Iraq Not Moving Into 21st Century

Jim Brown
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You may have seen the headlines last week. The U.S. said Iraq is actually more dangerous today than it was a year ago. Increased rocket attacks on the Green Zone, an increase in IEDs and an increase in the number of suicide bombers. The increased violence does not bode well for quadrupling their oil production by 2020.

Most agree Iraq has the potential to increase its oil production from 2.5 mbpd to 5.0 mbpd over the next 5-10 years. Iraq leaders have said they want to increase production to 10-12 mbpd by 2017. That is completely unreasonable even if Iraq were not a war zone. Just the political red tape alone would keep it from happening even if equipment and supplies were unlimited.

Iran is expected to increase production by 200,000 bpd in 2011 but constant challenges exist. Infrastructure is unreliable, skilled personnel are afraid to work in Iraq and existing wells are apparently in worse shape than previously expected.

The oil is there in plenty of quantity and easy to produce but just getting it out of the ground is only the first step in a long line of problems. If they could actually repair the pipelines and pumping stations, get all the equipment they need and had a peaceful environment in which to work, most doubt the production would arrive in the next few years.

Meghan Sullivan, professor of International Affairs from Harvard University said "Should Iraq meet its ambitions to bring nearly 10 million more barrels of oil online by 2017, it would constitute the largest ever capacity increase in the history of the oil industry." Basically unless peace breaks out immediately the new production, in any meaningful quantity, is not going to happen.

Once Iraq production moves over 3.0 mbpd OPEC is going to immediately begin pressing for the resumption of a quota on Iraq. They don't currently have a quota because of the war and the need to pump as much as they can to rebuild the country. If Iraq suddenly begins to increase output OPEC will attempt to control it in order to maintain prices at or above the current level.

If Iraq could reach their goal of 10-12 mbpd they would exceed the current output of Saudi Arabia. Saudi has spent $14 billion since 2005 to increase oil production to 12 mbpd. Despite spending the money Saudi has never produced that much oil and appears to be having trouble producing 10 mbpd in the current environment. Saudi would not like to see Iraq suddenly drive prices down with an equal amount of production.

Saudi does not have as much money to spend on exploration as they had in the past despite the higher prices for oil. In order to quiet civil unrest the Saudi King promised to spend $67 billion in March for housing, job creation and the military. This was in addition to $36 billion paid out to citizens in February to calm the crowds. Taking $103 billion out of the Saudi coffers means they need oil prices to hold over $100. Actually $95 is assumed to be their budget breakeven today.

The failure of Saudi Arabia to produce "in any quantity and any quality" as promised after the Libyan war started has dented Saudi's image and called into question if they even have any additional excess capacity. We know they don't have any excess light sweet crude but they have some heavy sour crude. Unfortunately nobody wants that flavor.

With the violence increasing in Iraq and new reports of long term damage coming out of Libya they should not have to worry about prices in the near future. Libyan production has declined from 1.6 mbpd to 100,000 bpd. Domestic consumption before the war was 270,000 bpd. The lack of fuel in Libya is becoming a serious problem for rebels and government forces alike.

The IEA claims Libyan production will not return until 2015 at the earliest although some production will be able to resume immediately after the crisis ends. Barclay's put out a note last week agreeing with the 2015 assessment.

The problems are twofold. If Qaddafi leaves or is killed the country will be left with no government. At least bad government is still government and they can get things done like rebuilding oil facilities. Once that government collapses there is nothing to take its place. The rebels have no experience running a country, especially one that has been bombed back into the 1800s.

Secondly they have no money and no experience at rebuilding oil fields, refineries and oil facilities. It will take years to decide what parts they need, who will do the rebuilding and how it will be paid.

If Iraq could get its problems solved and begin pumping more oil it would not likely alter the price picture until the Libyan oil began to come back online. Since both Iraq and Libya are works in progress I seriously doubt there will be any sudden increase in production in the near future.

Jim Brown

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