Who controls Iraq’s oil?

The conflict in Iraq is unlikely to materially reduce oil production but could lead to a significant slowdown in its growth.

The International Energy Agency has released the full text of its monthly Oil Market Report. The report raises interesting points about the current state of Iraqi oil production, some of which I discuss below.

                                 Source: International Energy Agency

1. Iraqi oil production continues unabated, despite the ongoing violence. Officially, Iraq's daily oil production averaged 3.1 million barrels per day (mb/d) in July. Oil fields in Kirkuk pumped 0.16 mb/d; the Kurdish Regional Government (KRG) produced 0.31 mb/d; with the southern fields responsible for the remainder of production at around 2.65 mb/d. 

2. By capturing Kirkuk, the KRG has doubled the production capacity under its control to around 0.85 mb/d. However, logistical constraints and political/legal disputes with the central government in Baghdad has kept production at half capacity.

3. Logistically, the KRG does not have the infrastructure to refine or export additional oil production. Fighting around Baiji has resulted in the closure of Iraq’s biggest refinery—with 0.3 mb/d capacity. Furthermore, the Kurdish private pipeline, which has been used to transport independent Kurdish exports, can accommodate current Kurdish exports but very little on top of that.

4. The dispute with Baghdad over independent oil exports has made it difficult for the KRG to find international buyers. Of the six KRG cargoes which have left the Turkish port of Ceyhan since May, only one has managed to offload its contents—at the Israeli port of Ashkelon. Another cargo is a subject of a legal dispute before a US court between Baghdad and the Kurds. The rest are still in limbo.

5. The Islamic State of Iraq and al-Sham (ISIS) has added Ain Zahla and Batma to its existing portfolio of oil fields, which consists of Najma, Qayara, Himreen, Ajeel and Balad. This means that ISIS controls 80 thousand barrels of daily oil production in Iraq alone—equivalent to 2.6% of the total official Iraqi output (including the KRG).

6. Oil production and smuggling has been reportedly providing ISIS with $2 million a day. These reports are not backed by hard data but they seem plausible if we assume that ISIS is producing at 50% of capacity (40 kb/d) and selling crude at half price ($50 per barrel). It also means that losing the oil fields could deal a significant blow to ISIS by depriving it from a valuable source of funding.

7. Southern oil accounts for 85% of Iraqi production and all official exports. Southern production and export facilities are quite distant from the conflict zones in the north and west of the country, and have been immune from sabotage. In the short term, violence is likely to have limited impact on Iraq’s ability to pump and export oil.

8. In the medium term, violence could have quite a negative impact on oil production and exports. First, the general deterioration in the country’s security situation could lead to a disruption in foreign investment and missing out on ambitious production targets. Some companies, such as BP and ExxonMobil, have already withdrawn non-essential staff. Second, trade partnerships are likely to be tested, with China and India—the largest importers of Iraqi oil—pre-emptively looking for supply alternatives.