ltd 3