Iraq rises as Opec's balance of power shifts



Sanctions against Tehran are shifting the balance of power between two long-time Opec rivals - Iraq and Iran.

The two nations have clashed over their output quotas at Opec meetings since the 1980s, while on the battlefield they fought a ruinous eight-year war. Now Iraq is poised to unseat Iran as the organisation's second-biggest producer.

The Islamic republic, Opec's top producer after Saudi Arabia, is expected to face a fall in output from today's 3.5 million barrels per day (bpd) to 3 million bpd as an EU oil embargo takes effect and sanctions by the United States aimed at Tehran's finance and energy sectors come into force in June. Analysts predict the output level could decline to 2.7 million bpd by the third quarter.

Meanwhile Iraqi production has hit 3 million bpd, its highest since 1979, said Hussein Al Shahristani, Iraq's deputy prime minister for energy. Furthermore, a new export terminal with 300,000 bpd of extra capacity will allow Iraq to service more former Iranian crude customers.

If the production trends in the two nations continue, Iraq is expected to overtake Iran by June. That could make for a particularly fraught meeting that month, when Opec is next scheduled to meet. Venezuela, meanwhile, is also targeting an increase this year from 3 million to 3.5 million bpd.

Members will have to address high oil prices that some economists say threaten to derail the global economy as well as the matter of an official production quota for Iraq, which was shepherded in under the group production ceiling in December but has not been assigned a quota.

But the group will try to maintain appearances, said Caroline Bain, the senior commodities specialist at the Economist Intelligence Unit.

"The history of Opec shows that despite all-out war between Iraq and Iran, they do seek to have a united front, even though we know that's not what's going on behind the scenes," said Ms Bain. "The statement made at the end will be an Opec united."

Iran, which held the alphabetically rotating Opec presidency last year, is to cede the position to Iraq this year. Iran and Iraq are also nominating candidates for the post of secretary general in a bid to secure more influence in the group, which has historically been dominated by Saudi Arabia, home to most of Opec's spare production capacity. Iran asked fellow Opec nations not to boost output to make up for an EU oil embargo against the Islamic republic, Rostam Qasemi, Iran's oil minister, said last month.

But an increase in output from Iraq as well as Angola and post-war Libya has sent Opec's total production to 30.97 million bpd, its highest in more than three years, according to the secretariat's latest report.

"Saudi Arabia is sending a clear message that it's not willing to replace every Iranian barrel," said Ehsan Ul-Haq, a senior market consultant at KBC Energy Economics. "Saudi Arabia is willing to replace some Iranian barrels, but not all of them, because they think that if they increase their production and export significantly, then the world will start worrying about Opec's spare capacity."

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