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A Realistic Outlook For Iraq's Oil Production In 2030

By Ali Khajavi 0 Published on Sunday, 03 Jul 21:00 pm

Mr Khajavi is an expert with the Strategic Planning Department at the Iranian Ministry of Petroleum (a.khajavi@gmail.com). In fulfillment of the contracts concluded between the Iraqi Ministry of Petroleum and international oil companies, Iraqs crude oil production is supposed to increase from 2.5mn b/d in 2010 to approximately 12mn b/d in 2017. However, projections by international energy agencies are underestimated. The following are some of the projection highlights: Based on the estimations by the International Energy Agency (IEA) in 2010, Iraqs crude oil production will amount to 3.6mn b/d by 2015, 4.8mn b/d in 2020, 5.3mn b/d in 2025, 6.1mn b/d by 2030 and 7mn b/d by 2035.
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Based on the BP Energy Outlook to 2030, which was prepared at the beginning of 2011, Iraqs crude oil production is envisaged to rise to 4.5mn b/d in 2020 and 5.5mn b/d in 2030. Nonetheless, BP has announced that among the countries whose production capacity is projected, the biggest uncertainty is related to Iraq. This is attributable to the fact that based on the concluded contracts, Iraqs crude production is supposed to reach 12mn b/d. Of special note is that, due to lack of necessary infrastructures, shortage of water resources required to be injected into the oil fields, and severe security and political problems on the one hand and the fact that transfer and export establishments and facilities are not yet put into operation on the other, BP may not be certain of the actualization of its estimations.
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A US Energy Information Administration (EIA) analysis, studying sharp increases of crude oil production in Russia and Saudi Arabia, reveals that an increase of 10mn b/d in Iraqs crude production will not be plausible in the short or medium run. It took Russia more than 10 years to increase its crude oil production by 3.8mn b/d. Furthermore, an increase of 2mn b/d in Saudi Arabias crude oil production was a result of five years of preparation. Therefore, taking into account the lack of necessary infrastructures, the EIA has forecast in its main scenario that Iraqs crude oil production will amount to 2.6mn b/d in 2015, 3.1mn b/d in 2020, 3.9mn b/d in 2025 and 6.1mn b/d in 2030. In EIAs low price scenario, Iraqs crude oil production is estimated at 8.3mn b/d for 2030 and in its high price scenario, 4.2mn b/d. 2015 and 4.3mn b/d till 2019.
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According to Business Monitor International, Iraqs crude oil production is forecast to grow to 3.35mn b/d till Based on Wood Mackenzies forecast, Iraqs maximum crude oil extracted from Rumaila, Zubair, West Qurna-1, West Qurna-2, Majnoun and Halfaya oil fields will equal 7.5mn b/d in 2018. This is against the 5 backdrop of an expected production of 10.5mnb/d in 2017 based on the concluded contracts. According to IHS CERA, Iraq will have the capacity to produce 4.3mn b/d of crude oil in 2015 and 6.5mn b/d in 2020.
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Deutsche Bank, after comprehensive studies on recent developments of Iraqs oil industry, has estimated that Iraqs crude oil production will increase to 3.5mn b/d till 2013, 4.5mn b/d in 2015, 5.5mn b/d in 2017 and 7mn b/d till 2020.
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Based on 2011 projections of Merrill Lynch, Iraq will have the capacity to produce 4.4mn b/d in 2015.

Based on the Iraqi governments five-year development plan, which included plans for all economic sectors 9 till 2014, Iraqs crude oil production is estimated at 4.1mn b/d for 2014, of which 3.1mn b/d will be exported.

Role Of Iraq In Crude Oil Global Markets: Pessimistic Scenario The most pessimistic scenario could be the forecast of the IEA. Considering OPEC oil demand in the outlook of 2030, the share of Iraq in OPEC crude oil production will increase from 11.69% in 2015 to a remarkable 15.76% in 2030. Table 1: Pessimistic Forecasts Of Iraqs Share Of Total OPEC Crude Production To 2030

Reviewing the shares of Iraqs crude oil production in total OPEC production over the last 38 years reveals that the largest share (about 14%) was related to 1988. This is indicative of the fact that even in the worst case scenario, current development plans formulated by Iraqs Ministry of Oil will be a far bigger step forward for the Iraqi oil industry compared with what this industry has achieved in the last 40 years.

