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Update No: 110 - (26/06/12)

Despite the fact that Iraq has done better than expected in terms of increasing its oil production, international investors are still not satisfied with the terms offered for oil contracts, which add to worries about the internal and regional political environment. The May oil and gas contracts auction ended up therefore in a failure.

Iraq’s comeback as oil power
At the June OPEC meeting, Iraq aligned with Iran against Saudi Arabia, opposing any increase in oil production and arguing in favour of a reduction. OPEC decided in the end to keep production stable, but Iraq’s choosing to align with Iran was in part motivated by the political alliance between the two regimes against ‘the common enemy Saudi Arabia’, and in part by self-interest (push oil prices upwards). Maliki is also making more public statements against Saudi and Qatari interference in Syria and Iraq. The Iranians in return have been seen as propping up Maliki in his internal confrontation with other Shiite groups, whose hostility to the Prime Minister has been rising steadily; the parliament seemed ready to pass a vote of no-confidence in Maliki in May. Although at the moment Iraq is colluding with Iran within OPEC, at the same the increase in Iraqi oil production has allowed the market to absorb better than expected, the decline in Iranian exports. Iraqi production is now around 3 million bpd, of which about 2.5 million are being exported. Capacity to produce an additional 400,000 bpd should be added by 2013, according to the current plan. It is not clear therefore whether the alliance is sustainable: as Iraq expands its production, it will have to argue in the long term for either an expansion of production levels or for other countries to sacrifice some of their production quotas.

Not such a bad performer
Oil company executives have in the past been dismissive of Iraq’s plans and potential for recovery and expansion, but now admit that they are positively impressed by what has been achieved so far. Iraq has revised its old goal of producing 12 million bpd by 2017 downwards to 9.5 million bpd, a plan still considered to be too optimistic by most observers; 6 million bpd is judged to be realistic. The project to develop capacity for pumping seawater underground and increase pressure in order to keep pumping oil out is only progressing slowly, as the Iraqi state bureaucracy remains quite inefficient. Renegotiating Iraq’s quota within the OPEC will also take some effort before more oil can be exported. Most importantly, foreign investors are still not too keen to invest in Iraq’s oil and gas fields. Western and Chinese oil companies’ modern extraction equipment has been key to the improved output.

It takes more to attract investors
However, the late May tender for 12 more gas and oil fields went badly, as only three fields were awarded. Some of the fields were not attractive because of their location in remote areas, but the main problem is the terms offered by the Iraqi government. Regional instability (Syria, Yemen, Iran) also tends to discourage foreign investors, as does Iraq’s continuing inability to approve an oil law and resolve the dispute between Baghdad and the Kurdish regional government over oil exports from northern Iraq. Erbil shows no sign of relenting and in fact argues that interest among investors for investing in Kurdish oil fields is at an all time high; Erbil expects production to reach 1 million bpd by 2015 at the latest.

A new licensing auction is not planned for late 2012 or early 2013, including the blocks which were not taken in May and others. The Oil Ministry now says that the terms offered in the next auction will be more attractive for investors. However many investors are put off by the existing clause that bans companies from investing in Kurdistan and there is no indication that that clause is about to be dropped. Tension with the Kurdish regional government runs so high now that Prime Minister Maliki even cancelled a visit by US vice-president Biden, upset that Biden had decided to visit Kurdistan as well.

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