Hussain Al-Shahristani, Iraqi deputy prime minister for Energy Affairs' recent comments on collaboration with Iran has stirred the hornet's nest and may have made Saudi Arabia a bit uneasy.
The minister pledged to boost Iraq capacity to 9 million bpd by 2020, and told an energy audience in London that it had been in talks with Tehran to boost their production.
"Iran has been in touch with us," Al-Shahristani told the audience according to a report by the Daily Telegraph. "They want to share our contracts model and experience."
Analysts may read a lot into this, especially as a sign that the two Shiaa-dominated countries are forging an alliance to counter Saudi Arabia.
But it does not necessarily signal a coordinated energy policy.
"Iraq and Iran are unlikely to form a unified front to coordinate oil production policy, production quotas, or marketing strategies," said Ayham Kamel, analyst, Middle East and North Africa at Eurasia Group.
"Comments by deputy prime minister Hussain Al-Shahristani on support for Iran in developing a new IOC-friendly contract structure do not signal strategic cooperation, but reflects Baghdad's interest in seeing Iran return from isolation. Iraq's energy strategy and its relationships with IOCs are significantly differentiated from Iranian policy. Discussions of an alliance are in our view premature as sanctions against Tehran remain largely in place."
REINING IN IRAQ'S PRODUCTION
Iraq will also soon have to adhere to an OPEC quota once its production ramps up to 4-5 million barrels per day. The country has been spared of quota ceilings as a concession by other OPEC members to help revive the economy, but the country has saved billions in surpluses since then.
Once Iraqi production revs up, it is quite likely that OPEC members would want to rein in Iraq's output.
While Shahristani's comments regarding Iran signify a collaborative relationship with Tehran, in reality Iraq's energy policy will be driven primarily by local and domestic agendas.
There is already much on prime minister Nour Al-Maliki's plate as he grapples with his oil strategy.
Iraq's central government plan to turn three districts into provinces is driven by a desire to weaken powerful provinces and avoid a repeat of oil-rich Kurdistan Regional Government' flexing its autonomous muscle.
"Carving up areas of the two largest Sunni provinces (Nineveh and Anbar) would prevent local politicians from demanding federal status as decentralization begins to address the grievances of prominent figures in the Sunni areas and provide them with additional funds," Kamel of Eurasia Group said in a note.
"More importantly, we believe this is in fact a prelude to the creation of new provinces in oil rich southern Iraq where many Shias could over time grow exhausted of Sunni violence and the central government's inefficiency and attempt to create a federal entity."
PREMATURE TALKS
Talks with Iran may also be premature given that there is a long way before the sanctions are lifted on the country.
Iranian production fell by another 320,000 bpd in December to contract to 2.68 million bpd.
"The wide‐ranging sanctions on Iran's financial, oil and shipping sectors have combined to reduce the country's output by just under 1 million bpd since 2011," the International Energy Agency said in its latest report.
The prospect of a diplomatic thaw between Iran and the international community improved in 4Q13, but any significant return of oil to world markets will likely depend on the success of current negotiations between Tehran and the so‐called P5+1 ,i.e. the five permanent members of the UN Security Council, Germany and the European Union.
"Despite the Geneva accord, Iran's oil production is unlikely to climb until a permanent nuclear deal falls into place," said an analyst at RBC Capital Markets.
But Iran is hopeful and is already holding discussions with major oil companies in parallel to its discussions with P5+1 nations to reach a full nuclear deal.
The country has said that it will improve its exploration and production contract to attract major oil companies to replace the current buyback structure.
"The type of new contract structure or structures Iran envisions remains unclear. A Eurasia Group source stated that Iran is considering a version of the "Iraq model" for use in projects to expand output at mature fields," said Cliff Kupchan
director, Middle East at Eurasia Group.
"Under this structure, IOCs achieve quick cost recovery. In addition, the sides agree on a baseline production forecast, and the foreign firm receives a per-barrel profit above cost recovery for production that exceeds that baseline, providing more of an incentive to achieve production gains. The model has been effective in Iraq, but it has potential only for mature fields."
But it is unclear whether beyond following the Iraqi template, the two countries are going to collaborate. In fact, both may soon be competing for attention of major oil companies.
Major energy players have been frustrated by the Iraqi security issues, its inability to sign a hydrocarbons law and lack of infrastructure, which is hurting exports.
In the end, Iran may have to improve on its 'Iraq model' to get the attention of oil companies.
The feature was produced by alifarabia.com exclusively for zawya.com.
© Zawya 2014