Figure 1: Share Of Iraq In Total World And OPEC Oil Production

Reasons Behind Low Estimations Of Iraqs Crude Oil Production Capacity International energy agencies have attributed their pessimistic estimations on Iraq reaching its production target to the following factors: unsustainable security; political instability; limitations in the services sector; lack of establishments and equipment required for the development of oil fields; lack of skilled human resources; misalignment between production targets in some oil fields and their actual reserves; unrealistic projections of the oil recovery value of oil fields; lack of necessary infrastructures for the import of equipment required for the construction of roads, bridges, and airports; inadequacy and obsoleteness of transfer equipment; and difficulties regarding the provision of water required for injection into the oil fields. Some of these factors are discussed in detail below.

Unsustainable Security and Political Instability

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Security and political problems are among factors that make the actualization of the Iraqi government's plans implausible. Although political instability is among major challenges faced by the Iraqi government, based on recent information released by security agencies in the US and the world, terrorist attacks have significantly decreased during the recent years all over this country. Furthermore, the blasts of previous years have mainly occurred in Sunni and Kurdish-inhabited areas, ie major oil fields which are located in the southern and southeastern Shi'ite areas enjoy a relatively high level of security. Besides, attacks have mostly targeted American troops and the Shi'ite Iraqis and seldom major infrastructures.

Figure 2: Security Incidents In Iraq By Area During 2004-09

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Political analysts believe that in case of the exit of the American troops and further independence of security agencies in the country, more security will be provided by the central government. Therefore, one can conclude that international energy agencies have formed a seriously pessimistic outlook to 2030 for Iraq and, in a way, have tried to exaggerate the effects of political instability on crude oil production.

Lack of Necessary Infrastructure Multiple wars along with domestic dictatorship dominating Iraq led to a decline in investments and destruction of infrastructural establishments. In fact, conditions in Iraq are far from favorable at present. Based on the views of international observers, all the current infrastructures in Iraq must undergo major repair and renovation operations. From 2003 till end-2007, Iraqs oil facilities and pipelines were targeted with 465 bombs, which caused huge losses.
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Iraqs total refining capacity is estimated to range from 637,000 b/d to 790,000 b/d.

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However, as the facilities

are outdated and have also been damaged during the wars, only 50% this capacity is put into effect. Iraqs oil refineries produce a lot of heavy products, so there is a need for imports. Currently, oil transfer lines are not fully operational. In case of a rise in the production of crude oil, both the capacity of oil refineries and exporting terminals need to increase. The Kirkuk-Banias pipeline, which runs from the Kirkuk oil field in Iraq to the Syrian port of Banias, is around 800km long and has a capacity of 300,000 b/d. The pipeline was opened on 23 April 1952 and, during the 2003 invasion of Iraq, was damaged by US air strikes and remained out of operation since then. Meanwhile, the Kirkuk-Ceyhan crude oil pipeline which was initially made operational for the export of crude oil without taking the risk of passing through the Persian Gulf during 1980-88, came into operation in 1977. This pipeline had a maximum capacity of 1.6mn b/d and currently has a capacity of 300,000 b/d. The 626km Iraq-Saudi Arabia pipeline, with a design capacity of 1.7mn b/d, started operating in 1989 but was closed by Saudi Arabia 13 during the Iraq-Kuwait war. This pipeline is in need of major renovating operations. Estimates show an investment of $50bn is required for the renovation of pipelines and oil facilities in the future.
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Other obstacles in the way of the Iraqi Ministry of Oil are the lack of basic infrastructures such as operational service sectors and the inefficiency of roads, airports, urban transportation and information technology systems. Ineffectiveness of infrastructures is a major challenge that the Iraqi oil industry is currently faced with. Improving infrastructures is a capital intensive and time consuming process, as sectors involved in the innovation and renovation of infrastructures are numerous and mismanagement and inefficiency of decision-making adversely affect various economic sectors. In the face of all the mentioned obstacles, the Iraqi Ministry of Oil has taken measures to establish new crude oil pipelines and renovate the existing ones, increase the capacity of oil exporting

