Iraqi Oil Set For Record Output Despite Slight Dip

Part of the credit for OPEC’s swelling output numbers during the last half of 2014 certainly goes to Iraq—which despite ongoing domestic turmoil as Baghdad and Erbil join the U.S. in battling Islamic State insurgents—has seen its crude production and export levels continue to rise. That is, until this past month, when it appears that there were declines in both exports from Iraq’s southern oil fields and oil pumped from northern Iraq, resulting in the Gulf producer’s output in January reportedly falling as much as 300,00 b/d from December levels.

However, this does not appear to be a lengthy setback for Iraq, with suggestions that record exports from southern fields are anticipated for this month, which will bring its numbers back up. The warmer political climate between the federal government and the Kurds has prompted a consensus between the two sides on the principle that lower oil prices need to be offset by volumetric increases.

While Iraqi Oil Minister Adel Abdul Mahdi stated first on December 21st that Iraq’s oil production would hit a record 4 million b/d following the strategic oil revenue sharing agreement reached between Baghdad and Erbil on December 2nd and then a month later insisted that his country had produced nearly 4 million b/d in December, he may have been overreaching a tad.

There are conflicting reports of Iraqi oil output in December, with some reports suggest that Iraq’s total production for December reached just shy of 3.8 million b/d, while others were more conservative at around 3.4 million b/d, though there was consistency with the fact that the country’s output fell by around 300,000 b/d in January. Mahdi’s assertion that Iraq had reached a record 4 million b/d in December combined with reports of Chinese economic worries caused oil prices to decline more than a $1 a barrel on January 19th.

Baghdad has been stridently opposed to the Saudi-led push within OPEC that prompted the cartel to decide against cutting collective output of 30 million b/d at the group’s November gathering in Vienna. Last month, Iraqi Vice President Ayad Allawi, in an interview at the World Economic Forum in Davos, suggested the need for a summit meeting between OPEC members and independent producers to tackle the issues of low oil prices and the impact of shale oil. Also at Davos, Iraqi Deputy Prime Minister Rowsch Nuri Shaways argued that his country was forced to boost its production and exports to counter the plunge in oil prices.

That historic December 2nd deal between the Iraqi federal government and the Kurdistan Regional Government (KRG) resolved a long-simmering dispute over sharing oil wealth and budget allocations, at least for now, and has seemingly slowed Kurdistan’s push for autonomy, again at least for now. The deal specifies that the KRG will export 250,000 b/d of oil from its fields through the pipeline it built to Turkey, from which the Iraqi federal government’s State Oil Marketing Organization will assume responsibility for its sale. The KRG will export another 300,000 b/d of oil produced from Kirkuk fields.

In return, Erbil will receive its 17% share of the national budget as well as $1 billion doled out in installments to pay the salaries of the KRG’s Peshmerga forces and provide necessary equipment as they contribute to U.S.-led efforts to rout advances made by the Islamic State. The question is whether Erbil will commit to supplying all of the 550,000 b/d of combined output as stipulated by the agreement and whether Baghdad will hold up its end of the bargain in terms of budget allocations and Peshmerga financial support.

The agreement de facto hands to the Kurds the oil-rich area of Kirkuk, which Peshmerga forces had seized when Iraqi troops retreated from an advancing Islamic State threat in June. Earlier this month, Kurdish forces were able to wrest back control from Islamic State militants of a small crude station at the Khabbaz oil field 20 km southwest of Kirkuk, but not before extensive damage was done to the station, which in turn caused production at the Khabbaz oil field to be halted. The field was only producing around 10,000 b/d, but it signals the first major effort to capture Kirkuk fields since Islamic State forces took over four small oil fields in northern Iraq last summer.

Just this past weekend, coalition airstrikes included a dozen or so strikes on Mosul, which had been seized by the Islamic State in June. As part of the campaign to oust the Sunni terrorist group from Iraq’s second largest city, Kurdish forces recently have been attempting to surround the city in an effort to put a stranglehold on supply lines from Syria in advance of a looming battle to retake Mosul.

The huge inroads made by the Islamic State helped force the Iraqi federal government and the KRG to reach that December agreement on sharing oil revenue and budget allocations. With both governments in dire need of American military aid to stem the threat from the Sunni terrorist organization, Washington obviously had a bargaining chip in trying to ensure that Erbil didn’t move forward on its drive for independence.

The new federal government of Prime Minister Haider al-Abadi needed the Kurds to pull together a coalition government that would be effective and the KRG could not afford to continue without the financial support that came from the federal government budget allocations. Both sides were suffering as a result of oil prices that have plunged as much as 60% from last summer. There is interesting speculation that the KRG’s near-term independence movement recently became derailed when the Turkish government reportedly withdrew its support of Erbil’s efforts to seek full autonomy, after having implicitly championed the cause by signing historic oil and gas supply agreements in 2013 with the KRG.