While the mayhem and political impasse go on in Iraq, it is not possible to underestimate the impact on the domestic market and crude oil prices in the world.

It is almost a month since intense fighting erupted between the forces of the Baghdad government and its adversaries in most of the west and north of the country. Of course, the current situation is a result of the government’s failure to handle peacefully what was initially an orderly and transparent demonstration to demand reforms in the way the country was being run, especially in the now affected areas.

The oil situation in Iraq even before the current crisis was mixed. While crude oil production was rising slowly but surely after the signing of a multitude of service contracts with international oil companies, the domestic oil market was far from being satisfactory.

For 11 years, the government failed to operate its refineries at more than 70 per cent of capacity and their expansion was slow in coming. The quality is the lowest among its neighbouring countries. It was only recently that Iraq signed a contract to build a new refinery which may come on stream in 2018.

Therefore, Iraq relied on petroleum product imports to satisfy rising demand, with severe shortages being reported every now and then. The average daily import of light petroleum products in 2013 and the first quarter of 2014 were close to 100,000 barrels a day and at an enormous cost to the economy.

A battle ground

In the current crisis, the Baiji refinery became a battle ground and was even damaged by helicopters raids. It is now out of operation and it is difficult to estimate the damages. As this refinery contributes close to 50 per cent of domestic products production, imports are definitely going to rise sharply, though the government is denying products and electricity to those regions impacted by the uprising.

On the gas side, the situation is bleak; Iraq is flaring almost 12 billion cubic meters a year of gas while the power stations are crying out for more gas instead of the costly liquid fuels. Gas processing plants are not even at the level they were in 2003 and new ones are yet to be initiated to cater to rising gas production. While flaring is going on, the government is to import gas from Iran and it is doubtful whether this solution is in any way positive.

As was said earlier, Iraq’s crude oil production is rising, especially after the rehabilitation of some old fields and the start-up of production from new fields such as Badra, Gharraf, West Qurna 2 and Majnoon. Production in 2013 was close to 3 million barrels a day (mbd) and exports around 2.4 mbd. However, Iraq lost its northern exports since early March and also the Kirkuk fields to the Peshmerga. Therefore, the expected increase in the southern fields this year may only compensate for the loss of the northern production.

All this is likely to change since what happened on June 9 led to the central government losing control over large swathes of the country. Many oil companies in the south have reduced their staff substantially as fear rises that violence may even involve the southern governorates. Judging by what happened recently in Karbala, Dewaniya and other places is an indicator that this is now more probable.

In addition, the country is locked in a political crisis where no mandates emanated from the first meeting of the Parliament to elect a speaker and president and to form a new government.

To demonstrate the seriousness of the situation we have just to look at the oil market reaction. Although Iraq’s exports have not been affected so far by the fighting in the west and north of the country, crude oil prices rose sharply with Brent rising from $109.82 a barrel on June 9 to more than $115 on June 19.

Although prices eased later due to the return of Libyan export ports to under government control, the risk premium to Iraqi oil is still there. Reuters even reported Asian refiners shunning Iraq crude in the spot market “worried that the militant insurgency in the country could spread to the area where the oil is churned out and exported”.

The most serious result of the Iraqi situation so far is the fact that the Kurdish Regional Government has seized Kirkuk and its oilfields in addition to all what they call “disputed regions” and declaring that they will not give them back under any circumstances. And who is going to stop them when the Iraqi government has been too busy clobbering Iraqi Arab cities with field guns, helicopters gunships and now winged aircraft delivered from Iran? 


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