If the oil prices stay at their current somewhat depressed levels or further decline, then Iraq’s budget is going to run into problems. Brent crude is currently at $71 per barrel, less than the allocated price of $80 per barrel.
Iraqi oil has frequently fallen short of its potential, so it is easy to ignore its significance. On Thursday, Opec decided to pause its scheduled production increase due to Iraq’s overproduction. Since new projects are in the works, the future of the nation’s oil output is critical for the group’s strategy.
Opec has received compensation from three countries- Russia, Kazakhstan, and Iraq, for their past overproduction. Thus, the most recent two-month delay in reducing total reduction makes this more challenging.
Russia produced 9.089 million bpd in July, more than the Opex target of 8.978 million bpd. The short-term production depends on various factors like access to markets under sanctions and potential damage from an intensified Ukrainian drone and missile campaign.
Kazakhstan has produced 1.545 million bdp in July. By 2027, it plans to increase its capacity to about 2.11 million bdp by developing its three main fields, Tengiz, Kashagan, and Karachaganak. If there are no significant discoveries, its output will peak around 2030.
Opec’s secondary sources estimated that Iraq production would be 4.251 million bpd in July, less than the goal of 4 million bpd. On Saturday, Iraq’s oil ministry declared they would produce 6 million bpd by 2028. Its compensation plan says it should reduce output by about 100,000 bpd below target for the rest of the year.
The Kurdish regional government and the Iraqi federal authorities have intense negotiations between them, but so far, there is no final deal, although Turkey has said for some time that it is ready to resume its operations.
When the pipeline was closed, most of the production in the Kurdish region was shut down. To make up for it, the federal government increased its output. However, most of the Kurdish production has resumed, and it is either refined locally or transported illegally to Turkey or Iran.
That resulted in Iraq’s overproduction, but Baghdad reminds Opec of the difficulty of keeping up with its commitment if it does not regulate Kurdish output. The federal Ministry of Oil is pressurizing Kurdish to reduce its production and withhold the national budget.
Despite ongoing issues in Iraq, Prime Minister Mohammed Shia Al Sudani has advanced quicker than any of its predecessors.
The main disadvantage of Iraq is its capacity to export oil. Various initiatives are underway to increase capacity from Kirkuk to Turkey, which was destroyed by Isis, from the ports of Basra, and rebuild a north-south pipeline to provide flexibility and revive the pipelines.
The UAE wants to raise capacity from its present production target of 2.91 million bdp, which increase next year to 5 million bdp by 2030. So, depending on what Russia does, Opec may need to plan to increase capacity by the end of that decade, which may be between 3.7 million to 5.7 million bdp over present expectations.
If the oil prices stay at their current somewhat depressed levels or further decline, then Iraq’s budget is going to run into problems. Brent crude is currently at $71, less than the allocated price of $80/barrel. That would slow down major infrastructure projects and encourage Baghdad to export more to close the gap.
However, it is doubtful that Iraq will meet its short-term compensation. Its Opec colleagues will need to find a fast compromise or exert pressure. Unless demand soars or production stops, Iraq’s desire to sell more barrels will be a persistent problem.