BAML: Iraq poses risk to oil outlook

Iraq poses a risk to oil market outlook as the country may not fulfil output expectations in the shorter term, says Bank of America Merrill Lynch (BAML). However, the prospect of a huge increase in oil production may still maybe able to keep prices under $100 per barrel (/bbl) in 2010, says the bank

BAML says while Iraq has the potential to vastly expand productive capacity, the Iraqi government's stated intention to increase oil capacity from 2.5 to 10-12 million barrels per day (b/d) over the next decade is "very optimistic and we remain sceptical that such increases can be achieved".

However, BAML says, ‘still, a four-fold increase in Iraqi production could be sufficient to keep oil prices from rising above $100 per barrel (/bbl) for much of this decade.'

The US Energy Information Administration (EIA) says Iraq's immediate goal is to boost production by 300,000 b/d by the end of 2010, to 2.7 million b/d.

In 2008, Iraq's crude oil production under the control of the regional state-owned oil companies averaged 2.4 million b/d, up from its 2007 production of 2.1 million b/d, according to the EIA. This is still below its pre-war production capacity level of 2.8 million b/d in 2003.

Last week, at the IP Week conference held in London, oil experts emphasised how the recovery of Iraq's oil industry is putting downward pressure on global oil prices as the ability of the world market to absorb the extra capacity might be limited.

"Iraq is a wildcard, so it isn't clear how quickly and how deep the effect of its production will be," said Ennio Senese, head of the resources practice for Turkey and Greece, and account lead for oil companies in Italy, at Accenture. "But it could have a big impact on oil prices and urge the need to readdress its current membership of the Organisation of the Petroleum Exporting Countries (Opec)."

A raft of non-Iraqi energy giants, such as Eni and BP, and the European Union have announced they are turning towards Iraq for major oil supply in the future. BP's chief executive officer Tony Hayward recently said he hoped Iraq would become a major oil player, producing up to 10 million b/d in the next decade.

However, analysts warn that limited basic infrastructure, the lack of a petroleum law and the upcoming March elections may hinder this future supply in the shorter term.

"In the long term, Iraq promises to be a hugely rewarding source of energy supplies," says Julien Barnes-Dacey, Iraq analyst at global risk management consultancy Control Risks. "While it will still take several years to overcome ongoing political and security challenges, as well as rehabilitate the country's devastated infrastructure, the long-term outlook is very good."

BAML says "while Iraq's oil field infrastructure needs urgent repairs, we understand that Iraq can still handle levels of production of around 3 million b/d. In our view, anything significantly above that level will require a longer period of time and significant investment."

An in-depth article on Iraq's oil and energy security will appear in the March issue of Energy Risk and online at www.energyrisk.com or www.risk.net from the first week of March.

Energy Risk will also be providing news coverage at the Centre for Global Energy Studies (CGS) One-Day Seminar 'Iraq And the World Oil Order' on March 24, www.cges.co.uk