Iraq Oil and Gas Report Q3 2012

BMI View: Iraq has the greatest potential for oil production growth in the Middle East region. BMI believes that potential exists for almost 8mn barrels per day (b/d) of crude output by the end of the forecast period in 2021. This falls short of government expectations and the combined capability of all projects involving international oil company (IOC) partners. However, likely project slippage, technical difficulties, political instability, infrastructure lag and OPEC production policy are all issues that provide risks to the downside against the most optimistic projections.

We highlight the following trends and developments in Iraq’s oil and gas sector:

Unappealing licensing terms, regulatory uncertainty and ongoing security concerns continue to undermine the development of Iraq’s post-war oil industry. Baghdad’s latest round has drawn just three successful bids. Without improved terms and increased IOC interest, Iraq will find it very difficult to meet its ambitious oil production target of 11mn b/d by 2020.

BMI sees Iraq crossing the 6mn b/d oil production mark by 2016, with the largest contributions being made by the giant southern fields, such as Rumaila, Zubair and West Qurna-I. Much of this increase depends on the successful execution of the water injection project being led by USbased ExxonMobil.

Consumption of oil is set to exceed 1mn b/d by 2018, based on higher demand for refined fuels as the economy expands and from the country’s growing power needs. The huge increase in crude production and export volumes implies a spectacular rise in state revenues, which should filter through to much greater macroeconomic strength.

Iraq’s refining segment may struggle to attract the investment necessary to substantially reduce imports of refined fuels. We have pencilled in an ongoing programme of refinery expansion, but plans are somewhat vague and domestic capacity looks set to remain well below refined products consumption levels.

Iraq’s natural gas sector has substantial potential, both through the capture of associated gas (through the Basra Gas joint venture) and through the development of non-associated fields. We see gas output ramping up significantly after 2013, with small exports starting as early as 2017. We are assuming an average OPEC basket oil price for 2012 of US$111.47 per barrel (bbl), falling to US$107.00 in 2013. By 2016, we expect the price to average US$99.00, edging lower to US$97.00/bbl by 2021. Based on these assumptions and BMI production forecasts, Iraq’s oil revenues should increase from US$93.9bn in 2012 to US$238.4bn by 2021.