We recently wrote about the role Iraq may play in the future of crude oil production. By some IEA (International Energy Agency) estimates, the country’s potential future production would position Iraq as the world’s second most influential member in OPEC ahead of Iran and Venezuela, behind only Saudi Arabia, by 2030.
Now, a new report from Bernstein Research, a premier Wall Street investment research firm, is questioning these assumptions based on the volatile nature of Iraq politically and economically.
In 2010, Bernstein Research released a report titled “12 Herculean Challenges,” which addressed the top challenges facing Iraq’s oil industry. Their November 2012 report circles back to these challenges to assess what has changed, deteriorated or improved over time.
What they have found is that 4 of the challenges deteriorated and have gotten worse, 8 are basically the same as in 2010, and 4 new challenges have arisen.
According to the Bernstein report,
What has gotten worse?
- Civilian fatalities in Iraq have risen 20% since 2011 when U.S. Troops were withdrawn, and most of the violence is centered around oil-rich areas in the south.
- Intense cost inflation. The investment required to reach 2017 production goals is 195% of GDP. Iraqi oil industry salaries have risen to 70% higher than the regional average and both well costs and import costs have gone up 3 to 6 times.
- The Straits of Hormuz as a export choke point is critical as tensions with Iran escalate.
- The Common Seawater Supply Facility (CSSF) is a project that aims to provide millions of barrels of seawater a day to southern Iraqi oil fields, a factor critical for oil production. Exxon just pulled out of the project and it appears the facility will not be ready to provide water for injection in wells until 2017 at the earliest.
The new challenges:
- $30 billion per year in required capital expenditure if Iraq is to reach its new targets. Where will this money come from?
- The industry is increasingly less willing to invest in Iraq as evidenced by Exxon and others recently pulling out.
- When operators change, there is a year over year production loss of anywhere between 5-30%. With all the current political and economic security issues there are likely to be increased operator changes over time.
- Iranian sanctions may have a big impact on Iraq. It’s estimated that some $800 million is laundered out of Iraq to Iran each week.
Bernstein’s conclusion, after looking at all this information, is that Iraq might be too volatile to achieve the goals set for increased oil production.
In 2010, official goals for Iraqi oil production in 2017 were set at 12 million barrels per day. By 2012 that official number has been reduced to 9.5 million barrels per day, but Bernstein thinks that a more realistic number is 4.8 million barrels per day by 2017 - almost half of the official Iraqi target.
All of this speculation underscores the tenuous and volatile nature of global oil markets. Sustainable America is dedicated to reducing the amount of oil consumed in America. We aim to do this by promoting alternative fuel sources like natural gas and biofuels while reducing fuel consumption in the transportation sector with innovative technologies, like electric cars, and energy efficiency measures. All of these efforts taken together will help to reduce our overall oil consumption and will help to make America more resilient in the future.
Source, Bernstein Research: “European Integrated Oils: The Sisyphean Struggle of Lifting Iraq’s Oil Production - Time To Give Up & Go To Kurdistan?”