Iraq heads for OPEC clash over quota

Feb. 5, 2010 at 5:38 PM
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BAGHDAD, Feb. 5 (UPI) -- The government seems set to clash with the Organization of Petroleum Exporting Countries after declaring it will not participate in the cartel's production quota system as Iraq drives to quadruple its output.

Falah al-Amiri, head of the State Oil Marketing Organization, said Thursday that Iraq was not interested in discussing quotas until its production has hit 4.5 million barrels per day. That's more or less double the current level.

Oil Minister Hussain al-Shahristani wants to boost output to 10 million to 12 million bpd over the next decade or so to finance national reconstruction after four decades of war, international sanctions and neglect.

Iraq, a founding member of OPEC, has not had a production quota since 1998, when it was pegged at 1.3 million bpd to allow Saddam Hussein's regime to sell oil for food during U.N. sanctions imposed in 1990.

Clearly such a quota would be out of the question now for a country that has the fourth-largest oil reserves after Saudi Arabia, Canada and Iran.

These are currently estimated at 115 billion barrels, but that could double once untapped reserves are added.

The production target of 10 million to 12 million bpd would rival the current levels of Saudi Arabia and Russia, the world top energy producers, and would necessitate an OPEC quota for Iraq -- if it chose to remain in the cartel.

According to the U.S. security consultancy Stratfor, "Oil is Iraq's primary revenue source and Baghdad has no intention of cutting itself off from any potential income for the greater good of the oil cartel.

"At the same time, OPEC member states are eager to see Iraq join the quota system because of the threat its energy potential poses to the group's ability to limit world oil supply."

Iraq's production plans have been bolstered by the recent awarding of 20-year production contracts to some of the world's largest energy companies for 10 of the country's major oil fields.

The companies were selected on the basis of the production increase targets they submitted to the Oil Ministry.

More contracts are likely to follow, although not necessarily through two auctions held in Baghdad in June and December.

These companies, including Exxon Mobil, BP, PetroChina and Royal Dutch Shell, will be investing tens of billions of dollars in rebuilding Iraq's rundown oil industry.

Russia's oil major Lukoil said Feb. 1 that it alone plans to invest $30 billion in developing the huge West Qurna Phase 2 field in southern Iraq, one of the big prizes it won with Statoil of Norway.

Overall Iraqi production is not likely to increase significantly for two or three years. But this depends to some extent on how committed the foreign companies are to making the substantial investment required if they wish to have long-term access to Iraqi oil.

This means that to a large extent the Iraqi government will have to depend on these companies to achieve its production goal.

Despite the success of the 2009 auctions, problems remain -- mounting violence in the run-up to March 7 parliamentary elections, uncertainty over their outcome, and, probably more importantly, the absence of a long-delayed oil law that will define revenue-sharing and regulation of the industry.

The revenue-sharing question will become more acute as production increases and oil earnings swell.

A collision with OPEC, headed by Saudi Arabia, seems inevitable if Iraq succeeds in significantly boosting its oil production because the cartel is not likely to tolerate an Iraq that sees untrammeled oil exports as its salvation and vital to its survival.

Amiri, the marketing chief, was at pains to stress that when it comes to discussing Iraq's quota again, OPEC would have to factor in the size of Iraq's reserves -- which are widely expected to increase substantially as exploration resumes -- and its wide reconstruction requirements.

"Regardless of the pace at which its output capacity picks up, Iraq's oil fields, which are large, close to the surface and easy to develop, will ensure that the country is free to produce as much as it wants for the next few years," Stratfor observed.

"That statement from the State Oil Marketing Organization is an indication that Baghdad is bound to resist any attempts to cap its production level."

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