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Security dynamics in Iraq affect oil production

Oilfield Technology,

The Brookings Institution suggests that any significant disruption to current Iraqi oil production, or long-term diminution in its expected growth could have major repercussions for the US economy.

As former Federal Reserve Chairman Alan Greenspan pointed out in 2022: “All economic downturns in the United States since 1973, when oil became a prominent cost factor in business, have been preceded by sharp increases in the price of oil”.

Issues in the Iraqi oil industry

  • ISIS and other Salafi Jihadist groups have been trying to curtail Iraqi oil production by attacking the southern Iraqi oil infrastructure for years, although as yet they have not been particularly successful. However, now that they are locked in a full scale, conventional war with their Shi’a adversaries they are likely to redouble their efforts. After all, Iraq’s oil production is now the revenue stream funding the Shi’a coalition forces.
  • Even before the civil war re-ignited, Iraq was experiencing various problems ramping up production. According to Brookings, the Iraqi government is in inefficient, corrupt and badly overcentralised. Oil companies have had problems obtaining visa and licenses, moving personnel and equipment, and securing resources that the Iraqis were expected to provide. Some huge projects of critical importance to Iraq and its hydrocarbon industry have encountered numerous bureaucratic SNAFUs that have delayed their completion. With a civil war to fight, the Iraqi government is going to be even more distracted and probably less efficient than it as before the events of the past two weeks.
  • Over the past 6 - 8 months, the Iraqi government has been pulling Iraqi Army and police formations out of southern iraq and sending them West to Anbar to fight the ISIS offensive that had capture Fallujah. The removal of so many security personnel from the south has led to increasing incidences of tribal violence, expanding organized crime rings, and local political violence. Over time, it may be able to stand up new security units for the south, but it will always face competition for more troops along the frontlines for the duration of the war. Historically, it is the latter that gets priority over policing near areas.

Brookings emphasises that all of this will increase the costs of doing business in Iraq for major oil companies and make it harder to Iraq to reach its full export potential.

According to Brookings, one possible mitigating factor is whether Baghdad would use the opportunity to revise its approach for oil contracting. So far, Baghdad has insisted on terms for its contracts with foreign oil firms that have significantly diminished their profitability. Although Baghdad has been remarkably stubborn on the matter, the demands of waging civil war might force it to reconsider as the only way to keep the major oil companies in Iraq and pumping the oil that is now vital to the war effort.

The future of oil in Iraq

Brookings holds that while Iraqi oil production is unlikely to collapse in the near term, or even in the foreseeable future, over the longer term it may be difficult for Iraqi oil exports to continue to expand as previously projected. Iraqi oil production might even begin to decline over time depending on a variety of military and political factors. At the very least, it calls into question whether Iraqi oil production will continue to expand at the pace needed to conform to the projection of soft oil prices over the longer term.

Adapted from a report by Emma McAleavey.

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