Last week I wrote about the emerging realities in Iraq oil production and the unrealistic targets set in the contracts signed between the government and the international oil companies.

While Iraq revised its production targets downward to nine million barrels a day (mbd) in 2020 from over 12mbd in 2017, the International Energy Agency (IEA) just published its awaited report “Iraq Energy Outlook” and Iraqi officials must be regretting the invitation given to IEA and the disclosure of information for it to write a report totally in contrast to the official Iraqi line.

Needless to say that the report attempted to please the Iraqi government by some unrealistic statements about improving security and electricity supply and by even setting one of its scenarios to match the Iraqi production target, but the fact remains that the report is far from pleasing and it certainly exonerated all those Iraqi experts who were critical to the oil production targets from day one.

The report reviews the energy scene in Iraq but I will concentrate here about oil production only as it is the most central and where every other aspect follows from it.

The IEA says “Iraq will need to overcome a set of challenges relating to investment in infrastructure, institutional reform and the legal framework for the hydrocarbons sector, enhance human capacity and consolidate political stability and security.” From there it sets its “Central Scenario that reflects [its] judgement about a reasonable trajectory for Iraq’s development, based on an assessment of current and announced policies and projects.” In this scenario, Iraq’s oil production is expected to reach 6.1mbd in 2020 and 8.3mbd in 2035. Therefore, in the opinion of IEA, the expected production even in 2035 is about two-thirds of what the Iraqis signed for with the oil companies for 2017. The cumulative investment requirement in this scenario is $400 billion between 2012 and 2035 where to the year 2020 it is about $20 billion a year.

But to please some Iraqis who are still drumming high production, the IEA sets a “high case, in which [they] take a more favourable view on the prospects for energy sector development.” In this case, Iraqi oil production rises rapidly to 9.2mbd by 2020 and to 10.5mbd by 2035. There is no doubt that technically speaking and given Iraq reserves and its prolific fields these numbers are achievable but at what cost in investment and at what prospect for international oil prices and the impact on the market. Notice that in 2035 the expected production is again less than that originally set by the contracts for 2017. The cumulative investment is even more staggering at $600 billion and in the years to 2020 it is about $30 billion a year.

But the investment in 2011 was only $7 billion a year and therefore the IEA presents a “delayed Case, in which investment in Iraq’s energy sector rises only slowly from the levels seen in 2011.” Yet the cumulative investment will still be around 60 per cent of that in the central scenario or $240 billion to 2035 and “acting as a significant constraint on the pace at which the sector develops” in addition to other obstacles. The production in this case is expected to be only 4 mbd in 2020 and 5.3 mbd in 2035, a dire result which may be too pessimistic but given the “progress” in the last nine years it is possible.

I believe the central scenario is what Iraq should aspire to as it implies steady developments with the least implications for oil prices and revenues. For the higher rates of production even the IEA, which always supports high production from all producers says “it is also reasonable to ask whether such a vertiginous path corresponds to Iraq’s interest in deriving maximum value from its hydrocarbon wealth.” Vertiginous means dizzying for those like me who read the word for the first time.

The IEA adds that “the capacity of international markets to absorb the growth in Iraq’s production could also be limited.” World oil demand growth is persistently reduced in the forecasts due to the state of the world economy and the evolution of energy policy in different countries. Iraq cannot expect to capture all the growth in demand if it wants to preserve the stability of oil prices. Creating spare capacity should be reasonable and limited to suit the stability of the Iraqi physical system and not to create a redundancy that is costly to construct and detrimental to oil prices.

There are other aspects in the IEA report which I am hopeful to come back to. But now I want to have an answer as to how the Ministry of Oil will agree new targets with the oil companies and at what cost?

— The writer is former head of Energy Studies Department in Opec Secretariat in Vienna.