Iraq Must Diversify Despite Strong Oil Revenues
After a successful 2022, Iraq’s oil and gas industry has faced challenges this year following the closure of an export pipeline in the north of the country. Conflict over the semi-autonomous Kurdistan region has made it complicated to export the crude that provides most of the country’s income. An overreliance on oil revenues has led to economic instability and the dire need for economic diversification to bring about greater stability. However, with new energy projects in the works, with international partners, Iraq’s oil industry is expected to remain strong for years to come.
In 2022, Iraq’s oil revenues exceeded $115 billion, reflecting strong oil prices and the high global demand. This marks a four-year high after the low demand of the Covid pandemic when Iraq’s oil revenues fell to $42 billion. Iraq is the second biggest oil producer in OPEC, and crude production provides around 90 percent of the country’s income. The oil-rich nation exported over 1.2 billion barrels in 2022, averaging around 3.3 million bpd.
Iraq relies heavily on oil exports for its income due to ongoing economic challenges and conflict, which have led to the need for significant investment in the country’s infrastructure. Although Iraq has substantial oil resources, with over 143 billion barrels of proven reserves in 2016, it is currently experiencing an energy crisis. Its 42 million inhabitants face regular blackouts and damaging electrical surges. At present, around one-third of Iraq’s gas and electricity comes from Iran. However, these deliveries are often disrupted, resulting in power cuts. Iraq is now facing increasing pressure from international organisations to diversify its economy away from oil and natural gas in preparation for the global green transition. Related: Oil Prices Return To Recent Highs
In late March, producers were forced to shut in and reduce output from multiple northern Kirkuk oilfields in the Kurdistan region (KRI) in the north of Iraq due to the closure of the country’s northern export pipeline. The 450,000-bpd pipeline was closed after Iraq won an arbitration case in the International Chamber of Commerce (ICC) stating that Turkey had violated a joint agreement by letting the Kurdistan Regional Government (KRG) export oil to the Turkish port of Ceyhan without Baghdad's permission.
The halt to Iraq’s oil trade meant a slump in oil exports of 200,000 bpd in March and a rise in oil prices to $80 a barrel. Those that did not stop production altogether were forced to put their crude into storage while waiting for the pipeline to open again. However, limited storage capacity means oil production has fallen significantly. Several international oil firms stopped production, including Norwegian oil firm DNO and Canada’s Forza Petroleum.
In early April, the KRG reached an initial agreement with the Iraqi government to resume oil exports from the KRI. Officials from the federal government, the KRG, and the Turkish government held several discussions to come to an agreement over the oil exports. The agreement is expected to remain in place until the Iraqi parliament approved the oil and gas law bill. The deal is said to agree for oil to be jointly exported by KRG's natural resources ministry and Iraq's federal oil marketing firm Somo. While the KRG can set up an account for Kurdish revenues, the federal government will be able to monitor it. Turkey is currently still waiting for an official announcement to resume the flow of Iraqi crude.
In addition to a reduction in oil exports due to the pipeline closure, Iraq was forced to reduce crude output at its southern oilfields in response to the announcement of OPEC+ quota production cuts last month. OPEC stated it would be reducing output across its member states by 2 million bpd until the end of 2023. Iraq’s oil minister, Hayan Abdel-Ghani, said “We forced some companies (with technical service agreements) in the south to lower production in order to adhere to the OPEC+ decisions.”
Despite recent challenges, there is some optimism in the oil industry. Iraq is currently in talks with France’s TotalEnergies about the finalisation of a long-delayed $27-billion energy deal. Abdel-Ghani stated that the deal has reached an advanced stage, and he believes the actors "will activate the deal very soon.” The deal, which is expected to see TotalEnergies building four oil, gas, and renewables projects in southern Iraq for $10 billion, was initially signed in 2021. The project is expected to span 25 years.
Politicians are still debating the terms of the deal, with the federal government demanding a 40 percent share of the project. TotalEnergies wants to maintain a majority share, which has made the government demand a point of contention and has resulted in delays. However, Abdel-Ghani is hopeful that the deal will be finalised soon so the project can go ahead.
After a successful 2022, Iraq’s oil and gas industry has faced multiple challenges in 2023, leading to production and export cuts. The country’s reliance on its oil revenues means that disruptions in its oil output and export can often lead to economic instability. But there is hope around an agreement between the federal government and Kurdistan Regional Government over crude exports to Turkey, as well the finalisation of a deal for new projects in the south of Iraq with partner TotalEnergies.
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By Felicity Bradstock for Oilprice.com
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