Iraq’s OPEC+ compliance to fall short of target

Iraq produced more than 650,000 b/d above its target output level in May 2020 and is now being asked to make up for its non-compliance in future months. Rystad Energy estimates Iraq’s actual ability to cut more barrels is limited to between 300,000–500,000 b/d. Achieving any output target below 4mn b/d is overambitious given Iraq’s dire economic need for oil revenues right now, says the consultancy.

Out of the 650,000 b/d, Iraq is understood to have asked international companies such as BP, ExxonMobil and Lukoil to help out with 350,000 b/d of cuts in the Basrah region, and the state operator – Basra Oil Company (BOC) – to cut the remaining 300,000 b/d.

Iraq committed to OPEC to produce 57,000 b/d below its target production level of 3.75mn b/d in July 2020, and then go deeper and come in 258,000 b/d below in August and September against the slightly higher target production level of 3.96mn b/d. There is even talk of trying to get Kurdistan to contribute with 100,000 b/d of production cuts – an effort Rystad Energy believes to be futile.

The market analyst estimates Iraqi oil production reached 4.8mn b/d in October 2018, the month used as a reference in estimating the production cuts for the OPEC+ member nations. Iraqi oil production reached 4.6mn b/d in April 2020 and the compliance level was set at 3.7mn b/d.

Now, Iraq plans to cut 650,000 b/d from southern Federal Iraq (FI) and has directed the Kurdistan Region of Iraq (KRI) to cut about 100,000 b/d, reports Rystad Energy. ‘If Kurdistan doesn't “hand over the barrels”, Iraq will be forced to hatch a new plan and look at other fields that can fill the gap’, it notes.

‘Even before COVID-19 hit, Iraq and the rest of OPEC+ were cutting production to manage the market. Then, after the group failed to renew the agreement in March it was an all-out production war. But Iraq failed to ramp up production, so when the deeper cuts started in May, most Basra Oil Company (BOC) fields were already at near-compliance levels, leaving little to cut,’ explains Rystad Energy’s Senior Analyst Aditya Saraswat.

Lower oil demand amid COVID-19 has forced about 300,000 b/d in production cuts in Iraq, as buyers in lockdown in Asia either cancelled orders or storage became limited. PetroChina had to halve production at the Halfaya field down to 200,000 b/d. Petronas had to shut down 100,000 b/d of production capacity at Garraf due to quarantine measures taken to protect workers. In short, COVID lockdowns are a natural force in keeping oil in the ground and bringing Iraq closer to compliance. A swifter return to the ‘normal’ would adversely affect the country’s compliance, notes Rystad Energy.

The market analyst also notes that a reason for Iraq’s under compliance is ‘its very urgent need to use oil export revenues to help build up its gas production potential to meet surging demand’. The need to become self-sufficient in natural gas stems from the fact that Iraq’s main gas supplier – Iran – is under all sorts of sanctions and the US is encouraging Iraq to halt Iranian imports or potentially face sanctions.

Iraq gas reserves are primarily associated gas – extracted alongside oil. But due to limited infrastructure, Iraq flares most gas it produces. The country was relying on the giant Akkas and Mansuriya gas field developments to feed demand, but international operators have had to declare force majeure due to worsening security conditions north of Baghdad.

Citing the above, Iraq has opposed the process to decide its quota with OPEC as it points out that it doesn’t take its fiscal situation and regional issue with KRI into consideration. To address this, Saudi Arabia and Russia have signed a memorandum of understanding to develop the Akkas and Mansuriya fields, respectively, to help ease Iraqi investment obligations.

‘It will be a very tall order for Iraq to lower oil production below 4mn b/d… The country would have to think of a “Plan B” if they want to go for complete compliance,’ adds Saraswat. Additional measures could include forced shutdowns as well as including other state operators like North Oil Company (NOC) and Dhi Qar Oil Company (DQOC) in the cut agreements. These two operators can at least provide 100,000 b/d of additional cuts but this might not be a sustainable option as most of this production feeds regional refineries.

But the question that remains at is – for how long? Former Oil Minister Thamir Ghadhban recently said in an interview: ‘With a lower price and reduced production, the petroleum cost repayments… could exceed 40% of Iraq's total oil revenue which has to be paid to international oil companies, and which Iraq cannot afford.’