* Iran oil minister met Iraq prime minister before OPEC
* Both need oil over $110, to call on Saudi to cut output
* Iraq set to overtake Iran as OPEC's second biggest
By Peg Mackey
VIENNA, June 12 Historic rivals Iraq and Iran
are growing closer on OPEC policy, providing a counterweight to
the Gulf Arab countries led by Saudi Arabia that have long
dominated the cartel.
But cordial relations could grow strained later this year
when Iraq vaults past Iran to become OPEC's second biggest
producer after Saudi Arabia.
A bold oil expansion programme has already pushed Baghdad
to 3 million barrels per day (bpd) - a level last pumped before
Iraq invaded Kuwait in 1990 - and just a touch below Iran, where
output has sunk to 20-year lows because of Western sanctions.
Size matters in the Organization of the Petroleum Exporting
Countries, where high production and reserves mean influence.
Baghdad and Tehran sparred over OPEC quotas during the 1980s,
while they fought each other in an eight-year war.
But relations have warmed since the overthrow of Saddam
Hussein and the Shi'ite-ruled neighbours are now firmly aligned
as OPEC price hawks in the same camp as Venezuela and Algeria.
That pits them against the Gulf Arab price moderates in OPEC
- Saudi Arabia, Kuwait and the United Arab Emirates.
"This is a sign of the times," said Raad Alkadiri of
Washington consultancy PFC Energy of Iran and Iraq. "There's
been cooperation between them on oil matters for years, although
they haven't been lined up together in OPEC,"
A mutual need for oil above $110 a barrel to balance their
budgets is expected to prompt Iran and Iraq to call for Saudi
Arabia, pumping its highest in decades, to cut back when
producers meet in Vienna on Thursday.
Oil has fallen $30 since March to below $100 as oil stocks
build and the economy wobbles. That falls short of the $100-$120
range that Iraqi Oil Minister and current OPEC President Abdul
Kareem Luaibi says is reasonable.
"In terms of politics, it makes total sense. Everything Iraq
does is driven by its internal crisis and it needs Iran's
support. If Tehran asks for Baghdad's help, Iraq will deliver,"
As internal foes test his survival skills, Iraqi Prime
Minister Nuri al-Maliki's OPEC policy instructions to his oil
minister are being driven by domestic politics.
And with its ally Syria on the brink of civil war and under
Western sanctions for its nuclear programme, Iran wants to avoid
instability in Iraq and is using its influence to thwart efforts
to unseat Maliki.
So when Iran's Oil Minister Rostam Qasemi visited Maliki in
Baghdad last week, Maliki ordered the oil ministry to adopt a
unified position with Iran on OPEC production levels, say Iraqi
That will mean Iraqi support for Iran at OPEC this week in
calling for Saudi Arabia to rein in output to support prices.
IRAN, IRAQ WANT SAUDI TO CUT
Its output stymied by Western sanctions, Iran says lofty
production from Saudi Arabia and its Gulf Arab allies Kuwait and
the United Arab Emirates has caused prices to fall.
Tehran will be a leading voice among those calling on OPEC
to cut supply back to the 30 million barrels per day ceiling
agreed in December, well below current output of 31.6 million.
Saudi Arabia accounts for 10 million bpd of that.
Iraq agrees that supply is too high. There is scope for the
pair to build an alliance to compete with Gulf Arab producers
long-accustomed to getting their way in OPEC. Iran and Iraq
combined with others in OPEC a year ago when the Gulf Arabs
failed to get backing to raise output.
Venezuela and Algeria, also traditional price hawks, will
support calls for Saudi to cut back at this week's OPEC meeting.
But cooperation between Iraq and Iran has it limits. Rivalry
is already evident in the race for OPEC's secretary-general
post, where both - along with Saudi Arabia and Ecuador - are
More of a threat, though, is Iraq's growing production. In
April, Iraq exported more crude than in any month since it
invaded Kuwait in 1990 - helping to offset the loss of supply
from Iran because of sanctions.
Iraqi oil growth started in earnest in 2010, after Baghdad
secured a series of service contracts with companies such as BP,
Exxon Mobil, Eni and Royal Dutch Shell.
Since then production, held back by decades of wars and
sanctions, has risen 600,000 bpd to 3 million bpd. Exports to
world markets are now running at 2.4 to 2.5 million bpd - easily
overtaking Iran's sales of around 1.6 million bpd.
By the end of the year, production too should be outpacing
Iran's, down this year from 3.5 million to 3.1 million bpd,
threatening to erode Tehran's role as an oil power.
"It will be an historic development that will cause
friction," said Mehdi Varzi, a former official of the National
Iranian Oil Co.
"Volume matters in OPEC and Iran's star will be on the
decline unless measures are taken to reverse the decline in
Iranian oil production," said Varzi, who now runs an energy
consultancy in the UK.
IRAQ 4 MBPD BY 2014?
Iraq's oil expansion, still in its infancy, has elicited
varying degrees of scorn and concern from neighbouring OPEC
Western and Iraqi geologists say Iraq has enough oil in the
ground to produce to its target of 12 million bpd, but
infrastructure bottlenecks, red tape and a lumbering bureaucracy
make that impossible by a contractual deadline of 2017.
Production of 6 million bpd - enough to put Iraq a long way
ahead of all but Saudi Arabia in OPEC - could be reached by the
end of the decade, some say.
"It's one issue that Saudi Arabia and Iran can agree on:
Iraq's production should never get too high," says a former
Iraqi oil official.
As if to prove that point - following the success of its
licensing rounds, Iraq raised its estimated oil reserves to
143.1 billion barrels. A week later, Iran trumped it with a new
figure of 150.31 billion barrels.
At some stage, Iraq will need to negotiate a sizable OPEC
quota to reflect its potential, although Luaibi said it was not
a subject for discussion yet. "Now the parameters have all
changed," he said.
The quota debate will draw in Iran, which before the
1990-1991 Gulf War had parity with Iraq. Some OPEC veterans see
the issue coming to a head when Iraqi output hits about 4
million bpd, on a par with Iran's theoretical full capacity.
That point could be reached in 2014 if all goes to plan.
Iraqi oil officials say exports will gradually rise by up to
200,000 bpd during the second half of this year taking
production to 3.2 million bpd.
Iraq's oil minister says shipments next year will rise to
2.9 million bpd - boosting production including oil used
domestically to 3.4 million bpd.
Some cast doubt on whether Iraq will be able to sustain the
pace given the obstacles ahead.
"Iraq and the international oil companies have done an
amazing job, but Baghdad's ingenuity has its limits. It's a
mug's game in the short term to bet against rising production,
but a sustainable rise will be challenged by events," said
But those involved in the oilfield mega-projects have faith
in the qualified success of Iraq's oil development.
"The Iraqis are masters of squeezing everything out of what
they have," said a senior Western oil executive.
(editing by Richard Mably)