* 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 producer
By Peg Mackey
VIENNA, June 12 (Reuters) - 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,” said Alkadiri.
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 oil sources.
That will mean Iraqi support for Iran at OPEC this week in calling for Saudi Arabia to rein in output to support prices.
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 fielding contenders.
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’s oil expansion, still in its infancy, has elicited varying degrees of scorn and concern from neighbouring OPEC giants.
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 Alkadiri.
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)