Iraq’s oil output no major threat to prices until 2015: BofAML

According to Bank of America Merrill Lynch (BofAML), Iraqi oil output, though having huge potential is not in a shape to make a significant dent in the global oil prices currently hovering near $91 as on Friday.

Iraq’s production in December 2010 was 2.5 mn b/d though it had been at 3.05 million b/d in early 2000. It maintained production levels o f 3.5 million b/d before the advent of Iran-Iraq war in the 1980s.

In 2015, BofAML expects Iraq to produce 4.4 million b/d in light of revised reserve estimates from 115 billion bbl to 143 billion bbl. This is a 25% increase.

The government data shows that of the 66 known oil fields in Iraq, 19 are in production and only 20% of total reserves have been brought out till date.

As per BofAML , there are three main oil fields in Iraq: Rumaila, Zubair and West Qurna.

Of these, Zubair has been the best performer producing 220 thousand b/d in November achieving 10% growth target. BofAMl estimates that the field alone will produce 1.1 million b/d by 2020.

Majnoun, Halfaya and West Qurna-2 are other oil fields awarded for production; a mixture of large and small undeveloped fields.

However, following are the factors currently restricting Iraq from enhancing production capacity:

1. Domestic security situation
2. Lack of proper infrastructure
3. Growing domestic demand

Infrastructure inadequacy

New roads, ports and bridges would be required to carry out the expansion activities in Iraq’s oil fields. (Rumaila alone would demand digging of 1200 oil wells). Hospital’s schools and infrastructure facilities are also warranted. Bottlenecks in water supply also form a major issue.

Pipe line projects are also at the other end of the tunnel.

Kirkuk-Ceyhan pipeline connected to Turkey is yet to be leveraged fully. Currently it operates at around 1/4th of its capacity.

Iraq Syria pipeline (1.4 million b/d) and Iraq Petroleum Saudi Arabia pipeline (1.7 million b/d) are not in commission.

Domestic demand

According to BoFAML, Iraqi economy can double in size every six years if production were to hit 6.7 million b/d by 2025. This translates into a graphic picture of an oil guzzling economy. Growing from 476 thousand b/d in 2003 to 763 thousand b/d in 2010, Iraq’s expansion and reconstruction is going to be highly oil intensive.

Iraq re-joining quota system

Though Iraq is not a part of OPEC’s quota system, Iraq had accounted for 16% of OPEC -11 productions during the peak output days.

Now this is a mere 9%.

Once Iraq hits 4 million b/d of production figures, it will have to re-join the stipulated quota system.

According to BofAML there exists an informal agreement that Iraq and Iran have the same production quota due to similar reserve holdings i.e. 3.3mn b/d.

Conclusion

The BofAML report concludes, “...as Iraq’s economy continues to expand and oil-intensive infrastructure development resumes, oil consumption could increase by at least 200 thousand b/d, or 26%, from now until 2015, on our estimates. Combined with strong demand growth in other emerging markets, we do not view Iraq’s production increase of 1.9 million b/d from now until 2015 as a major threat to crude oil prices.”