Sunday, September 1, 2013

Iraqi Oil Production and Exports to Continue Declining Without Infrastructure Overhaul

The escalating conflict in Syria and OPEC crude oil supply disruptions appear to have sent a mild panic to the oil markets. While Syria may not be a defining factor of price jumps, oil production cuts from Iraq and Libya by 170,000 barrels per day (bpd), in spite of increased output in Saudi Arabia, play a larger role. Worker protests in Libya brought the production down to 400,000 bpd in early August. Meantime, the second largest oil producer in OPEC with oil output exceeding 3 million bpd (mbpd) in 2012 and 2.4 mbpd going to exports, Iraq’s oil sales in 2013 have fallen below last year’s average, with July 2013 exports hovering at 2.25 million bpd. With Iraq’s increasingly important role as an oil exporter in the years to come, it is worth examining why its oil exports are on the decline and are unlikely to make a big jump without fixing the security and infrastructure problems.

This year’s decline in Iraq’s oil exports was largely due to the repeated insurgent attacks on the Kirkuk-Ceyhan (Iraq-Turkey) oil pipeline as well as other infrastructure failures. According to Iraqi officials, production disruptions due to repairs of de-gassing stations at the country’s oldest and largest Rumaila oilfield contributed to the recent cutbacks. Iraq plans to increase production by 360,000 bpd by the end of 2013 or early next year from new oil fields Majnoon, West Qurna-2 and Garraf and install three new single point mooring platforms in the Persian Gulf for additional export capacity.

But it is unlikely that the exports will increase further with a planned maintenance of Iraq’s major export terminal in the south – al-Basra Oil Terminal and Khor al-Amaya Oil terminal – which could cut output by 500,000 bpd for four to six months from September, despite assurances of Iraqi oil officials that disruptions would be minimal. Besides, the increase in export capacity is subject to tanker traffic in the Gulf, weather challenges, and the current export infrastructure taking turns between a shut-down and slow re-starts. At the end of the day, Iraq’s antiquated and neglected energy infrastructure is a critical obstacle to oil production and exports. This August, Iraqi officials chided Royal Dutch Shell for delayed start-up and for the inability to meet production goals of 175,000 bpd from the giant Majoon oilfield in the south. The row points to the infrastructure challenges confronting international oil firms operating in Iraq. Shell attributed delays to health and safety concerns, stressing that additional work was required to safeguard existing facilities. Similar problems exist in every part of the country’s energy value chain. Thus, Iraq’s new ambitious production figures of 9 mbpd by 2020 and exports of 4.5 mbpd in 2014 will be further curtailed with recurring infrastructure failures that beg for a complete renewal of the infrastructure, and inevitably cause disruptions while renovations take place. Constant terrorist attacks on the Kirkuk-Ceyhan export pipeline will not help the increase of exports either.

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