Iraq Oil - Boast, Bluff or Bull

Jim Brown
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The background topic at the OPEC meeting this week is probably going to be Iraq. After signing deals with dozens of oil companies to overhaul their existing fields and explore new ones this is going to be a serious problem for OPEC if they can actually pull it off.

Iraq currently produces a highly volatile 2.5 million barrels per day. That is impacted by rusted and broken down equipment and constant attacks by insurgents attempting to slow the flow of oil. If they perform as they are advertising Iraq could be producing 12 million barrels per day within seven years. Unfortunately for Iraq they get no respect because all prior promises of millions of barrels in new production have always evaporated.

Most analysts believe it will be years before Iraq can make any serious additions to the current 2.5 mbpd of production. The political arguments and counter claims of ownership should keep repair and development efforts sidetracked for years. Add in the new targets for insurgents as the oil companies bring new equipment into the country and that will cause even further delays.

If the U.S. does successfully pull out of Iraq there will be an even bigger problem. That problem is Iran. They are just waiting for the U.S. to leave so they can take over the country through a Shia Muslim uprising. The Shia's and Sunni's hate each other and they each control about half of Iraq. Iran is a Shia nation. Without a strong government in Iraq and a strong military it should be an easy task to divide Iraq from within and either take over the country or plunge it into a civil war that lasts for years to come.

For OPEC that would be the best option because it would keep Iraq's huge oil fields offline and preserve the status quo for production. The majority of the OPEC nations are Sunni Muslims. The largest Sunni countries are Saudi Arabia, Egypt and Jordan.

However, a Shia controlled Iraq and a Shia controlled Yemen puts Saudi Arabia in the hot seat between the two hostile countries. Leaders in Iran and Iraq have long coveted the oil in Saudi Arabia and despised the house of Saud. A Shia takeover in Iraq would be a bad day for Saudi Arabia.

Even if a miracle happens and Iraq develops into a shining democracy of peaceful people that is still a problem for Saudi Arabia and the rest of OPEC. Iraq is not going to honor any OPEC quotas. You can bet on it. They are not spending billions to develop 12 mbpd of capacity to sit back and produce 3-4 mbpd because of a quota. The varied and diverse ethnic populations in Iraq are clamoring for order and growth. That growth can only come from the billions in oil revenues that will go to rebuild Iraq. They are not going to be denied.

The contracts they just signed with the oil majors have incentives for rapid production goals. Given the size and availability of Iraq's fields this should be no problem as long as the insurgents are kept from blowing everything up once a week.

Iraq's oil fields are so easy to produce compared to the ultra deepwater in the Gulf of Mexico or the black water off the coast of Brazil that finding oil in Iraq is like picking up Easter eggs for the oil giants. This is why they were willing to sign the contracts for an average gain of $2 per barrel. That does not sound like a lot of money but with production of 12 mbpd that $2 adds up fast. Plus they have some added incentives for developing new fields.

Iraq does not currently have an OPEC quota because of the decade of conflict. OPEC will probably put off dealing with the thorny problem as long as possible in hopes Iraq will fail in this effort as they have failed so many times in the past.

If, in the next 2-3 years before Iraq can add any significant production the oil market recovers and demand is back at the 2008 highs then adding Iraq's production will not be a problem. However, if the recession conditions linger and demand fails to recover then OPEC would be forced to confront Iraq and demand a quota.

If you are Iraq and well on your way to 12 mbpd and OPEC tries to slap a 3-4 mbpd quota on you then trouble is coming. Iraq's reserves are slightly smaller than Iran's and the current quota for Iran is 3.34 mbpd. That suggests a quota for Iraq would be in the 3.0 mbpd range.

I am sure you can see the trouble ahead. This is not going to be a problem that is resolved easily. When discussing annual revenues in the hundreds of billions I would not be surprised to see Saudi and the Sunni Muslims actually help in creating adversity in Iraq. If they can keep the civil strife at a boil then the production efforts could be slowed. It would be easier for Saudi Arabia and the other OPEC countries to sow strife in Iraq whenever possible than face the possibility of a 12 mbpd producer 5-7 years from now. Historically there have been countless times when one faction in the Muslim world infiltrated the other's territory to conduct undeclared guerrilla warfare to prevent the success of that faction in whatever they were attempting to do.

This battle between Sunni and Shia has been in progress for 1,354 years and it is not about to suddenly go away. Since the murder of Mohammed, the founder of Islam, the two sides have been fighting over land and camels and the prize today is worth far more than all the captured booty since that event in 629 AD. To think they would beat their swords into drill pipe today and peacefully coexist is ridiculous.

Iraq may increase production over the coming years but once the Americans pull out of the country those production gains and any future gains will be tough to protect. If the U.S. stays in Iraq there is a good chance those production gains will appear. I guess that brings up the biggest question of all. Will President Obama go back on another campaign promise and leave the force in Iraq in order to lower oil prices for years to come? What would you do?

Jim Brown

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