January 9, 2014 / 8:33 AM / 5 years ago

Violence not hitting Iraq oil for now, but raises concern

LONDON/ARBIL (Reuters) - Iraq’s oil industry and its foreign investors see no cause to panic after al Qaeda militants seized major towns last week - troubled Anbar province, they note, could hardly be further from the main oilfields.

A military convoy drives towards Anbar, to reinforce Iraqi troops in the province, west of Baghdad, January 6, 2014. REUTERS/Ahmed Saad

Yet the violence, in part a spillover from Syria’s civil war into Iraq’s western desert, has brought new unease about the security of pipelines and other facilities, which are concentrated in the northeast and southeast of the country.

And new evidence of the Baghdad government’s trouble in winning acceptance by Sunni Muslims, who make up a third of the population, clouds long-term prospects for a stable economy, fully a decade after U.S. forces toppled Sunni leader Saddam Hussein.

Iraq is looking to 2014 to show the biggest annual rise in oil exports since then, confirming its No. 2 position behind Saudi Arabia in OPEC as investments bear fruit. Ending a row over revenue sharing between Baghdad and Kurdish leaders that has blocked exports from the north would also be a big boost.

International experts mostly view the government’s official export target of 3.4 million barrels per day (bpd) this year - an increase 1 million bpd on 2013 - as pure fiction. But 2.8 million bpd seems feasible - if militants can be kept at bay.

“Iraq has the potential for record growth this year,” said a senior executive involved in a major oilfield project near the southern oil hub city of Basra. “But I’m quite uneasy about the deteriorating security situation.”

But while it is less than an hour’s drive from central Baghdad, Falluja is 600 km (375 miles) from Basra, in the Shi’ite-dominated south, and 400 km (250 miles) from the Kurdish capital Arbil in the north.

Both north and south, Sunni insurgents face great obstacles in mounting attacks on oil facilities situated in territories populated and heavily policed by hostile Kurds and Shi’ites.

“Over the next year, a rise in violence is unlikely to materially impact oil production and exports from southern Iraq,” analysts Eurasia Group wrote.

“Deteriorating security conditions in central and western Iraq are hundreds of kilometers away from oil facilities around the Basra region, where the bulk of Iraq’s oil is produced and where support for the political order is robust.”


Around more accessible targets in other parts of the country, the government has stepped up security since an surge in bomb attacks and other violence in recent months.

Those include the export pipeline to Turkey running through Nineveh and Salahaddin provinces and the Akkas gas field in Anbar near the Syrian border.

“The situation in Anbar will have no direct impact on oil operations in southern provinces, where the violence is unlikely to spread,” said Sam Wilkin of the Control Risks consultancy. “But there are concerns about the northern Iraq-Turkey pipeline - which has been sabotaged repeatedly - if the unrest spreads to provinces such as Nineveh and Salahaddin.”

And, looking ahead to a parliamentary election due in April and to the persistent friction among Iraq’s main communities against a background of widening sectarian fallout from the civil war in Syria, political instability poses serious risks.

“If the insurgency continues to grow, it raises longer term concerns about the trajectory of the country as a whole and how it might look after elections that are less than four months away,” Wilkin said. “There could be increased unrest if there is a delay in government formation, while disagreements between federal and provincial governments could have an impact on oil production.”

“The international oil companies can cope with the violence in Iraq as long as it’s far away,” said Mohammed al-Jibouri, who headed Iraq’s State Oil Marketing Organisation after the fall of Saddam and later served as trade minister.

“But if it spreads, they may re-think their positions - if only in the short-term - and that would have an impact on production.”

Companies working in the north and south say they have no plans to quit a country that sits on the world’s fifth biggest oil reserves, however.

“We are not feeling the Anbar effect here,” said a Kurdistan-based industry source.

“We continue to be committed to Iraq and to the development of our projects and future investments in this country,” said a spokesman for Lukoil Overseas, part of Russia’s Lukoil.

BP, Exxon Mobil, Royal Dutch Shell and Eni have been tapping the prized fields of Rumaila, West Qurna-1 and Zubair since 2010 when they signed a series of service contracts with Baghdad.


After stagnating for decades due to sanctions and wars, overall spending of about $30 billion by the foreign oil companies - from 2010 through 2013 - ramped up the country’s oil output by 600,000 bpd through those four years.

But Iraq’s oil revival stalled last year due to continued difficulties with long neglected infrastructure and security problems on top of the dispute between Baghdad and Arbil, keeping output far below official targets.

Production last year ran at around 3 million bpd - flat on the previous year. Average exports fell a touch to 2.39 million bpd. Growth is now expected to return - led by increases in the south, while gains are also expected from Kurdistan.

If Baghdad gives a green-light to Kurdish oil exports, these could run at 250,000 bpd. The oilfields of southern Iraq could pump an extra 500,000 bpd this year.

Big output rises are expected from Majnoon, led by Shell, Halfaya, where PetroChina is operator, and West Qurna-2, where Lukoil is in charge. In practice, industry sources expect to see gains of roughly 300,000 bpd in the southern fields.

Although tightly guarded facilities near the Saudi and Kuwaiti borders in the south have been a safe haven for oil workers, 2013 was the deadliest year in Iraq since 2008, with nearly 9,000 people killed, and foreign executives are wary.

“We’re acutely aware of our operating environment,” said a source at a major international oil company. “Western companies are not being targeted, but we’re staying out of harm’s way and regularly call Basra and Baghdad out of bounds.”

Even without attacks by Sunni militants, the south has known trouble of its own. Six years ago, Maliki had to send in troops to wrest control of Basra from Shi’ite militiamen.

And only in November, the government had to act to keep the peace after protests in which Shi’ite workers and tribesmen, angered by a perceived slight to their religion, stormed a camp run by Schlumberger in the North Rumaila field.

“The government of Iraq has thrown resources into improving security - oil is its lifeline,” said a Western diplomat. “There was a robust response after the Schlumberger incident.”

However, Iraq’s long term uncertainties mean international oil executives are not rushing to build up their investments. A senior source at one firm said: Against the backdrop of volatile security and politics, we will move carefully to ensure we’ve got the right risk-reward balance.”

Additional reporting by Stephen Jewkes in Milan and Alex Lawler in London; Editing by Alastair Macdonald

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