Can Iraq Replace Iranian Oil After U.S.Sanctions?

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Can Iraq Replace Iranian Oil After U.S.Sanctions?

Anwar Altaqi – Esam Aziz

While Iraq theoretically has the necessary tools to boost its crude output to over 6 million barrels per day (bpd), it is difficult to move in that direction practically. Yet, what is more difficult to answer is a simple question: If Iraq could boost its production to 6 million barrels per day despite internal problems, would Iran allow that?

Corruption, political and social divisions, the lack of a strong central government, the absence of long-term strategies, and foreign influence over Iraq’s national decision-making have all contributed to the frustrating picture of what Iraq is today. This milieu clearly affects any plan to increase oil production and exports.

But there are also industry-specific problems, and most of them have to do with money. There is a great deal of investment flooding into the opening of wells. There is also a lot of investment in exporting oil. But the connections between the oil fields and the storage facilities in the south and the export points are the reason for bottlenecks in Iraq.

Why is no attention paid to internal pipelines? Because there are some political forces in Baghdad that resist any attempt to allocate the money — that is, if there is money to start with. It is evident that pipeline shortages and lack of electricity in some fields were also among the challenges that Iraq needs to overcome if it wants to boost its production quickly and considerably.

Iraq had oil reserves of 153 billion barrels as of last year, but earlier this year Oil Minister Jabar al-Luaibi said the actual reserves could be twice as large. If the higher estimate proves true, it would make Iraq the largest oil-rich country in the world, ahead of Venezuela, which claims its reserves are just above 300 billion barrels, and also ahead of Saudi Arabia, with 260.8 billion barrels.

Iraq pumped 4.68 million/b last month, an all-time high for OPEC’s second-largest producer after Saudi Arabia. Baghdad hopes to continue expanding its export facilities. Iraqi officials estimate the country’s export capacity to be at some 3.7 million barrels per day. There is some work being done to construct pipelines and move the crude to an onshore storage facility at Fao and to further increase its scale. There is also a political effort to reach a deal with the semi-autonomous Kurdistan region and Turkey to utilize a pipeline sending crude from northern Iraq to Ceyhan that would add 400,000 barrels per day of exports. Yet, this is an excruciatingly slow process. Only the deal with Kurdistan could be explained in non-Iranian terms. Accessing Kurdistan’s pipeline to Turkey and Ceyhan storage would require commitment that all of the crude would be sold by Baghdad. The fear is that crude would not be handed back over once it reached Ceyhan and would be sold by Kurdistan to cover claims of due payments. Since the crisis with the Kurdish region erupted after the Kurdish referendum last year, the total value of Iranian non-oil exports to Iraq grew 16 percent. The reason was blocking Baghdad’s “borders” with the Kurdish region, hence blocking any access north to Turkey.

However, by deliberately working to slow Iraq’s progress in exporting oil, Iran is hurting itself. Under sanctions again, Iran is increasingly focused on securing its access to the Iraqi market, the second biggest importer of Iranian non-oil commodities. Tehran has been pushing to empower its networks of loyal paramilitary forces in the country, in part to expand its control over Iraqi economic policy, which Tehran has little influence over compared to security and national politics.

So far, Iran’s influence in Iraq is substantial. But it will grow more so after the sanctions. Iran’s revenue from oil and other exports are destined to fall. This will push Tehran to cement its influence over Iraq’s economy and build new bridges with Iraq’s Kurdish region. Iran’s backbone of the non-oil economy, its domestic housing sector, will likely stagnate again under sanctions and have knock-on effects on an array of linked non-oil industries, from cement and steel to petrochemicals. Stagnant domestic consumption will push Iran to scale up non-oil exports, where neighboring and allying countries like Iraq and Syria will be top priorities.

But in the oil sector, it is a different game. If Iraq increases its exports, the absence of Iran’s exports will not be felt. No one will rush to think the sanctions over.

It is a balancing game for Iran between allowing Iraq to export more crude in order to buy more Iranian merchandise, or preventing Baghdad from boosting its crude exports in order to tighten global supplies, hence increasing resistance to sanctions. We do not know which way Tehran will go. But we know that Iraqis are loyal to their own country before anybody else.