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IHS CERA: Big, But Potentially Limited, Output Growth in Iraq

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Iraq's current "highly ambitious plans" to expand oil production are unlikely to be fully realized given political, security, operational and infrastructure challenges, according to a new report, Fields of Dreams: The Great Iraqi Oil Rush -- Its Potential, Challenges, and Limits by IHS Cambridge Energy Research Associates (IHS CERA).

Iraq currently plans to expand production to as much as 12 million barrels per day (bpd) in the next six to seven years. Achieving levels around half that in the next decade would be more likely and would still constitute "a significant expansion," the report emphasizes. IHS CERA's current outlook for Iraq is 4.3 mbd in 2015 and 6.5 mbd in 2020 -- still big growth numbers.

The report points out that Iraq starts out with rich oil resources that have suffered from "underinvestment and underdevelopment for decades."

"But Iraq's new expansion timetable would dwarf the most rapid buildups that we have recently seen in places such as Russia and Saudi Arabia," said IHS CERA Senior Middle East Director, Bhushan Bahree. "The political, security, operational and infrastructure challenges in the country, along with a likely shortage of skilled personnel, are likely to hamper progress towards such an unprecedented achievement."

Iraq's recent elections and current efforts to form a new government could exacerbate existing sectarian and other tensions in the country and it is unclear what approach a new government could take regarding oil contracts. Security will also remain a concern as foreign workers and oil company operations expand in areas that have been prone to violence in the past, the report says.

The report identifies infrastructure and logistics as "major challenges." Iraq is responsible for providing the infrastructure needed to receive the extra oil but its plans for providing a "complex network of capital-intensive infrastructure" -- from ports and roads to power and water crucial for operations -- in synchronization with the development oil fields are not known, representing a major potential bottleneck.

"Iraq's expansion timetable appears extraordinarily ambitious in comparison to the recently completed capacity increase in Saudi Arabia," said Bahree. "Saudi Arabia has significant security and infrastructure advantages yet it took Saudi Arabia between four and five years to expand its net output capacity by some 2 million barrels per day. Iraq will certainly be challenged to match this pace, much less exceed it."

Though Iraq is unlikely to meet its "very stretch target" of elevating its capacity to 12mbd in six to seven years, the expansion of its production capacity still represents a significant increase with strong implications for OPEC and the regional balance, the report finds.

Iraq is not currently a party to OPEC's production quota system. A significant ramp-up in Iraqi production would put the issue of bringing Iraq back into the quota system back on the agenda. Any issue within OPEC is likely years away, however, as it is widely assumed that the major producers will wait until Iraqi output begins to approach its OPEC share negotiated in 1988, which is at parity with Iran.

The discussion of quotas is also likely to be put off because OPEC cannot address quotas pertaining to Iraq without also discussing the allocations of other countries, such as Angola, Nigeria and Venezuela that dispute their current output targets.

"Expansion beyond parity with Iran is likely to generate a strong reaction from Tehran, which views parity as one of the concessions that it had to make for peace with Iraq in the late 1980s," Bahree said. "Equally important will be the conflicting oil strategies that the two countries are pursuing. Iran, unable to raise its own output, is pursuing a strategy of maximizing oil revenues through higher prices. Iraq's unfolding strategy is just the opposite -- expanded volume to increase revenues."

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