Oil output slowdown to hit petrodollar-reliant Iraq

08 September 2013
The Iraqi oil sector has been one of the great success stories of the past five years, rising by a million barrels from 2008 to 2012 to cross three million barrels per day.

But that growth is now threatened as near-term temporary export constraints could wipe out as much as 500,000 barrels of oil per day (bpd) from September.

Iraq's State Oil Marketing Co (SOMO) has announced infrastructure work at southern export terminals, which could restrict exports temporarily.

Analysts worry that the planned shutdown could drag on for months and the problem would exacerbate if the South Oil Co. also proceeds with a second shutdown to complete repair work at the Basra and Khor Al-Amaya shipping terminals.

While Iraq's South Oil officials have maintained that the work will not affect the company's export capacity, the International Energy Agency (IEA) notes that repair work on both the facilities could take off half a million barrels per day of the market for an extended period of time.

"If the back-to‐back work plan is implemented, export flows could be reduced for anywhere from 4‐6 months," said the IEA in its latest monthly report.

The Iraqi authorities say the planned work will eventually raise exports to 3.5 million barrels per day, but uncertainty surrounding the repair program has pushed prices up, and refiners have been complaining of "vacillating and declining quality" of the crude since early 2012.

In addition, increased attacks on the key northern pipeline to the Mediterranean port of Ceyhan continue to disrupt flows, with sharply reduced exports of Kirkuk crude behind the reduced July supplies, the IEA warns.

The attacks on infrastructure are part of greater political issues facing the Iraqi authorities, as they scramble to manage a whole host of problems including rising insecurity, lack of unity among governorates, as well as sectarian and terror threats.


A civil war in Syria has also raised the political temperature in the country and added to the uncertainty.

The political troubles have meant economic reforms have taken a back seat, and the country has depended heavily on the oil sector over the past decade.

To be sure, the oil sector has stepped up for the Iraqis.

Thanks to soaring crude oil production, GDP per capita has more than quadrupled from USD 1,300 in 2004 to USD 6,300 in 2013. Iraq produced more than 3 million barrels per day earlier this year - its highest level in 30 years.

"Oil production will rise gradually by about 400-500 thousand barrels per day (bpd) per year, reaching 5.7 million bpd by 2018," the International Monetary Fund said.

Despite these impressive numbers, Iraq remains vulnerable to oil price shocks. Its breakeven price of USD 102 per barrel is among the highest in the region - a remarkable statistic given that Iraq is considered one of the lowest-cost producers in the world with favorable geological basins.

The high fiscal breakeven oil price is more a reflection of the heavy burden carried by the country's oil sector.


But the hydrocarbon sector is not the panacea for all of the country's ills. The sector employs only 80,000 of the 8 million strong labor work force. Indeed, unemployment remains high at 11%, leaving many Iraqis excluded from the country's much-improved fiscal position.

The sector itself is in need of a major overhaul. Oil companies remain concerned about transportation bottlenecks and lack of infrastructure that have held back growth.

The Iraqi cabinet recently authorized the Oil Ministry to set up three new companies focused on oil services, crude oil transportation pipelines and gas transportation pipelines, to address some of the chronic transportation issues facing the sector.

While Iraq is making slow progress on the oil front, there is a clear need to accelerate and build on the platform. Analysts expect the country's foreign exchange reserves to double from USD 100 billion to USD 200 billion, giving the country the cushion to pursue economic reforms and invest in non-oil infrastructure.

"Regulation should be streamlined, made more consistent, and focused on assisting, rather than constraining private-sector operators," said the IMF in a recent note on the country.

In addition, state-owned enterprises that dominate every aspect of the economy, from the banking sector to agriculture, also need to be reviewed.

"The authorities should launch a comprehensive triage of SOEs, leading to the operational restructuring, governance reform, and recapitalization of those that can be rehabilitated and the closure of unviable enterprises."

Clearly, the challenge for the authorities is to channel the oil wealth to other sectors, and nurture the private sector to bring more Iraqis into the economic fold.

"Failure to do so could expose the economy to the harmful effects of the natural resource curse - weak governance, rent-seeking behavior, loss of competitiveness, and a stunted non-oil private sector," said the IMF.

© 2013

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