
Baghdad in the oil driving seat
Referendum in Kurdistan and rout of Islamic State hands Iraq chance to control crude sales and expand Basra production
Kurdistan’s ill-fated referendum and the rout of the Islamic State have handed Iraq’s central government the opportunity to try and reassert control over oil sales from the autonomous region while refocusing efforts on expanding production from the giant fields in Basra.
Baghdad is suddenly in the driving seat, having quickly vanquished the Kurds in a series of lightning military moves in the aftermath of the 25 September referendum.
The advances drove the Kurds from 40% of the territory they controlled, including oilfields in Kirkuk and around Mosul, augmenting the authority of the central government following its recent spectacular victories over IS militants in northern Iraq.
Prime Minister Haider al-Abadi now has more leeway to focus on rebuilding the war-torn country, including the vital oil sector. Iraq’s Oil Ministry has been quick to increase exports from the south via the Persian Gulf to make up for disruptions to the Kirkuk supply.
The authorities are again talking about a massive production expansion of the Basra fields to 6 million barrels per day by implementing a much-delayed multi-billion-dollar sea-water injection project.
This remains a tall order, however, given Iraq’s entrenched bureaucracy and poor record in project implementation.
There is even talk of giving BP the task of rehabilitating the Kirkuk fields, whose production has been decimated by decades of wars and disputes with the Kurds.
Baghdad’s victories on the ground are a good omen, and should at least lessen the need for massive military expenditure, thus channelling more funds to key energy projects.
A weakened Kurdistan Regional Government (KRG) is less likely to stand in the way since the loss of Kirkuk’s oilfields, which provided the Kurds with almost half of their oil exports of 600,000 bpd, leaves them financially at the mercy of Baghdad.
The KRG may therefore have little choice but to cede control of oil sales through its territory to Baghdad to ensure it gets a 17% share of the federal budget as it cannot function on the current restricted oil exports.
The Kurdish region had previously insisted on playing a pivotal role in reviving output from the Kirkuk fields.
Despite reduced threats from the Kurds and the jihadists, Baghdad faces major hurdles on the road to implementing key projects, including the water injection programme.
Nonetheless, it has already taken practical measures aimed at safeguarding and increasing its oil revenues. The Oil Ministry is busy rehabilitating an oil pipeline to Turkey’s Ceyhan port that bypasses Iraqi Kurdistan.
It has also increased exports from the south by 200,000 bpd to 3.4 million bpd in the past week.
Basra Oil Company director-general Ihsan Abdul Jabbar says his team is working to increase the southern oilfields' capacity to the 6-million-bpd level by as soon as 2020.
This compares to the current total capacity of about 4.8 million bpd, with the lion’s share coming from the Basra region.
The expansion programme is hostage to the expected award next year of the much-needed water-injection contract, with Iraqi officials talking about a consortium consisting of ExxonMobil and PetroChina being in line for the work.
Apart from its aim of boosting output from a cluster of smaller Basra fields, the project is vital to countering natural decline at giant fields such as West Qurna, Majnoon, Zubair and Rumaila.
Low oil prices and bureaucracy have so far sapped Baghdad's ability to fund the enhanced recovery project.
But the current more buoyant oil market, coupled with an increasingly-assertive central government, may finally position Baghdad to move to achieve its long-term production goal.