Analysis: Rapid Rise In Iraqi Crude Oil Production Likely A Thing Of The Past

Iraq’s crude oil production has made impressive gains to record high levels in recent years despite ongoing political dysfunction and the Islamic State controlling as much as a third of the country’s territory since the middle of 2014. But future production gains are in doubt for a combination of political and economic reasons, and Iraq could in fact see a decline in its crude oil production if ethnic and intra-ethnic rivalries were to lead to a multi-sided civil war.

Iraq has had big plans for its crude oil production since the fall of President Saddam Hussein in 2003. The country is blessed with vast quantities of low-cost, medium-quality crude oil, especially in the Shiite-dominated south and less so the Kurdish-dominated north. But development of its crude reserves has been hindered since 1980 by intermittent warfare, civil war and U.N. economic sanctions.

The Iraqi oil ministry had been targeting crude oil production of 12 million barrels per day and then 9 million b/d by 2020, but in the middle of last year was forced to revise its target down to a still optimistic 6 million b/d. Iraq’s crude production, now the second highest among OPEC members, hit a record high of 4.78 million b/d this past January. The country produced 4.33 million b/d in July, roughly 1 million b/d more than average production in 2014 and almost 2 million b/d more than at the end of the Saddam Hussein regime.

The Iraqi government is failing to meet financial obligations for cost recovery payments to the international oil companies under the service contracts signed to develop its oil resources over four licensing rounds from 2009 to 2012. The Iraqi government’s budget is currently constrained by low oil prices and the high cost of fighting the war against Islamic State in the Sunni-dominated central region of the country.

At the same time, the global oil market simply cannot absorb substantial new volumes of Iraqi oil at the current time. The rapid development of Iraq’s crude oil resources has contributed to the global oil glut and low crude oil prices. Iraqi Prime Minister Haider al-Abadi appears to have acknowledged this fact on August 30, when he said his country now supports a possible decision by OPEC and some other major oil exporting countries to freeze oil output to help support oil prices.

On the political front, the Iraqi government is attempting to decrease inter-ethnic rivalry between the three major groups in the country by decentralizing power from the federal government to the regions. On July 27, the Iraqi parliament endorsed a bill to create semi-independent regions with far greater political and administrative powers than in the past. The goal is to bring the country’s Sunni population back into the political fold and to placate Shiite groups in the oil-rich south.

But the upcoming attack on Mosul — Iraq’s second largest city — to rid the country of Islamic State, could lead to greater fragmentation of the Iraqi political scene once the common enemy (Islamic State) has been vanquished and also work against efforts to decrease Sunni alienation.

A wide range of military forces are expected to liberate Mosul, including Iraqi Army units and Kurdish Peshmerga Forces primarily trained by the United States, the Hash al-Shaabi, a coalition of roughly 100 Shiite militias, many of which are backed by Iran, and some Sunni tribal forces with the support of Turkey. A common concern is that victory against Islamic State will turn into warfare between Kurdish, Shiite and Sunni militias as they attempt to grab land for themselves to create facts on the ground in case of Iraqi disintegration in the future.

In addition, there is growing concern that Shiite militias within the Hash al-Shaabi will commit atrocities against Sunni civilians upon gaining control of parts of Mosul, just as Kataib Hezbollah did when helping to retake the city of Fallujah in early June.

A number of respected political analysts, including Kenneth M. Pollack from the Brookings Institution, have warned that Iraq could slip into Lebanon-like political paralysis due to antagonisms between and within the country’s three major ethnic groups. At the worst, Pollock has warned that Iraq could fall into a multi-sided civil war akin to Lebanon’s from 1975 to 1991. There are serious divisions within all three of the major ethnic groups in Iraq, which have led to bloodshed and even intra-ethnic civil war in the past.

Barring a major geopolitical disruption to supply elsewhere in the world, Iraq’s oil production is likely to increase only gradually in the coming years due to budget, contractual and market constraints. Under a worst-case scenario, where Iraq falls into multi-sided civil war, the country’s production would decline. The degree of decline is questionable, however, and is dependent upon how things play out between the various Shiite factions. The bulk of Iraq’s crude oil is produced in the south of the country and is exported via the nearby Arabian Gulf by supertanker.

Vincent Lauerman is president of Geopolitics Central, a Calgary-based consultancy.