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OPEC rolls on as Iraq maps out its future


By Margaret McQuaile in London


July 16, 2014 - Back in late May, it was obvious that OPEC's June 11 meeting in Vienna was going to result in yet another rollover of the 30 million b/d crude production ceiling that has been in place since January 2012. It was also clear that ministers were unlikely to devote any serious discussion to the potential for output currently offline to come back on or for further outages to occur.


What wasn't obvious was how much the landscape of one of the group's founder members, Iraq, was about to change.


The advance across a large swathe of northern Iraq by jihadist fighters of the self-styled Islamic State of Iraq and the Levant has effectively partitioned the country. ISIS now controls the cities of Mosul and Tikrit and even has its sights on Baghdad.


Now semi-autonomous Iraqi Kurdistan is talking about independence from Iraq, which would mean that future volumes from the region would not be included in overall Iraqi production - a key consideration given that natural resources minister Ashti Hawrami says the KRG is targeting crude exports of 1 million b/d by the end of next year.


Analysis continues below...


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Whether the Kurds will achieve full independence from Baghdad is another matter, given the geopolitical and regional impact of such a development. But in the meantime, the Kurdistan Regional Government has taken advantage of the ISIS onslaught to seize control of the Baghdad-controlled Kirkuk and Bai Hassan oil fields.


The KRG, which explained that it had sent Kurdish Peshmerga armed forces to secure the fields to protect them from sabotage allegedly planned by Baghdad, has said it will use crude produced from the fields to meet local demand. It has also said it will claim its "constitutional share" of oil revenues derived from these fields to make up for the "huge financial deficit triggered by the illegal withholding of the KRG's 17% share of the federal budget by Baghdad."Not surprisingly, Baghdad has threatened "serious consequences," though what these are we have yet to learn.


Meanwhile, even as ISIS was establishing control over Mosul, Iraqi oil minister Abdul Karim al-Luaibi was telling reporters in Vienna that the country's southern exports were safe and set to continue around the 2.5-2.6 million b/d level.


At the moment, the main constraints on Iraq's southern exports are technical or related to the weather. And, as Luaibi pointed out, the southern fields and export terminals are far from the area controlled by ISIS. But, while it seems unlikely at this stage that ISIS will be able to mount a sustained campaign of attacks on the southern energy infrastructure, the story in Iraq is a fast-moving one and complacency on this score would be severely misplaced.


Iraq isn't the only OPEC member with problems.


Libya still in crisis


Libya, having seen its output flounder at low levels of around 200,000 b/d in recent months, is now seeing production rise again after a series of agreements with the various tribes and factions that have occupied fields and facilities and blocaded ports for more than a year. Production is now around the 600,000 b/d level.


But, despite the government's insistence that the crisis is now "over," Libya is unlikely to see a return to the 1.4 million b/d of early last year any time soon. Indeed, even as the National Oil Corporation was reporting the rising levels of crude output, the United Nations said it was evacuating its remaining staff because of the worsening security situation in the country.


Another big question mark lies over Iran, whose interim nuclear deal with six world powers will expire in just a few days' time July 20. A comprehensive deal by Sunday now looks beyond reach, so the interim agreement is likely to be extended, which will mean that Iranian crude exports won't rise to anywhere close to pre-sanctions levels this year. Nevertheless, given the seismic events that are taking place in neighboring Iraq and, as a consequence, the potential for Iran's star to rise in both the regional and international political firmament, a deal can't be ruled out entirely in the next few weeks.


Iranian oil minister Bijan Zanganeh told reporters in Vienna that Iranian crude exports were currently running at 1.5 million b/d and that this volume could be boosted immediately by 500,000 b/d if a nuclear deal were struck and sanctions lifted. He said Tehran could achieve a total export boost of 700,000 b/d two months after the lifting of sanctions.


Crude imports are not quite the same as crude exports -- voyage times vary and oil exported in one month may not reach its destination until the following one. Still, the total export figure given by Zanganeh is not far from the kind of crude import numbers showing up in official and trade data.


In May, for example, Iran's top four Asian buyers--China, India, Japan and South Korea--collectively imported 1.356 million b/d. Add about 100,000 b/d for Turkey, which has yet to release figures for May, and the May total import figure rises to 1.456 million b/d--rather a lot more than the 1 million b/d level US officials said they expected to see over the duration of the six-month interim agreement despite the pausing of pressure on these countries to reduce volumes from Iran.


What does all this mean for OPEC?


For OPEC, read Saudi Arabia. As the only member with any significant volume of surplus output capacity, the kingdom will be obliged -- assuming it wants to maintain prices at a certain level -- to adjust its production if other producers boost or decrease theirs. So far this year, Saudi Arabia has not had to make huge swings in output. But if Libya manages to maintain its upward push, Iraq sustains southern exports at least around current levels and if Iran strikes a nuclear deal that leads to the removal of sanctions, next year could be very different.


OPEC itself sees demand for its crude falling to an average 29.4 million b/d in 2015 from 29.7 million b/d this year. But its projections vary sharply from quarter to quarter, with a fall of 1.64 million b/d between the fourth quarter of this year and the first of 2015, when demand for OPEC crude is forecast at 28.64 million b/d. That first quarter projection is around 1 million b/d below the 29.7 million b/d OPEC says it pumped in June. The IEA estimates OPEC's June production at 30.03 million b/d, while the latest Platts survey estimates June output at 29.94 million b/d.


Next article: OPEC heads for fresh rollover on output







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