May 13 (Bloomberg) -- Iraq, seeking to more than double oil output by 2015, is poised to overtake Iran as OPEC’s second-largest producer by the end of the year as sanctions hobble crude production in its Persian Gulf neighbor.
Iraq is pumping at the highest rate since Saddam Hussein seized power in 1979, supported by foreign investors such as Exxon Mobil Corp. and BP Plc that are developing new fields and reworking older deposits. The country produced 3.03 million barrels a day in April, 7.7 percent more than in March, while Iranian production declined to 3.2 million barrels a day, according to an OPEC monthly report on May 10. Iraq’s output last exceeded Iran’s in 1988, when the countries ended their eight-year war, statistics compiled by BP show.
With oil supplies rising from Libya and Saudi Arabia, the recovery of Iraq’s biggest foreign-currency earner is helping to alleviate concern that a European Union embargo on Iranian crude starting July 1 will squeeze global output. Tensions over Iran’s nuclear program and the prospect of curbs on its oil sales pushed Brent crude to a 3 1/2-year high of $128.40 a barrel on March 1. Oil fell to as low as $111.40 on May 11.
“Iraq appears to be a steady and growing producer,” Victor Shum, managing director at consultant Purvin and Gertz Inc. in Singapore, said in a telephone interview on May 10. “That’s certainly a positive for world supply as there have been lingering concerns on output and spare capacity.”
Views on Prices
The Organization of Petroleum Exporting Countries plans to meet next month in Vienna to assess output after absorbing Iraq into its quota system when the group raised its ceiling to 30 million barrels a day in December. Oil prices of $100 to $120 a barrel are “acceptable” and won’t damage the world economy, Iraqi Oil Minister Abdul Kareem al-Luaibi said in an interview on May 10 in Baghdad.
Ali al-Naimi, oil minister of Saudi Arabia, OPEC’s biggest producer, said today in Adelaide, Australia, that prices are too high. Global supply outweighs demand, and prices need to fall to the equivalent of about $100 a barrel for Brent, al-Naimi said.
Iraq holds the world’s fifth-largest crude reserves, according to data from BP that include Canadian oil sands. Production has revived since the U.S.-led invasion of 2003 ended more than two decades of stagnation caused by wars, sanctions and underinvestment. Since Hussein’s ouster, the government has awarded 15 oil and gas licenses to foreign companies, and 47 potential bidders have signed up for its next auction of exploration rights scheduled for May 30.
“Iraq is on the upswing,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London, said in a May 10 telephone interview. “With all the investment coming in, with people developing new areas or trying to expand output at existing fields, it was a foregone conclusion that production would rise. There was a question mark over stability and security, but that’s been mostly OK.”
The country is targeting production of 3.4 million a day this year and more than 4 million barrels in 2013, according to Asim Jihad, a spokesman for the Oil Ministry in Baghdad. Exports will increase to 2.9 million barrels in 2013 from a current level of 2.5 million barrels, al-Luaibi said May 10.
Export shipments from Iraq surpassed those of Iran during the first quarter of the year, David Fyfe, head of the International Energy Agency’s market and industry division, said on May 7 in Bahrain. Iranian sales dropped by 400,000 barrels a day to 2.1 million barrels a day for the same period, Fyfe said, while ministry data show Iraq shipped a daily average of 2.145 million barrels in the quarter and 2.5 million in April.
Crude exports from Iran averaged 1.8 million barrels a day in April, the agency said on May 11, citing traders it didn’t identify. As much as 35 million barrels may be held in floating storage, compared with 8 million in March, it said.
Iranian output may suffer further as tougher international restrictions take effect, falling an additional 600,000 to 700,000 barrels a day once the new sanctions are in place, the IEA’s Fyfe said in a May 11 telephone interview.
Bottlenecks for shipments from southern Iraq, where energy companies are making most of their investments, have eased with the construction of two offshore mooring facilities for supertankers. Another two units will be built in coming months. The country will generate $100 billion from oil sales this year, according to al-Luaibi.
Exports to Asia
“Asian markets, chiefly China and India, have become very important for Iraq’s crude exports over the last few years, making up 60 percent of Iraq’s total crude exports,” Jihad said on May 10. “Crude exports to Asia are still on the rise.”
As sanctions have made it more difficult for importers to buy Iranian petroleum, Iraq overtook Iran to become the second-largest supplier of crude to India after Saudi Arabia in the 12 months through March, according to data from the Associated Chambers of Commerce and Industry of India.
Iraq still faces hurdles to its re-emergence as a reliable global supplier. As the U.S. withdrew the last of its troops from the country in December, Prime Minister Nouri al-Maliki’s government reinforced security at energy installations, including the use of army helicopters. Bombings, assassinations and attacks on pipelines and refineries have persisted, though their frequency and intensity has decreased.
The government has failed to bridge sectarian and political divisions, adopt an energy law after six years of effort, find investors to upgrade the country’s refining capacity or prevent electricity blackouts lasting an average of more than half of every day. Crude exports this month won’t increase from April’s level because Iraq needs to divert fuel to new power plants, al-Luaibi said May 9.
Although the two new mooring facilities helped boost output from Basra in southern Iraq by 200,000 barrels a day last month, they are operating well below capacity because of pipeline and storage constraints, the IEA said. Exports from the offshore units will be capped for now at 300,000 barrels, compared with planned capacity of 1.8 million.
Politicians are also at loggerheads over how to share oil revenue with the country’s semi-autonomous Kurdish region, a dispute that threatens projects of Exxon Mobil and other foreign investors. The Oil Ministry is in talks with “a number of companies” that may result in cuts to targets for crude production, al-Luaibi said. The government wants to pump 12 million barrels a day by 2017, he said.
Even with the Kurds halting shipments of crude on April 1 through a pipeline controlled by the central government, the country’s progress in rebuilding its energy infrastructure through investment and foreign expertise has allowed Iraq to raise crude production by 45 percent since the end of 2003, according to data compiled by Bloomberg.
“The investment environment does look more robust in Iraq than in Iran at the moment,” the IEA’s Fyfe said.
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