Dubai: Iraq’s crude production will start to decline in 2018 because of a slowdown in investment due to lower oil prices and a costly war on Islamist militants, according to Morgan Stanley.

Opec’s second-largest crude producer will pump 4.18 million barrels a day in 2017, with output then falling to 4.132 million in 2018 and to 4.127 million by 2020, Haythem Rashed, a Morgan Stanley analyst in London, said in a Sept. 2 report. The bank had previously forecast rising output every year to 4.6 million barrels by 2020.

Iraq’s production has climbed 1 million barrels a day by July from a year earlier, becoming the strongest contributor to global supply, Morgan Stanley said. The removal of export constraints in the south, increased pipeline capacity in the semi-autonomous Kurdish region and the separation of heavy and light crude streams all contributed to growth, according to the report.

“With these infrastructure and crude marketing tailwinds now largely played out, we see limited prospects for further production growth,” Rashed said in the report.

Islamist Militants

Iraq, with the world’s fifth-biggest oil reserves, has been rebuilding its energy industry after decades of war and sanctions, while fighting a costly war against Daesh militants who seized a swathe of the country’s northwest. The nation needs to keep increasing crude output because lower oil prices have curbed government revenue. Oil prices slumped since last year as the Organisation of Petroleum Exporting Countries defended market share against booming production in the US

With oil prices down 41 per cent in the past year amid fighting Daesh militants, the Iraqi government’s finances face “significant pressure,” Morgan Stanley said, citing an International Monetary Fund estimate that its foreign reserves will drop by more than 50 per cent by the end of next year.

The number of Iraq’s oil-directed rigs has declined 50 per cent in the past year, and some of Iraq’s largest oilfields cut capital expenditure spending by about 30 per cent, the bank said in the report.

The Arabian Gulf country had been ramping up production and exports with the help of companies such as BP Plc, Exxon Mobil Corp. and Royal Dutch Shell Plc. Morgan Stanley raised its estimate for production this year by 119,000 barrels to 3.88 million, and for next year by 79,000 barrels to 4.17 million.

“We understand from meetings with majors, service companies and energy lawyers that the government has asked operators to reduce activity on oilfields in order to moderate the cost recovery burden,” Morgan Stanley said.