Iraq Oil Revival Stalls Again as Violence Pinches Growth: Energy

The revival in Iraqi oil output has stalled. Again.

Production forecasts for 2014 are getting less optimistic. The Oil Ministry’s official target is 4 million barrels a day by the end of the year. More likely it will be 3.75 million, Thamir Ghadhban, an adviser to the prime minister, said in an interview May 14. Or perhaps 3.4 million, about the same as last month, according to the average of six analyst estimates compiled by Bloomberg News.

Violence and conflict are pinching growth for OPEC’s second-biggest member. While Iraq added about 2 million barrels to daily production since 2003, the year of Saddam Hussein’s ouster, attacks on pipelines and an oil-revenue dispute with the semi-autonomous Kurdish region are diminishing the country’s dependability as a supplier. They’re also contributing to making oil more expensive, VTB Capital said.

“Iraq always seems to be the producer of the future,” Mike Wittner, head of oil market research at Societe Generale SA in New York, said by phone May 13. “The entire world has been upbeat on Iraq’s prospects for the last couple of years. But it’s not steady growth. They have to get the security situation sorted out, or that’s going to continue to hamper them.”

Iraq’s exports to Europe have been curbed since early March because of sabotage on its northern pipeline to Turkey. New supplies from the Kurdish region are mostly halted because of the dispute with the central government. Prime Minister Nouri al-Maliki may need to form a broad coalition to remain in power after last month’s parliamentary elections, potentially slowing oil-policy decisions.

Global Benchmark

Brent crude, a global benchmark, is trading above $100 a barrel for a 23rd consecutive month, the longest stretch in data starting in 1988. Prices will average more than $100 this year and in each of the next three years, according to analyst estimates compiled by Bloomberg. It ended today’s session at $109.81 a barrel.

Iraq’s production contracted 7 percent since reaching a 35-year peak of 3.6 million barrels a day in February, according to the International Energy Agency. The Basrah Oil Terminal in southern Iraq is scheduled to load 2.5 million barrels a day of crude for export this month and 2.7 million in June, according to loading programs obtained by Bloomberg News.

Shipments from the south, the only region exporting regularly, will probably stall at about 2.5 million barrels a day, unless work on storage tanks, pumping stations and other infrastructure is completed, the Paris-based IEA said in a report May 15.

“There are still lots of uncertainties regarding deliveries,” B.K. Namdeo, refineries director at Hindustan Petroleum Corp., said in Mumbai on May 13. “If the situation continues or worsens, we may have to cut Iraqi oil imports next year and switch to countries like Iran.”

Overtaking Iran

Iraq overtook Iran in 2012 to become the second-largest producer in the Organization of Petroleum Exporting Countries. It would need to produce about another 6 million barrels a day to top Saudi Arabia.

Iraq is seeking to overcome the constraints on exports, Ghadhban, the prime minister’s adviser, said in an interview in Dubai. That includes adding a third mooring point at the southern Basra oil terminal by July, which will increase capacity by 900,000 barrels daily, he said. Companies have been shortlisted to build a pipeline to Jordan’s Aqaba port, the government said in April. Another link crossing Iraq from north to south is under construction, providing an alternative route for crude from northern fields.

Iraqi crude is still sought after because the country is offering 60-day credit terms, compared with the 30 days typically available from Middle Eastern suppliers, according to Namdeo of Hindustan Petroleum. (HPCL) The refiner is increasing purchases by 8 percent this year to 3.25 million metric tons.

Huge Potential

More than 1 million barrels from Iraq’s Kurdish region were shipped from Turkey to Europe last week, according to Turkish Energy Minister Taner Yildiz and Kurdish authorities. Iraq’s government, which says the Kurds have no right to sell oil independently, tried to stop the shipment and asked the International Chamber of Commerce to intervene.

“Iraq has a huge amount of potential, and yes, there will be delays, but they will deliver,” Amrita Sen, chief oil market strategist at Energy Aspects Ltd. in London, said by e-mail on May 6. The consultant forecasts production of 3.3 million barrels a day this year, rising to 3.65 million in 2015.

Oil Exports

Even with the extra loading facilities at Basra, a lack of pumping capacity and onshore storage tanks will keep production growth in check, Miswin Mahesh, an analyst at Barclays Plc in London, wrote in a report April 30. Iraq can boost exports from West Qurna-2 or another of the fields being developed only by scaling back flows elsewhere, he wrote.

Some Asian refiners have complained about the presence of too much water in some cargoes from Iraq, the result of inadequate oil-treatment facilities, according to Mahesh. High sulfur content in the main Basrah Light grade has also been an issue, R.K. Mehra, head of international trade at Bharat Petroleum Corp., an Indian refiner, said in Abu Dhabi on May 7.

“We don’t see significantly more export capacity” this year, Alexander Poegl, an analyst at JBC Energy GmbH in Vienna, said by phone on May 13. “The volumes we’ve seen earlier in the year are kind of the maximum we would expect to happen. It’s a healthy development in Iraq, but we don’t see the big numbers others might sometimes suggest.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Nayla Razzouk in Dubai at nrazzouk2@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net James Herron

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