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Iraq's deputy PM confirms reduced oil production targets

Published: 04 June 2013

Hussein al Shahristani, Iraq's deputy prime minister, has confirmed that Iraq is in talks with international oil companies (IOCs) to revise the technical service contracts (TSC) agreed since 2009 to reduce the country's long-term oil production targets from an unrealistic 12 million b/d down to the still ambitious 9 million b/d of crude.

IHS Global Insight perspective



Iraq officially confirmed that it revised its highly unrealistic oil production targets.


This indicates that Iraq is keen to maintain good commercial relations with IOCs that can produce oil over a longer period of time.


Iraq needs to sustain oil production to invest in its conflict-ridden economy and IOCs need attractive oil contracts to stay; the revision of the contracts was needed. But political instability remains an area of concern.

Shahristani said that Baghdad is "revising the production plan for all the [oil] fields…some of them have already been agreed and finalised, and some of them are in discussion", in quotes carried by AFP. He also stressed that Iraq is revising all 30 contracts awarded and "may decide in certain cases that we will keep the production that was contracted for, because it will be feasible to maintain that production for a much longer time, based on our new studies".

As IHS World Markets Energy's analysis indicated last Friday (31 May), the Italian oil company Eni and the Iraqi government have agreed to revise the plateau production target at the Zubair field in southern Iraq from 1.2 million b/d down to 850,000 b/d, according to Iraq's oil minister Abdul Karim al Luaibi speaking before OPEC's ministerial meeting on 29 May. Zubair's estimated reserves are 4 billion barrels and the field is currently producing an estimated 250,000 b/d of oil. Eni signed the Zubair TSC with Iraq in 2009 as part of a consortium led by Eni (31.81%), including Occidental Petroleum (23.44%), Korea Gas Corporation (18.7%), and state partner Missan Oil Company (25%).

It was Russia's LUKoil however that managed to revise a TSC in Iraq successfully for the first time. In January, LUKoil reached an agreement with Baghdad to reduce the production target at LUKoil's West Qurna-2 oilfield from 1.8 million b/d down to 1.2 million b/d. As part of the amended contract, LUKoil also extended the contractual plateau duration from 13 to 19.5 years and agreed to operate the field for 25 years instead of the 20 years agreed earlier. LUKoil expects to reach first production levels of 150,000 b/d of oil in November this year and to increase this to 400,000 b/d in 2014.

However, Iraq's oil ministry made less progress in revising its TSC with its key oil majors – Shell, ExxonMobil, and BP – which are still in negotiations with Baghdad to amend their output target and contractual duration at Majnoon (current production target 1.8 million b/d), West Qurna-1 (current production target 1.8 million b/d), and Rumaila (current production target 2.85 million b/d), respectively. Al Luaibi made no comments on the state of negotiations with Shell regarding the production revision. However, Shell has reportedly proposed adjustments to the Majnoon contract, which were unacceptable to the Iraqi oil ministry, according to industry sources. New talks are reportedly scheduled within the next few weeks. This comes as a surprise given that it was Shell which started to challenge Iraq over its TSC at Majnoon asking for a reduction of the unrealistic and unnecessarily high production plateau targets and an extension of the contract duration period.

Iraq's production outlook 2013

Iraq currently produces around 3 million b/d of oil and its crude oil exports fell to 2.48 million b/d in May, a drop of 139,000 b/d compared with April. The exports were affected by the continued absence of oil export contributions from the semi-autonomous Kurdistan Region of Iraq (Kurdistan). Around 152,000 b/d of Kurdish oil in November last year came to a halt in mid-December because of the outstanding oil-payment issue between Baghdad and Erbil, the capital of the Kurdistan region. Under the September 2012 agreement, the Kurdistan Regional Government (KRG) was committed to supply 250,000 b/d of Kurdish oil exports to the national Kirkuk-Ceyhan pipeline but because of the political stalemate with the central government, Erbil is exporting 60,000 b/d of oil via trucks independently to Turkey. Meanwhile, Iraqi oil exports from the northern fields to Ceyhan totalled 273,000 b/d of oil, down just 19,000 b/d from April, despite a halt in supplies through the northern pipeline system for two weeks in May due to repeated attacks by Sunni insurgents as the pipeline system was attacked four times between 24 April and 17 May. This means that Iraq may miss its 2013 average 2.9 million b/d budget export target as exports between January and April averaged 2.48 million b/d.

