Iraq's capacity puts pressure on oil prices

The recovery of Iraq’s oil industry is putting downward pressure on global oil prices as the ability of the world market to absorb the extra capacity might be limited, say oil experts.

"Iraq is a wildcard, so it isn't clear how quickly and how deep the affect of its production will be," said Ennio Senese, head of the resources practice for Turkey and Greece, and account lead for oil companies in Italy, at Accenture, at IP Week in London today. "But it could have a big impact on oil prices and urge the need to readdress its current membership of the Organisation of the Petroleum Exporting Countries (Opec)."

"A lot of people have focused on Iraq pumping out huge amounts of production," says John Hall, chairman at energy management firm Energyquote. "It will be at least three years though, before we see whether this will have an impact on the supply and demand picture and therefore prices."

The US Energy Information Administration (EIA) says Iraq's immediate goal is to boost production by 300,000 barrels per day (b/d) by the end of 2010, to 2.7 million b/d. Iraq's 10-year strategic plan for 2008–2017 set a goal of increasing crude oil production capacity by 1.5 million b/d within three to four years.

A raft of non-Iraqi energy giants, such as Eni and BP, and the European Union have announced they are turning towards Iraq for major oil supply in the future. BP's chief executive officer Tony Hayward recently said he hoped Iraq would become a major oil player, producing up to 10 million b/d in the next decade.

In 2008, Iraq's crude oil production under the control of the regional state-owned oil companies averaged 2.4 million b/d, up from its 2007 production of 2.1 million b/d, according to the EIA. This is still below its pre-war production capacity level of 2.8 million b/d in 2003.

Along with the question over Iraq's status in Opec, Accenture says there are two other variables that make the country a wildcard for its influence of world oil prices.

"Seeing whether Iraq will formulate a fully fledged oil law is one," says Senese. "And of course any major geopolitical incident with, for example, Iran would have an instant effect on oil prices [referring to previous invasions in Iraq from neighbouring countries]."

An in-depth article on Iraq's oil and energy security will appear in the March issue of Energy Risk and online at www.energyrisk.com or www.risk.net from the first week of March.

Energy Risk will also be providing news coverage at the CGS One-Day Seminar Iraq And the World Oil Order on March 24, www.cges.co.uk