Baghdad oil revival to calm fuel prices

13 June 2008
International economist says rejuvenating Iraq's oil sector offers the best hope of easing supply concerns.

Investing in the revival of the Iraqi oil industry offers the best hope of containing soaring global oil prices, according to a leading international economist in the energy industry.

The International Energy Agency (IEA), which acts as an energy adviser to 27 of the largest oil-consuming nations, says the rebuilding of Baghdad’s production capacity beyond its output of about 2.5 million barrels-a-day (b/d) could help calm the current supply crunch.

“Iraq is one of the very few areas which could bring production [to the market] in a relatively short period of time in big levels, which would obviously help prices,” Fatih Birol, chief economist at the IEA tells MEED.

“Iraq’s geology is easy compared with other countries and it is easy to bring it to the pump stations. The rehabilitation of the existing fields [and the] development of new fields could be the industry’s window to ease supply concerns.”

His comments come at a time of increasing global concern over high oil prices, which have been trading in excess of $130 a barrel in recent days. The situation has prompted Riyadh to call a summit of oil-producing and consuming countries to discuss the issue.

The meeting, to be held on 22 June in Jeddah, will look at the causes of the high prices and try to develop strategies to deal with them. Officials from oil-producing nations, consuming countries and international oil companies (IOCs) are all expected to attend.

Birol says Saudi Arabia’s efforts to take the lead on such a contentious issue should be welcomed. “We strongly believe producers and consumers should talk and this is a good step,” he says.

However, he emphasises the need for firm decisions to be made. “I really hope that these talks end up with concrete steps, such as convincing the market that we will have enough investments which will bring new supply additions.”

Previous meetings between top oil producers, including last year’s Opec summit in Riyadh, have been criticised for failing to tackle issues including the rise of price speculation by hedge funds and the impact of the falling dollar on oil revenues.

Baghdad is already moving head with its plans to boost output, although continued delays to the introduction of a new oil law have hampered progress.

It is due to announce the results of the first round of tenders to develop several of its largest oil fields on 30 June, including South Rumeila and North Rumeila, West Qurna, Zubair, Missan and Kirkuk. ExxonMobil, Chevron, ConocoPhillips, all of the US, the UK Dutch Shell Group and the UK’s BP are competing for the deals (MEED 10:6:08).

Oil Minister Hussain al-Shahristani told MEED earlier this year that the contracts, thought to be worth about $500m each, would increase production by 100,000 b/d per field. They are part of plans to more than double oil production within five years (MEED 8:2:08).

Bob Fryklund, vice-president for industry relations at energy consultant IHS, says Baghdad should be able to increase production by 300,000-500,000 b/d in the short-term, although the ministry’s aim of reaching this level by December was ambitious.

“It is pretty clear Iraq has enormous potential but it remains uncertain how quickly IOCs will be able to ramp up existing production levels,” he says.

As well as Iraq, other major oil producers around the region are also likely to come under pressure to boost output.

The IEA argues that, across the region, a stronger commitment to increase output in the long-term is needed if supply is to keep pace with demand.

“They [prices] are abnormally high,” says Birol. “It is mainly driven by growing demand which may not be met by growing supply. This makes the market nervous. There are lots of revenues [due to the high oil price] and it would be very good to put those revenues into firm and transparent capacity expansions.”

The IEA predicts that global consumption will jump from 86 million b/d to more than
116 million b/d by 2030, with a potential supply shortfall by 2015.

Birol emphasises that, while it is not the role of the IEA to predict prices, he cannot foresee prices falling back to the levels of a few years ago. “I do not know where they [prices] will end up but we will not go back to the levels of four years ago of $50.”

Brian Coulton, a managing director at credit ratings agency Fitch Ratings, suggests that oil prices should fall in line with other commodities. “It is not our expectation that oil prices will reach $200,” he says. “We think commodity prices are a little overdone. We think it is increasingly difficult to justify the current level .”

The IEA recently launched a study to obtain more detail on the world’s 400 largest oil fields, including those in Iraq and the rest of the Middle East, in an effort to encourage greater transparency. The study is due to be released in November.

A previous study by consultants Cera said the depletion rate of the world’s biggest fields is about 4.5 per cent a year.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications