(EnergyAsia, June 30 2014, Monday) — The International Energy Agency (IEA) has served notice that it may lower its medium-term forecast for Organisation of Petroleum Exporting Countries (OPEC) production amid the worsening geopolitical situation in the Middle East, with Iraq effectively plunged into civil war.

The agency and other analysts have long pinned their hopes on new supplies from post-Saddam Iraq to account for as much as 60% of the cartel’s new capacity through 2020. That assumption seems increasingly optimistic as the US-empowered Sunni militia under the Islamic State of Iraq and the Levant (ISIS) has taken over parts of Iraq and threatening to overthrow the Shia-led government in Baghdad as part of a wider revolution across the region.

While Iraq has huge oil reserves and production potential, the IEA said it also faces political challenges from both the ISIL insurrection and the Kurds who have control over a significant portion of the country’s oil reserves. The immediate threat is coming from Sunni insurgents who have shown themselves more ruthless and organised than any extremist groups operating the Middle East since launching their military campaign on June 9.

The conflict between pro-government and ISIL forces have helped Brent crude prices climb to a nine-month high above US$115 a barrel and WTI to US$108.
“Perception of heightened political risk in North Africa and the Middle East and chronic disruptions in Libyan exports have been a feature of the market for some time, but so far have been largely offset by record growth in non‐OPEC supply,” said the IEA.

“High crude imports into China, likely for expanding the country’s strategic reserves, also have pulled as much as 1.2 million b/d of additional crude demand in April and May, roughly equivalent to the current losses in Libyan production versus pre‐Civil War levels, providing additional support to markets.”

The Paris-based agency warned that the conflict in Iraq could reduce oil supplies following the loss of between 250,000 and 300,000 b/d of production from the north since late 2013. Since early March, Iraqi oil production has been affected by the violence in Anbar province and attacks on the Kirkuk‐Ceyhan pipeline that link supply from Iraq’s northern fields to world markets via Turkey.

Supply from the south of the country, in contrast, had been on the rise. As Iraq managed to lift production to 30‐year highs this year, all of its exports since March have come from southern terminals near Basrah.

But prospects of a return of the Kirkuk‐Ceyhan pipeline now only look even more elusive, and the situation of the ground, at the time of writing, remained highly fluid.

At OPEC’s regular ministerial meeting in Vienna on 11 June, the cartel agreed to maintain the 30 million b/d production target for 2014. The loss of supplies from Iraq and Libya, where volumes have fallen by a total of 100,000 b/d in early June from 1.4 million b/d a year ago, have increased the burden on Saudi Arabia, the group’s largest holder of spare capacity, to maintain global supply.

The IEA estimates OPEC’s “effective” spare capacity at 3.31 million b/d, with 80% of that held by Saudi Arabia.

Consultant Douglas Westwood said international upstream companies pulling their workers out of Iraq could affect its ability to meet production targets.

“BP, ExxonMobil, Petronas and China National Petroleum Corp (CNPC) have all undertaken this to lessen the risk of possible attacks. Militants have surrounded the Baiji oil refinery and production has been halted for several days. The political uncertainty and violence in Iraq has also caused Brent to hit a nine-month high of above $115 per barrel,” it said.

While the effects on exploration and production operations are minimal for now, the UK firm said Iraq’s oil operations could be affected if the insurgency spreads south where the bulk of its producing fields are located.

For now, it said operations are continuing even though some workers have been evacuated.

“The insurgency is focused in Central Iraq, whilst the majority of production and exports lie in the south. In the north, the Kurds are defending the Kirkuk oilfield,” it said.

US firm Marathon has yet to evacuate employees while Chevron and BP are continuing to operate as normal and Oryx Petroleum is still planning to ramp-up drilling activity in the north. Russia’s Lukoil has tightened security at its West Qurna-2 oilfield even though it believes operations are not under threat.

According to Douglas-Westwood, Iraq’s oil minister remains convinced that his country can still meet the 4.1 million b/d oil production target for 2014 that he set last December.

Douglas-Westwood disagrees and cites the IEA for support, stating that the agency recently concluded that the country’s targets are increasingly at risk.
“The agency expect capacity to reach 4.54 million b/d by 2019, compared to the Iraqi government’s objective of nine million b/d by 2020,” said Douglas-Westwood, which believes a target of six million b/d is more realistic.