PARIS: Escalating violence in Iraq is threatening the development of some of the world’s largest oil reserves at a time when the number-two producer of the Organization of the Petroleum Exporting Countries (OPEC) was expected to be a key future supplier.
Western majors including BP, ExxonMobil and Shell, along with state-backed Chinese giants China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC), have ploughed billions of dollars into the country’s oil fields since 2008.
But now a lightning offensive led by jihadists from the Islamic State of Iraq and the Levant (ISIL) means the anticipated modernization of Iraq’s major southern oil fields is looking slimmer by the day.
“There’s no question that outside of North America, Iraq is the country that matters the most for future production,” Antoine Halff, the head of the oil markets and industry division of the International Energy Agency (IEA), told Agence France-Presse.
So far, insurgents have forced the shutdown of Iraq’s main oil refinery but has not reached the main oil fields of the south, which account for 90 percent of exports.
Global oil prices have risen from around $109 a barrel to nine-month highs of over $114 a barrel on the back of the crisis, but are nowhere near what analysts predict they could reach if Iraq stops exporting.
“In an ‘ugly’ scenario, where the bulk of Iraqi supply is lost, the price of Brent could easily surge to new record highs above $140,” said Capital Economics.
But in the long-term, the bloodshed could hinder access to Iraq’s low cost-oil supplies, which account for 11 percent of proven world reserves, just as the depletion of mature fields elsewhere is starting to bite.
Iraq has ramped up production in recent years and currently produces 3.3 million barrels a day (bpd). The IEA expects that to grow to 6 million by 2020, accounting for around 60 percent of the cartel’s production growth.
That’s key as the agency predicts world oil demand will breach 100 million bpd in 2019, with developing countries overtaking the developing world for the first time.
“For upstream, there are a lot of investments that are going to happen from 2016,” said Hans Nijkamp, vice president of Shell Iraq.
“The Iraqi government is going to ask to sink a lot of money in the country again, [but]the political and security situation needs to be sufficiently good,” he added.
While it is unlikely ISIL could take direct control of fields in the Shiite south, they could target authorities and oil company headquarters in the capital.
They could also spread chaos using sabotage and terrorism as they did in the northern province of Anbar, where a key pipeline has been disabled since March.
The IEA has cut its growth outlook for Iraq by around half a million barrels to 4.29 million bpd by 2018, citing concerns about security, infrastructure and corruption that existed before the latest violence.
“It’s quite clear to all of us what the potential of Iraq is but we all know that the capacity to realise that potential has been seriously compromised,” said Jeremy Greenstock, chairman of Lambert Energy Advisory.
“It’s not just a question of security on the ground… the investment sector has to be reassured that Iraq can manage its business in order to provide return on that investment,” he added.
China hit hardest
Iraq’s ability to boost exports is particularly important given that violence is disrupting exports from other producers such as Libya and Syria.
The IEA estimates OPEC’s 2014 spare capacity at 3.52 million barrels a day — 80 percent from Saudi Arabia—so in theory the cartel could replace almost all of Iraq’s supplies.
But that would leave very little margin for error, especially if a rebound in global growth drives a faster-than-expected rise in demand.
Disruption in Iraq would be a particular issue for resource-hungry China, which is now the largest foreign investor in the country’s oil sector.
Last year, China overtook the US to become the world’s top oil importer and it is expected to be a key driver in pushing up world demand by 2020.
CNOOC and CNPC both have huge investments in the south and China has a total of 10,000 workers on the ground.
Halff said Beijing was likely to turn to Saudi Arabia, which produces crude of similar quality to Iraq’s, and to Iran and Russia for supplies.
The Iraq crisis has also turned the spotlight onto exports from the autonomous region of Kurdistan, which Baghdad says are illegal as it claims the sole right to develop and export Iraqi oil.
Kurdistan wants to increase them to 400,000 bpd by the end of 2014, from 125,000 bpd currently, and said it has already started pumping oil through Turkey.
Buyers have been reticent to touch the supplies so far as Iraq has threatened to sue anyone who buys Iraqi oil, but the crisis could change that.
“The market will be looking at whether this could be the catalyst that will precipitate an agreement,” said Halff.