Iraqi Oil Cranks Up

Iraqi Oil Cranks Up

August 01, 2003

Iraq’s execution of term contracts in late July for the export of oil with 10 international oil companies signals a level of stability in Iraqi petroleum production that many in the industry doubted would occur until next year, but it is still unclear whether Iraq’s oil revenues will meet the targets required in its new budget.Anchor

Iraq has entered into oil sales contracts with ExxonMobil, ChevronTexaco, ConocoPhillips, and Marathon (all US companies), BP (an English company), Royal Dutch/Shell (an Anglo-Dutch company),Vitol (a Swiss company),Total (a French company), Sinochem (a Chinese company) and Mitsubishi (a Japanese company).  Although the exact terms of these contracts are not public, it is generally believed that each of the 10 companies will lift approximately 2,000,000 barrels of Basra light crude each month from August 2003 until December 2003 (which is an average of 650,000 barrels per day (bpd) for all ten of the contracts) — all at the Persian Gulf export terminal of Mina al-Bakr in southern Iraq.

After several missed production targets in Iraq since the end of major hostilities with the US, many in the petroleum industry believed that Iraq would not be able to commit to a consistent production of 650,000 bpd until at least 2004.

Future Uncertainty

Before the war with the US, Iraq’s domestic oil consumption was approximately 500,000 bpd.  Because of damage to various parts of the Iraqi infrastructure (particularly power plants, power grids, and refineries) caused by bombing, looting, and sabotage, domestic consumption has varied widely, but is expected to reach at least pre-war levels as the infrastructure is repaired.  Therefore, Iraq must produce more than 1,000,000 bpd to meet both its domestic consumption needs and its export obligations.

It is unclear whether Iraq will be able to maintain such a production level for the next five months, as there have been conflicting forecasts of its expected production capacity through the end of the year.  Initially, US and Iraqi officials announced that Iraq would produce 1,500,000 bpd by the summer and return to pre-war levels of approximately 2,500,000 bpd by the end of 2003.  Those forecasts were later adjusted and now range from between 1,500,000 bpd and 2,000,000 bpd by the end of the year.  Although there have been conflicting reports in the press about the current level of oil production in Iraq, at the end of July 2003, most officials seemed to agree that production had increased to at least 1,000,000 bpd and, perhaps, is as high as 1,500,000 bpd.  If this is the case, then Iraq should be able to meet both its domestic consumption demand and its export obligations under its term contracts.

One of the primary reasons for the uncertainty surrounding future production levels is that the export pipeline from the massive Kirkuk field in the north of Iraq to Ceyhan on the coast of Turkey has been the subject of repeated and ongoing sabotage, making it impossible to predict when that export route will become available.  Because of this lack of an export route in the north of Iraq, production from the Kirkuk field remains relatively stagnant at approximately 500,000 bpd, even though its capacity is estimated at 1,800,000 bpd.  Currently, the only production that can get to market is approximately 180,000 bpd for the Baiji refinery in the north.  Associated natural gas is being siphoned off of the remaining production, which is then being reinjected because of a lack of export routes or storage facilities.

Production from the southern oil fields around Basra has been much more predictable, although not without difficulties caused by deteriorating infrastructure and ongoing security concerns.  In June, the fields around Basra (including South Rumaila and North Rumaila, which have an estimated collective capacity of approximately 1,300,000 bpd) were producing only 350,000 bpd.  However, by the end of July 2003, they were producing between 600,000 bpd and 700,000 bpd.  As soon as the installation of pumping facilities at the Qarmat Ali water processing plant is complete — and, therefore, the reinjection of filtered water into the oil wells to improve the quality of the crude is possible — production is expected to increase to approximately 800,000 bpd.  Of those 800,000 bpd, approximately 120,000 bpd will be allocated to the Basra refinery and 20,000 bpd will be allocated for the local power plant.  The remaining amount will be available for export through Mina al-Bakr, the terminal in the Persian Gulf through which more than 1,000,000 bpd flowed during the United Nations’ oil-for-food program.  The predictability and flexibility of export availability from the southern fields is assisted by the existence of approximately 4,000,000 barrels of storage capacity in the region.

Effect on Oil Prices

Iraq should earn approximately $2.5 billion in oil revenues (assuming a $25 per barrel price) from the 10 term contracts, if the oil production level is maintained at least at its current reported levels and the domestic consumption level does not increase substantially.

Some analysts have predicted that the inflow of Iraqi oil to the market would cause the collapse, or at least a dramatic decrease, in the price of oil, forcing OPEC to adjust its production quota to maintain the price within the target range it set of between $22 and $28 a barrel.  However, at its meeting on July 31, 2003, OPEC decided not to change its output quota of 25,400,000 bpd.  This decision indicates that OPEC does not believe that the increase of 600,000 to 650,000 bpd (approximately 2.5% of total OPEC output) of Iraqi oil on the market will have any real impact on the price of oil, or at least not cause the price to fall below the target range.

However, even if the price of oil remains stable at approximately $25 a barrel, Iraq must export substantially more oil to satisfy the expected oil revenues provided in its budget for the period July-to-December 2003.  According to the Iraqi budget, oil revenues for the last half of 2003 are expected to be $3.455 billion, which would require the export of approximately 770,000 bpd for the entire six-month period at $25 per barrel.  This budget was created by each Iraqi ministry and each Kurd region working with its coalition senior adviser.  The budget was then discussed with the coalition finance adviser and reviewed by officials from the Iraqi Ministry of Finance and Ministry of Planning.  Finally, the budget was presented to the US Agency for International Development and United Nations representatives and approved by the Coalition Provisional Authority Program Review Board.

Iraqi oil officials working with the US Army Corps of Engineers, Kellogg, Brown & Root and Halliburton estimated at the end of July that increasing average export capability to 770,000 bpd for the last half of 2003 will require an investment in the oil fields and infrastructure of approximately $1.6 billion.  If this investment is made, the experts then suggested that sustained production capacity of 1,500,000 bpd should be reached by October 2003; 2,000,000 bpd by December 2003; and 2,800,000 bpd (its pre-war level) by April 2004.  If the production capacity targets of this plan for 2003 are achieved, domestic consumption does not exceed approximately 500,000 bpd, and the price per barrel of oil is maintained at $25 or more, then Iraq should be able to earn the oil revenues called for in its budget for July-December 2003.

The first sales of Iraqi oil after the US invasion occurred in June and were made based on a tender for spot sales.  ChevronTexaco won the right to buy 2,000,000 barrels of Basra light crude, to be lifted at Mina al-Bakr.  Kirkuk grade crude that had been stored in Turkey since before the US invasion was sold to Turkey’s Tupras (2,500,000 barrels), France’s Total (2,000,000 barrels), Italy’s Eni (1,000,000 barrels), Spain’s Repsol-YPF (1,000,000 barrels) and Cepsa (1,000,000 barrels).  According to the US administrator, Paul Bremer, the sale of those 9,500,000 barrels of oil resulted in $250 million of revenue.  All of that crude was lifted by July 3, 2003, at which time the second tender for Iraqi oil was announced.  The winners of that second tender were ChevronTexaco, BP, US trading house Taurus, and Royal Dutch/Shell, each of whom was awarded 2,000,000 barrels.  A third round of sales at the end of July was for export of another 6,000,000 barrels of crude in total to ChevronTexaco, Petrobras (Brazil) and Vitol (Switzerland).