2013-12-27 11:01:27 - Fast Market Research recommends "Iraq Oil & Gas Report Q1 2014" from Business Monitor International, now available
While the start of major upstream projects over in the coming quarters highlights Iraq's potential, volatile production and weak gas production underscore the country's challenges. Although we expect strong growth in both oil and gas output over the course of our forecast period, we expect delays and setbacks to continue, causing production to underperform in light of the country's raw potential. As the political situation between Baghdad and Erbil remains strained, we see further challenges ahead as a pipeline to Turkey nears completion.
We highlight the following trends and developments in Iraq's oil & gas sector:
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* We have slightly revised our 2013 production forecast for Iraq, accounting for lacklustre growth even as major upstream
expansion projects are underway. However, while we expect these fields to deliver gains into 2014, in light of temporary setbacks and longstanding challenges, we expect output to average only 3.1mn b/d for 2013. Although Iraqi officials are confident they can deliver an additional 500,000b/d in production over 2014, we are more conservative in our forecast given a history of underperforming and downwardly revising targets. Iraq is targeting production of 4.5mn b/d by 2014, up from the 3.4mn b/d in production capacity Iraq is targeting by end-2013.
* While we see production significantly lower at 3.6mn b/d currently, due to continued challenges associated with security, infrastructure, weak incentives and a cumbersome bureaucracy, we note that there is sizable upside to this figure given the ramp up of a host of major upstream projects. However, most notable for the 2014 target, is that the bold number fails to include any contribution from the semi autonomous region of Kurdistan.
* According to Ashti Horami, natural resources minister of the Kurdistan region, an oil export pipeline is near completion and may be online before the end of 2013. The 300,000 barrel-per-day pipeline to Turkey would dramatically increase the region's export capacity with trade currently limited to volumes moved by truck. The pipeline, which the central government continues to oppose as an illegal method to subvert the authority it claims over the management of the entire country's oil and gas sector, is set to only further reduce Baghdad's leverage over a region that has increasingly asserted its autonomy from federal authorities.
* The political situation in Iraq appeared to grow more complicated with news that the provincial council of Nineveh in the country's northwest granted the authority to the local governor to sign deals with oil and gas firms directly. If Nineveh can duplicate the Kurdish model, it could be in line to attract sizable attention and investment. The area is prospective, evidenced by the 800mn barrel (bbl) Qayyarah oil field located south of Mosul and in the centre of the province. According to the region's governor, oil majors were among the several firms who had already contacted provincial officials to express interest in potential investments.
* While low lifting costs, large reserves and ease of production from large onshore fields reduces the below-ground risks associated with Iraq's upstream, unappealing licensing terms, regulatory uncertainty and ongoing security concerns continue to undermine the post-war oil industry. Baghdad's last licensing round drew just three successful bids. Without improved terms and increased international oil company (IOC) interest, Iraqi oil production will remain well below potential, in our view.
* We see more downside risk than upside to our near-term forecast, and we could be forced to revise our 2013 figures down further should, for example, volumes from Kurdistan fail to return to market at pre- shut-in rates. The start of large fields, such as Shell's Majnoon, which is due to reach 175,000b/d by the end of 2013, has led us to maintain our forecast for output of 3.3mn b/d for now. Officials recently revised downward their long-term production targets, now expecting to produce 9.5mn b/d by 2020. We believe production will fall well short of that target, approach only 6mn b/d by that date.
* Rising Iraqi volumes must also be balanced with rising non-OEPC volumes elsewhere. In light of OPEC's stated preference to maintain prices in the US$100/bbl range, the pressure to bring Baghdad back into the production quota system is likely to rise alongside its output.
* Challenges in sustaining steady levels of both exports underscore the importance of infrastructure to Iraq's oil sector. The Kirkuk-Ceyhan pipeline, already in disrepair, has fallen victim to more frequent attacks by insurgents and struggled to operate reliable in recent months. To the south, bad weather regularly interrupts loading operations at the port of Basra. While Iraq is making notable progress in developing a new export route to Jordan, the 1mn b/d pipeline currently planned is not due to come online until 2018 at the earliest.
* Iraq's refining segment may struggle to attract the investment necessary to substantially reduce imports of refined fuels. Iraq has an ongoing programme of refinery expansion, but plans are ambiguous, and domestic capacity looks set to remain well below refined products consumption levels.
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