Will growing Iraqi production dent the oil price?

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Iraq plans to almost quintuple its oil production capacity by 2017, which could be enough to overwhelm expected demand growth and weigh heavily on the oil price. But will Iraq achieve its ambitious targets?

YES, says David Cline
Iraq has recently agreed service contracts for several large-scale oil projects. These include output commitments that, if met, would boost Iraqi oil output to remarkably high levels. These contracts could almost quintuple Iraq's production capacity by 2017 to 11.75m barrels per day (mb/d), close to the International Energy Agency's projections for Saudi Arabia. We calculate that an equivalent rise in Iraqi output could cater for most of the anticipated growth in global oil demand in the next eight years, assuming that this rises by 1.5 per cent per annum.
This would leave only a modest need for extra oil from other sources. The IEA is not expecting material growth in non-Opec supply, but it forecasts a significant rise in Opec output of natural gas liquids. In addition, Opec nations other than Iraq, especially Saudi Arabia, have oil output capacity that is currently 6.2mb/d above actual production.
Sceptics claim that politics, security, inadequate infrastructure and potential Opec quota constraints will prevent any large and rapid build-up in Iraqi capacity. All these are challenges, but the figures cited above are underpinned by binding contracts with expert oil companies that have commercial incentives to deliver agreed output levels within contractually defined timeframes. This points to a considerable upwards force on output capacity.
It is unclear whether Iraq will agree to an Opec quota being re-imposed, and at what level a new quota might be set. The issue is bound to be divisive and could ignite old rivalries, threatening Opec's effectiveness, to the detriment of oil prices. Also, a rise in Iraq's capacity on such a scale would be seen as a significant headwind for prices, even if it did not translate into rising output. Spare capacity in Opec is a closely-watched parameter because it gives one indication of oil market tightness.
These factors point to Iraq being an emerging force on oil prices that could become a major influence until the end of the decade. Those expecting the imminent return of China-fuelled oil price increases may be disappointed.
David Cline is head of European oils (equities) at RBS

NO, say Richard Savage and Alex Martinos
After years of glacial progress, Iraq recently grabbed the attention of oil-market watchers by striking deals with international companies to boost production from several giant oilfields. The output targets being discussed - pushing production from 2.5mb/d to 12mb/d within the next decade – are substantial and, if achieved quickly, would have a real impact on the balance of global oil markets.
Iraq undoubtedly has enough oil - that has long been known - but the scale of these plans, set out by oil minister Dr Hussain al-Shahristani, is quite new.
A major, rapid production increase, as envisioned by Dr al-Shahristani, is not entirely unprecedented - Russia managed something comparable in the 1990s, although this was a recovery to previous levels, not a new high. However, in the case of Iraq it must be seen as highly unlikely. Even though the worst of the post-invasion strife seems, thankfully, to have passed, the country still faces a raft of challenges.
Upcoming elections, the withdrawal of US forces, unresolved disputes with the Kurdish minority and ongoing security concerns are likely to ensure progress is slow, and Iraq remains a tough place for the oil industry to operate. Companies looking to raise production may face logistical and technical problems resulting from the neglect of the country's oilfields and infrastructure, while a rapid upturn in activity could push oilfield services costs sharply higher. Moreover, the 12mb/d target is, arguably, inflated after a licensing process that encouraged competing companies to set high production targets for each field, with limited economic penalties if these are subsequently missed.
On balance, while new Iraqi production may come onstream in the coming decade, it is likely to flow at much less dramatic rates. A slower output increase (the IEA sees production creeping past 3mb/d by 2014) is likely to see Iraqi oil helping to offset increasing non-OECD demand and declining non-Opec production, rather than flooding the markets in the near-term. As such, Iraq represents only a limited threat to today’s relatively stable high oil price.
Richard Savage and Alex Martinos are energy analysts at Mirabaud Securities

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