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ports and raise the capacity of oil refineries. Exaggerated Estimations Of Production Capacity Of Oil Fields As suggested production rates for oil fields put up for bidding rounds by Iraq are a factor behind the success of Iraqs oil rounds, international oil companies seem to be seriously competing with their counterparts to win the bids. To this end, they suggest unachievable rates to the Iraqi Ministry of Oil. A wide range of difference in suggested rates could be a proof of the above supposition. For instance, the production rate suggested by a consortium of ExxonMobil and Shell for the first stage of West Qurna oil field is different than the one offered by Russias Lukoil by 850,000 b/d. Estimations by the Ministry of Oil for the production rate of Majnoun oil field are at 1.1mn b/d whereas Shells figure is far larger at 1.8mn b/d. Furthermore, the Iraqi Ministry of Oils estimation on the production of Halfaya oil field was 235,000 b/d while the China National Petroleum Corporation (CNPC) consortiums figure is 535,000 b/d. On the other hand, based on an analysis by Ahmed Jiyad published in MEES, comparing the production plan as stipulated in contracts with the proven reserves of awarded oil fields reveals that West Qurna-1, Zubair and Gharraf oil fields will be totally depleted in 2022, 2021, and 2024, respectively. Therefore, the production ceiling of Iraqs crude oil would fall by 3.68mn b/d from about 11mn b/d to 7mn b/d in 2025.
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Dealing with this question, the Ministry of Oil announced that based on recent studies, Iraqs crude reserves had increased by 30%. As a result, the reserves of 13 oil fields including the controversial West Qurna, Zubair and Gharraf rose as well.
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The most important technical controversy regarding the development plan of Iraqs oil fields was brought up by Wood Mackenzie. This consultancy announced that the ratio of reserves to production was set at 4.9% for six major Iraqi oil fields. According to Wood Mackenzie, with a reserves to production ratio of 31.5%, a production of 7.5mn b/d would not be far from reality. Of special note is that the origin of this figure is not clear and is thus implausible. Meanwhile, the hypothetical depletion rate stipulated in concluded contracts is below the world average, which is 6%. Besides, as Iraqi fields are onshore, the mentioned depletion rate is achievable. According to the same institute, average recovery envisaged for the six Iraqi oil fields, comprising 85% of this countrys crude oil production in the future, is set at 43%, which is achievable. Due to the difficulty to identify nature of hydrocarbon reserves and the exaggerated estimations of international companies in oil producing countries of the Middle-East and Central Asia, targeted figures related to the production of crude oil in Iraq seem unreliable. However, low estimations of several international agencies on the production capacity of Iraq crude (6mn b/d for 2030) need further consideration. Based on the views of these institutes, what occurred in Russia and Saudi Arabia indicates that it is impossible to increase crude oil production in Iraq. The point that these institutes seem to be missing is that the types and conditions of Iraqi oil fields are different from the oil fields of Russia and Saudi Arabia in past decades. Todays Iraq has the privilege of new production technology and the advancements of the past 30 years in terms of upgrading operational efficiency. Although errors are probable, low estimations of international energy agencies on Iraqs capacity to produce crude oil could be attributable to a host of non-technical factors, inter alia the strategy of supply management and diversification of crude oil suppliers in coming years.
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Concluding Remarks Exaggerations may have occurred in the forecasting of figures related to the production of Iraqi oil fields due to ambiguities regarding the hydrocarbon reserves and a lack of recent and dependable information as well as obstacles in the way of financing the necessary infrastructures. The fact is that exaggerated estimations and non-actualized contracts are not unheard of in Central Asian and the Middle East countries, including Iran. Iraq is no exception. In fact, foreign companies manage to augment the value of their shares in financial markets by concluding contracts or registering their shares of the oil fields which are usually overestimated. This is against the fact that unrealistic estimations on volume of reserves or production targets are gradually realized over many years.

