Iraq's Islamist insurgency puts its southern oil in the spotlight

Mon Aug 4, 2014 8:55am EDT

* Insurgency adds political risk to production

* Southern output insulated but not untouchable

* Long-term projects may be delayed, shelved

By Rania El Gamal

DUBAI, August 4 (Reuters) - Iraq's Sunni Islamist insurgency, crippling further its dream to match the oil power of Saudi Arabia, makes oilfields in the safer south more vital, but even that region has not been completely free from attacks.

Baghdad is struggling to contain the Islamic State militancy which seized some oil facilities when it swept through the northwest in June, emboldening the Kurds in their autonomous northern region to capture the giant Kirkuk oilfields.

There has been little impact on southern oil output, which is around 3.15 million barrels per day.

The south's oil capital Basra has seen less violence this year than other cities - but there have been few car bombs, assassination attempts and kidnappings of foreign workers there over the past several months, security and oil sources say.

It is not clear who was behind those attacks. The line between insurgency and crime is often blurred.

History suggests nothing can be ruled out. In 2011, bombings of southern pipelines disrupted output from the Rumaila oilfield, Iraq's largest, at least twice.

Thamer Ghadhban, top energy adviser to Prime Minister Nuri al-Maliki, said at present everything "is going on as planned," with southern output unaffected and national output targets in place.

"We have not seriously reconsidered the long-term targets. Until now there has been no revision. We hope there would be political solutions soon so we don't reconsider the long-term targets," he told Reuters.

Over the past few years, poor infrastructure and technical problems have forced Baghdad to scale back ambitions of reaching output capacity of 12 million bpd by 2020, a level eclipsed only by Saudi Arabia with 12.5 million bpd.

Now even Iraq's new long-term capacity target of 8.4 million bpd is over optimistic, industry experts and analysts say.

The southern export facilities have remained insulated from the turmoil; oil exports in July averaged 2.442 million bpd, near a record rate.

Around 300,000-400,000 bpd of crude used to move through the northern pipeline from Iraq's Kirkuk in the north to Turkey's Ceyhan before flow was halted by bombing in February, Ghadhban said.

"Kirkuk and other areas have been affected by the security situation - without a doubt that will have an effect" on Iraq's output in the short term, he said.

Iraq has previously said it aimed to boost oil production to 3.7 million bpd in 2014, a figure that excludes Kurdish crude, as Baghdad is locked in a legal and diplomatic dispute with the autonomous Kurdish region over oil sales and exports.

Ghadhban conceded Iraq was now unlikely to reach its 2014 output target, but did not give a revised figure.

Some industry experts see 3.4 million bpd as more feasible this year. A Merrill Lynch research note in June said Iraqi oil output was unlikely to grow at all this year.

Major attacks on southern oil facilities appear unlikely. Luay al-Khatteeb, visiting fellow at the Brookings Doha Centre, said it would be hard for Sunni insurgents to infiltrate the Shi'ite south.

"They can send suicide bombers with a one-way ticket, but they do not have the hosts compared to territories they control in the west of Iraq," he said.

Jabar al-Saadi, head of the Basra provincial council's security committee, told Reuters Iraq has tightened security and deployed extra troops around southern oil infrastructure.

LONG TERM INVESTMENT

There is the risk too that new projects to boost Iraq's oil production, export and refining capacities may be delayed for months or years or canceled entirely, as foreign companies balk at taking on further investment risks.

ExxonMobil has carried out a "major evacuation" of staff from Iraq while BP evacuated 20 percent of its staff, the head of state-run South Oil Co said in June.

Islamist militants have launched a Twitter campaign naming companies working in Iraq such as ExxonMobil and Royal Dutch Shell as "a legitimate target for every Muslim."

In May, the U.S. Embassy and British officials warned their citizens, particularly oil workers, in Basra may be at risk of kidnapping by militant groups.

"Oil production and exports from Basra were not affected, they are far away in the south. But the question now is what will happen next?" said a senior oil executive still working in Iraq.

Baghdad had planned to build a strategic pipeline from its Basra fields through Turkey and Syria, and another one to Jordan. Such projects are unlikely to materialise any time soon.

"It would be difficult to convince companies to take on new projects and new engagements in the south - I think most companies are going to want to wait and see, and probably for some time," said Gala Riani of security firm Control Risks.

The International Energy Agency (IEA) said last month that prolonged sectarian bloodshed may shake investor confidence and set back longer-term growth in Iraq.

Iraq's actual output by 2020 also depends on global oil demand and possible OPEC quota restrictions - which Baghdad is currently exempt from. (Editing by William Hardy and Andrew Torchia)

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