Baghdad plans increased oil production and exports for 2019

Iraq’s new oil minister has made it abundantly clear that little should stand in Baghdad’s path to boosting its crude production capacity in 2019 to 5 million barrels per day.

Building on its oil production growth this year, Iraq is to further expand its oil capacity in 2019 as Baghdad continues to face economic challenges, including substantial reconstruction costs.

Iraq’s new oil minister has made it abundantly clear that little should stand in Baghdad’s path to boosting its crude production capacity in 2019 to 5 million barrels per day (bpd), even though that agenda might run counter to plans by other oil producers for collaborative output cuts in 2019.

Baghdad’s production capacity goals may come at the expense of its tenuous cooperation with the coalition of OPEC members and independent producers — referred to as OPEC+ — that is looking to bolster crude prices. As part of that coalition, Iraq agreed to participate in the group’s December 7 decision to reduce combined output by 1.2 million bpd for six months. One telling signal will be if Iraq’s government restores full volumes of Kirkuk crude through a pipeline crossing from northern Iraq through Kurdistan to the Turkish port of Ceyhan.

As OPEC’s second-largest producer, Iraq’s booming oil output has come under increasing scrutiny from other producers. Baghdad has demonstrated weak compliance with implied production targets recommended by the OPEC+ alliance by repeatedly overshooting its assigned level.

Iraq’s crude production jumped as much as 6% in 2018, thanks to strong output from its southern oil fields. Exports from those fields account for 95% of state revenues. Former Oil Minister Jabbar Al-Luaibi announced that Iraq produced a record 4.78 million bpd in October, though other industry estimates put that month’s output at 4.65 million-4.69 million bpd.

Thamer Ghadban, who was approved in October by the Iraqi parliament as oil minister in the new Iraqi government led by Prime Minister Adel Abdul-Mahdi, is fully backing Baghdad’s plans for achieving 2019 production capacity of 5 million bpd and export capacity of 3.8 million bpd.

After hitting a record export high of 3.58 million bpd in August, Iraqi export levels dropped the three months following, partly because bad weather impeded loadings at the southern ports. November exports averaged 3.37 million bpd, the lowest levels since April.

Such export challenges have regularly bedevilled Iraq as it seeks to increase its oil production capacity. Ghadban said enhancing export capacity, particularly in the south, “is a top priority.”

He stated that by upgrading infrastructure, including diversifying export terminals and introducing new pipelines, Baghdad hopes to achieve an export capacity of 8.5 million bpd. This would involve 6.5 million bpd of capacity from southern fields with 1 million bpd of additional capacity from a second pipeline from Kirkuk to Ceyhan.

The resumption of limited volumes of Kirkuk crude to Turkey in November after a year’s stoppage suggests that the Abdul-Mahdi government is feeling out the Kurdish government on resolving their issues, not only on Kirkuk oil flow but on the sharing of revenues of Kurdish oil exports to Turkey and federal budget allocations to Erbil.

The restart of Kirkuk exports came after Baghdad acquiesced to pressure from the Trump administration to stop trucking its Kirkuk barrels to Iran, which appears to be a quid pro quo for Baghdad being granted a sanctions waiver allowing it to receive natural gas and electricity from Iran to meet domestic demand.

For now, the Iraqi government intends to keep the Kirkuk volumes being piped to Ceyhan at 50,000-100,000 bpd, a fraction of the 300,000 bpd routed through Kurdish territory before that flow stopped in October 2017 when Baghdad reclaimed Kirkuk territory from Erbil.

The new Iraqi government is maintaining the restored Kirkuk volumes at modest levels and putting those barrels into storage at Ceyhan as it tests its relationship with Erbil and to not antagonise the OPEC+ alliance. Concern about heightened Iraqi oil output may have been behind Saudi Oil Minister Khalid al-Falih’s visit to Baghdad in November when he met with Ghadban.

Baghdad, however, is banking on higher oil exports to meet its 2019 budget needs. A draft 2019 budget of $111.9 billion is based on projected crude exports of 3.8 million bpd at a price of $56 per barrel. The draft budget projects an increase in spending of $24 billion and a deficit of $22.8 billion. It has been rejected by Iraqi lawmakers who argue that it does not include reconstruction costs for provinces hardest hit during the 3-year war against the Islamic State.

During Falih’s visit, Ghadban suggested that international oil prices more than $70 per barrel would be “fair” but that the higher the price, the “better” for Iraq. Both Abdul-Mahdi and Ghadban have previously held the Iraqi oil portfolio, so they are no doubt on the same page as to how to increase Baghdad’s oil production and export capacities while also navigating OPEC politics.

Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.

This article was originally published in The Arab Weekly.