Political instability

Shahristani's comments over the re-negotiated production targets come at a time of political instability and uncertainty that continues to afflict Iraq. Security forces are struggling to contain Sunni militants in majority-Sunni provinces, such as Anbar, as well as in the capital Baghdad. Casualty figures in May were the highest levels since 2008, with AFP figures recording 614 killed. On Kurdistan's stalled relations with the central government in Baghdad, Masoud Barzani, the president of the KRG, said recently that Kurdistan may seek a "new form of relations" with the central government in Baghdad if negotiations fail to resolve their disputes over oil and land. He regards the recent rapprochement between Erbil and Baghdad as the "last chance". Rather than a call for independent Kurdish statehood, however, Barzani has placed his bets on Turkey's support to help Kurdistan become financially and economically independent from Baghdad.

Outlook and implications

While Iraq's treacherous security environment exacerbates divisions between Iraq's political blocs, there remains little appetite for a return to civil war among the Sunni population and although militant groups have benefited from the situation, they still lack sufficient popular support. Neither will the conflict escalate between Baghdad and Kurdistan but a stalemate is guaranteed to remain for the foreseeable future. However, this political instability distracts government attention from tackling other deep-seated issues affecting the country. Excessive bureaucracy, inefficiencies, and corruption has hampered infrastructure development, the energy sector, and attempts at job creation. Such underlying issues are likely to remain an impediment in Iraq.

Iraqi officials are looking to spur an economic recovery that is fuelled by hydrocarbon-related activity and revenue as the country pursues its goal of becoming a global leader in crude oil production. But any reduced oil production targets will stall these efforts. One welcome development on 31 May was Foreign Minister Hoshyar Zebari's announcement that he expected the payment of war reparations to neighbouring Kuwait to be concluded in 2015; Iraq has so far paid around USD30 billion of the USD41 billion total.

Shahristani's official confirmation reducing Iraq's overall oil production target from an overly ambitious original target of 12 million b/d by 2017 down to 9 million b/d was only a question of time as for months, if not years, it was clear that its original targets were too high. The revision of the TSC also indicates that Iraq was seeking to keep IOCs attracted to its oil and gas sector. The lower target will most likely enable companies to pump oil at full volumes for a longer period of time. Shahristani remains confident yet more cautious given the overall slump in global oil demand. He pointed out that Iraq could "theoretically" be able to pump as much as 9 million b/d of crude by 2017, but he was eager to say that Iraq would be satisfied with any output between 5 and 6 million b/d as this "would generate enough revenues to meet our needs". He also commented on the oil price hoping that from Iraq's perspective, "the oil price will remain at the level above USD90/b. Otherwise we have to revise our budget. We do not expect it to fall below USD90", in quotes carried by AFP. Given that Iraq is almost entirely dependent on oil sales for its income, it will need to increase and sustain oil sales over a longer period in the coming years to fund much-needed reconstruction of the country's dilapidated infrastructure and conflict-ridden economy.

While it remains unclear whether Baghdad will reduce the plateau targets for the oil majors mentioned above, one thing is clear, the Iraqi oil ministry is keen to extend production periods. This would not only mean more profitability for the IOCs that hope to benefit more from the fee per incremental barrel of oil equivalent produced under TSC compensation schemes. This also means that IOCs and the government in particular can monetise higher associated gas output – which is important for Iraq's electricity generation as it needs approximately 4 billion cubic feet (bcf)/d of gas for its power stations, according to Iraq's oil minister Luabi.

Related articles

  • Iraq: 31 May 2013: Italian Eni reduces production target at Zubair oilfield
  • Iraq: 26 April 2013: Iraqi PM seeks to defuse latest outbreak of violence
  • Iraq: 30 January 2013: Shell, Eni negotiate with Iraq to reduce production targets
  • Iraq: 21 January 2013: Russia's LUKoil reduces production target, extends contract to 25 years at Iraq's West Qurna-2
  • Iraq: 16 November 2012: BP prepares full-field development plan for giant Iraqi Rumaila oilfield to reduce production target
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