Can Iraq Out Produce Saudi Arabia?

Jim Brown
Printer Friendly Version

Iraq recently upgraded its estimated reserves and has launched some ambitious plans to boost capacity nearly 500% to 12 million barrels per day by 2017. Is Iraq delusional or can this be done?

As each day passes another analyst, industry official or OPEC minister casts doubts on Iraq's ability to achieve this goal. Not just to achieve it by 2017 but to never pump that much oil.

Iraq currently produces about 2.5 mbpd but that varies widely depending on the amount of sabotage the day before, the number of pipeline leaks and how many pumps finally wore out.

The former head of exploration and production for Saudi Aramco, Sadad al Husseini, explained that a 500% increase would be nearly impossible. "To reach even 6 mbpd would require years of planning and coordination." "You need to study the fields and determine the optimum sustainable production in each case." Mr Husseini said he had calculated a "best case scenario" for Iraq of 6.3 million bpd of oil output maintained for 12 to 14 years. "Excessively high production levels were likely to damage Iraq's oil reservoirs, leading to sharp declines later and reducing their productive life."

Saudi's Ghawar field has been producing since 1951 and has decades of production left because Saudi Arabia has always produced at a cautious rate in order not to damage the internal structure. Just punching holes and opening the valves wide open can cause irreparable harm to a field and cause it to produce significantly less than it would under careful management.

Iraq's former oil minister also agreed that the current target of 12 mbpd was not sustainable and it would be counterproductive to try and achieve it. "Maximisation of output is not really rewarding for the country. It will damage the reservoirs." To emphasize he said, "I will cut my hands off if Iraq can provide 12 mbpd of export facilities."

Peter Wells, director of Neftex Petroleum, a consulting agency based in the UK, said it would be impossible for contractors to drill the number of wells required in the current development plan. He believes Iraq might be able to raise output to 4 mbpd within five years. That is about the maximum level that OPEC could allow without starting an internal quota war.

A survey by the Economist of 367 senior executives on what they believed were the biggest risks facing oil companies in Iraq and they came up with the table below. Iraq was fifth from the bottom on Transparency International's corruption perceptions index in 2009. One businessman said he gave up on a deal in Iraq after nine different officials came to ask him for bribes.

Business Risks in Iraq

Iraq may have the second largest proven reserves but is also has the worst infrastructure, worst security and worst rule of law. There are an estimated 2.5 million land mines in Iraq that were left over from the Iran/Iraq war.

The pipelines are as much as 20 years past their expected useful life. Existing wells have been killed one by one by maintenance problems and failed equipment. 20 years of embargoes and sanctions and misappropriation of funds by the government forced the oil industry to resort to bailing wire and duct tape to keep the operations running.

These are not wells that someone can simply walk in and install a new pump or a new valve and be good as new again. The infrastructure is rusted and patched together with limited power and MacGyver type fixes. Thousands of miles of pipeline is restricted to 25% to 50% of its initial capacity because any higher rates literally spew oil out of thousands of rusted seams and joints.

The entire oil industry of Iraq has to be scrapped and started over from scratch. This is going to be a long and tedious task even for the big international companies that have contracted for the job.

Secondly the terms of the overhaul were not beneficial to the companies. Most are committing to do the work for $2 per barrel of oil produced or less. This is not a price that is going to cause an oil rush. Most companies have a penalty for non-performance but I would be shocked if several of them didn't throw up their hands and walk away in the first couple of years.

They are not going to get paid on time if at all. Their workers are going to be targeted by terrorists. Their facilities are going to be bombed. The rules will change routinely and Iraqi workers are going to walk off the job every time the political wind changes.

Lastly, once the U.S. pulls out of Iraq most believe Iran will move in. The region is very fractured with dozens of ethnic groups multiple sects and no government. Iran will infiltrate and overcome within a couple years of the U.S. withdrawal.

The odds of Iraq achieving 12 mbpd in any timeframe are nearly zero. The odds of producing 6 mbpd by 2020 are not much better. Iraq can probably build up production to around 4 mbpd but along with that will come significant additional demand from inside Iraq. As the country is rebuilt and refineries begin producing fuel again the country will see a business boom. The demand for additional motor fuels to support this boom will siphon off any new production over the initial increase. Countries run on oil. Emerging economies, which is really what Iraq is today, require a lot of oil to grow.

The next time you hear somebody say "Iraq's coming oil boom is a game changer" just change the channel because they don't know what they are talking about.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter