Iraq insurgency puts Opec’s oil capacity forecast at risk

Above, the West Qurna oilfield southeast of Baghdad. Iraq is Opec’s second largest producer of crude oil. Essam Al Sudani / Reuters

The Islamist insurgency in Iraq is putting at risk a predicted increase in the amount of crude oil that can be produced by Opec countries.

Opec had expected as much as 60 per cent of its predicted growth in capacity to have come from Iraq over the coming five years, a report from the International Energy Agency said yesterday.

The IEA had predicted that, following the US withdrawal of troops from Iraq, the country, which is already Opec’s second largest producer of crude oil, would be able to boost its production capacity by an additional 1.28 million barrels per day by 2019.

However, that prediction looks increasingly unlikely after insurgents from the Islamic State in Iraq and the Levant (ISIL) overran Iraq’s second largest city of Mosul last week and made further territorial gains in northern Iraq.

“[Our estimate], a conservative forecast made before the launch last week of a military campaign by insurgents that subsequently claimed several key cities in northern and central Iraq, faces considerable downside risk,” the IEA warned in its annual medium term oil market report.

Yesterday it emerged that the US was already deploying several hundred armed troops in and around Iraq and was considering sending additional special forces to deal with the crisis.

The report comes just days after Iraq’s oil minister Abdul Kareem Luaibi sought to reassure Opec, a group of 12 nations which between them control more than a third of the world’s crude oil, at a meeting in Vienna that the growing crisis would not affect oil exports.

“The accident is only in the north of Iraq,” Mr Luaibi told the meeting in Vienna. “The south is a very, very safe area.”

But with Iraq’s northern Kirkuk-Ceyhan export pipeline inoperable since March owing to attacks from insurgents, concerns about exports continue to grow.

Brent crude futures prices have surged to around US$114 a barrel over the past week as oil experts warned that other Opec countries, including the UAE, Saudi Arabia and Qatar, will need to pump more oil to meet demand.

“We assume that Iraq’s main producing fields in the south will remain secure for now,” said Jamie Webster, a senior director at the analyst IHS Energy. “However, ISIL could cause outages in other infrastructure links in the oil supply chain. We do not consider this a high threat at present, but such infrastructure, as well as producing assets, will be a tempting target if the ISIL offensive moves into higher gear.

“An increasing risk of supply outages in Iraq comes against a backdrop of an already tight global demand/supply balance that has markets already on edge,” Mr Webster added. “Opec spare capacity, currently estimated at around 3 million barrels per day (bpd), is at the lower end of the market’s comfort zone of 2.5 to 4.5 million bpd, as the market balancers Saudi Arabia, Kuwait and the United Arab Emirates continue producing at high levels in part to offset some 3.5 million bpd of supply offline globally.”

The IEA report also added that the controversial oil extraction process of “fracking” was likely to be used in countries beyond North America before the end of the decade – sooner than many analysts had predicted – with shale oil supply outside the United States reaching 650,000bpd, including 390,000 from Canada, 100,000 from Russia and 90,000 from Argentina.

It said that the US shale oil output is forecast to roughly double from 2013 levels to 5 million bpd by 2019.

“We are continuing to see unprecedented production growth from North America, and the United States in particular. By the end of the decade, North America will have the capacity to become a net exporter of oil liquids,” the IEA executive director Maria van der Hoeven said. “At the same time, while Opec remains a vital supplier to the market, it faces significant headwinds in expanding capacity.”

Last year it was estimated that China had overtaken the US to become the world’s largest net importer of oil.

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