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The question is how the Ministry of Oil will deal with companies that are party to contracts: which one is given more consideration, performance factor or remuneration fee? Meanwhile, there is a possibility that due to a high demand for facilities and equipment required for the development of oil fields, relevant costs increase remarkably. In this case, the development of oil fields with a low production rate will not be economical. This could lead to the postponement of the implementation of oil field development plans devised by the Iraqi Ministry of Oil. A worse case will be the entering of Iraqs excess oil into the market, which could in turn cause a sharp fall in the international oil prices. If the extent of development does not match the production capacity, multiple risks will threaten the market, which needs to be doubly monitored by the Ministry of Oil. It is expected that, based on the concluded contracts, developed oil fields equipped with necessary facilities and pipelines reach the production stage more rapidly than not-yet-developed oil fields. Furthermore, it is projected that Iraq will have the capacity to produce up to 4mn b/d after minimal repair and maintenance work and increase in the capacity of pipelines, ports, and refineries as well as putting into operation the unused capacities of the equipment required for the development of oil fields, such as drilling rigs. Needless to say, the country will confront numerous problems in case of production higher than the mentioned amount, due to the lack of establishments in terms of consumption and exports as well as inability in provision and financing of equipment or sharp increases in their price. Among the analysts, Deutsche Bank seems to have submitted the most realistic projection of the amount of production and the due operation time of the development plans of Iraqi oil fields. Although errors in production targets and their time of achievement are probable, reasons other than technical, security, and political ones seem to have contributed to the announcement of low estimations on the production capacity of Iraqs crude by international energy agencies. Two major factors in this regard are the management strategy of crude oil supply and diversification of world crude oil suppliers. Energy agencies are constantly trying to manage the oil global market by releasing data. However, it is not advisable that they officially announce the increasing production of Iraqs crude that leads to the excess oil in the market. This target, which may not be achieved, could lead to a stoppage in capacity-making for other countries. This is due to the fact that noticeable excess amounts of oil in the global market lead to prospective lower prices and the economic unfeasibility of oil field development projects in other countries. Besides, a favorable situation for international energy agencies that are located in developed countries and are among oil consumers is the diversity in crude oil suppliers, so that these agencies can impose their conditions on the suppliers. Low estimations of the production capacity of Iraqs crude oil for the 2030 outlook assure the oil-producing countries of the favorable conditions for capacity building in the coming years and necessary investments in these fields with the partnership of international companies. If Iraqs oil targets are fulfilled, developed countries that are the headquarters of international energy agencies will have access to inexpensive oil, diversified suppliers, and profitable projects in oil reserve holders. Forecasts by these agencies on Iraqs crude oil represent the minimum expected production, so that future market management will not face challenges. Therefore, it can be concluded that the low estimations of these agencies on Iraqs crude production capacity for the coming years are mainly attributable to their strategy on how to control and manage the oil global market. To this end, in their analyses, they choose an orientation that gives motivation to other producers to be active in the global market and invest in oil production.

Notes 1. International Energy Agency, World Energy Outlook, 2010. 2. BP, Energy Outlook 2030, January 2011. 3. US Energy Information Administration, International Energy Outlook, July 2010. 4. Business Monitor International, Iraq Oil and Gas Report (includes 10-year forecasts to 2019), 3Q 2010. 5. Wood Mackenzie, Unrealistic Ambitions for Iraqs Oil Production Capacity, June 2010. 6. IHS CERA, Iraq Oil Production Goals Overly Optimistic Amidst Significant Challenges, 31 March 2010.

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7. Deutsche Bank, Iraq: Oil Development and Implications for the Global Market, 8 December 2010. 8. Iraq Oil Output to Reach 4.4Mn B/D in 2015 Merrill, Reuters, 14 January 2011. 9. Iraqi Ministry of Planning and Development Cooperation, National Development Plan for the Years 2010-14, 2010. 10. Center for Strategic and International Studies, The Uncertain Security Situation in Iraq, 17 February 2010. 11. Institute for the Analysis of Global Security, Attacks on Iraqi Pipelines, Oil Installations and Oil Personnel, 2008. 12. US Energy Information Administration, Iraq Country Analysis Brief, last updated September 2010. 13. A Khajavi, Iraqs Alternative Routes for Reaching the European Gas Market (www.ekemeuroenergy.org). 14. Iraq Oil Export Facilities Plan to Cost $50Bn, MEES Says, www.businessweek.com, 16 July 2010. 15. A M Jiyad, Iraq Oil Field Development: Profiles of Production, Depletion and Revenue, MEES, 26 July 2010. 16. Baghdad Announces Oil Reserves Boost, MEES, 11 October 2010.

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