CERA Cuts Iraq Production Targets

Jim Brown
 
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IHS CERA, not normally a group that finds many friends in the peak oil community, said Iraq's bid to boost production to 12 million barrels per day over the next seven years was fraught with challenges. CERA said getting to only half that number would be an achievement.

In the CERA report, "Field of Dreams: The Great Iraqi Oil Rush" the challenges of politics, security, infrastructure and operations were discussed. CERA believes raising production from the current 2.5 mbpd to 6 mbpd over the next decade would be an achievement. This is much the same as my comments in these pages over the prior months.

Iraq is fighting a number of strong headwinds as it tries to add to production with dozens of deals with the oil majors to overhaul their outdated fields. CERA points out that Iraq has suffered from underinvestment and underdevelopment for decades. CERA claims that trying to push to 12 mbpd over the next seven years would dwarf the most rapid buildups the world has seen in places like Russia and Saudi Arabia. Those countries spent tens of billions in development and many years in construction and they managed to add much lower levels of production.

CERA points out the recent election problems and efforts to form a new government and agree on a new oil law could complicate existing sectarian and political tensions in the country. It is unclear what direction the proposed government will take in dealing with the new oil contracts.

Security is going to be a huge concern and the U.S. is pulling out of Iraq about the same time as the oil companies will be moving in to setup shop. These companies and their employees are going to be prime targets for terrorists. Skilled workers being imported from outside Iraq are going to be very difficult to attract and everyone will have a bulls-eye on their back from the time they step off the plane.

CERA points out that not only will the companies have to replace nearly all the existing infrastructure but things like ports, roads, power and water crucial to operations will have to be developed. CERA believes this will be a major bottleneck that could slow energy development for many years.

CERA said the timetable is extremely ambitious compared to the recent Saudi development. Saudi has similar fields to Iraq and they had no security problems and significant infrastructure was already in place. It still took them over $50 billion in investment and between 4-5 years to increase production by a little more than 2 mbpd.

Once production does begin to expand over 3 mbpd Iraq will have the quota problem to deal with. Quota expansion beyond parity with Iran's 3.0 mbpd production is going to be a challenge. For every 10 barrels Iraq produces over 3 mbpd everyone else in OPEC would have to lower their production by some amount to fit in the overall quota system. This is not going to happen willingly and the most likely outcome is that Iraq will opt out of OPEC so it can produce at will. The amount of external grief this is going to cause its OPEC neighbors is expressed in the tens of billions of dollars.

As I have said in these pages before I would not doubt that others in OPEC may decide to ferment some internal strife in Iraq in order to keep production low rather than see their quotas cut sharply and income plummet. Counting future Iraqi barrels is the equivalent of counting your eggs before the hen house was even built and the chickens bought.

Jim Brown

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