Iraq and the bitter reality: public expectations in 2016

December 24, 2015

Since 2003, the Iraqi policy-makers took the optimistic view - Oil prices will remain high and will investigate international oil companies, which have signed contracts to develop its vast southern oil fields, objectives, or about 12 million barrels per day by the year 2017 is now clear that they did not see the difficulties commercial and technical dangerous in front of them or that they failed to anticipate the internal dynamics of regional policies and results.

It approved the 2016 budget proposed by the Iraqi Ministry of Finance in mid-September 2015, some of what happened during the last year, but it is still full of optimism. The budget of 99.6 billion US dollars of spending and the deficit to 25.8 billion dollars, estimated at US $ 45 per barrel of oil, and the continuation of a smooth deal in December 2014 and has started with the Kurdistan Regional Government on oil revenues. This arrangement is based on the Kurdistan Regional Government to send 550,000 barrels a day to the Iraqi Oil Marketing Corporation: 300,000 barrels per day from the Kirkuk oilfields and 250,000 barrels per day from fields under the influence of the Kurdistan Regional Government.

According to the ministry estimates, oil exports for 2016 will amount to 3.6 million barrels per day, including 3.05 million barrels of the south. It seems possible - but the US $ 45 per barrel price to be somewhat ambitious. As the market saturated, and with the beginning of the year 2016 will start Iran's oil exports - not to mention the sale to Iran about 36 million barrels of oil floating store. Like the other OPEC Organization members, Iraq will offer discounts in order to maintain its market share, which reduces the chances of keeping prices above the $ 40 per barrel in 2016. It may be best to assume that Iraq will bring to $ 35 per barrel of oil in next year - making 2016 a difficult year for the country needs US $ 101 per barrel in order to achieve its budget goals.

That would be an additional challenge to increased financial challenges faced by Iraq originally, due to the costly war with the so-called Islamic state and the difficult task of managing the affairs of 3.5 million displaced people.

Falling oil prices and rising imports squeezed Iraq's foreign exchange reserves at the Central Bank of $ 78 billion, we have seen at the end of the year 2013 to about 59 billion in mid-year 2015. This was the Iraqi dinar also fell sharply.

It could be worse if it is not to achieve relatively strong growth in production in recent years. Since 2010, crude oil production increased in Iraq by 2 million barrels per day to reach 4.4 million barrels in the third quarter of 2015. The current production capacity of 3.7 million barrels per day, controlled by the Federal Ministry of oil and 700,000 controlled by the Ministry of Resources natural in the Kurdistan Regional Government.

Despite the loss of 220,000 barrels per day from the Baiji refinery because of the war against the Islamic state, it has exceeded the total consumption in Iraq (including Iraqi Kurdish) 800,000 barrels per day, while the left about 3.6 million barrels for export. This includes 3.1 million barrels per day under the Iraqi State Oil Marketing Organization Management and 500,000 barrels a day, the Ministry of Natural Resources in the Kurdistan Regional Government marketed independently.

The outlook for 2016 calls for the Ministry of Oil and the Ministry of Natural Resources in the Kurdistan Regional Government to add about 500,000 barrels per day of new oil, most of which comes from Iraq's Kurdistan (300,000 bpd). However, Baghdad and Erbil are facing significant financial and technical challenges that would not spoil and these expectations, but also the ability to reduce production to 10 percent if it is not resolved.

International oil companies in the south seeking to collect $ 9 billion by the end of 2015 to cover the payments until the third quarter of the year (with the postponement of payments for the fourth quarter 2016). Despite the government's claim that the international oil companies reduce their expenditures, but it is unlikely that the economics of technical service contracts signed by these investors are changing. And therefore, it can reach the international oil companies entitlements for 2016 to $ 12 billion. In order to be able to push it, to push it, the government may have to issue foreign bonds - or lose their ability to finance the operations of international oil companies in the south.

However, the international oil companies operating in Iraqi Kurdistan were less fortunate. Payments owed to them by the Ministry of Natural Resources still rising - the amount reached in the third quarter of 2015 to about $ 3.5 billion. The amount due will rise also because of the Kurdish oil revenues barely cover the budgets of the provinces, while the cost of the war effort against the Islamic state will continue to escalate.

Such a financial pressure to exacerbate the political dispute between Baghdad and Erbil on the export of oil rights and the amount that must be paid by the federal government to the Kurdistan Regional Government. In order to keep the flow of oil exports and revenue, find itself the Kurdistan Regional Government under pressure to offer discounted rates significantly to global markets and sales management with difficulty - which further complicated internal politics.

Worse still is that many experts believe that the expectations of the production of the Ministry of Natural Resources and the Ministry of Oil in 2016, and beyond, are the fantasies can not be achieved. There is a commercial, financial and technical reasons justifying the different doubts.

Facing infrastructure projects in the south, significant delays which can hinder development. And also export network and storage capacity is sufficient, has not been any progress in the water injection projects, it has doubled burn associated gas amounts to 1.6 billion cubic feet per day.

This is in addition to the anger of the international oil companies on late payments.

The defect technical service contracts is that Iraq must pay the operating costs and the fees of the international oil companies during the fourth one - and this means that international oil companies are not investors already. They are, at best, provide short-term capital factor.

In the north, the global liquidity crisis hinder the oil companies on the move in more investments. De demanding that the two companies or (DNO) and Giniel (Genel) and the Ministry of Natural Resources estimated at $ 1.5 billion, an amount that ought to have been for them to have carried out the work. This face and the Ministry of Natural Resources demands of billions of dollars owed for bills have not been paid and the damage caused by the loss at the stage of responsibility within the arbitration against Dana Gas Union; Evren company has abandoned (Afren) and all other fields in Kurdistan. In addition to the problems experienced by the Kurdistan Regional Government recently what gets from oil theft and sabotage in the only user of the pipeline to export oil - which is the lifeblood of financial life in the region and the source of funds used to fight against the Islamic state. KRG needs about $ 8 billion a year to pay local salaries only, not to mention the cost of the war and public services.

Because of the achievements made in the past five years relating to the raising oil production, it is possible that Iraq adds two million barrels other day to its production by 2020 - that is extracted most of this amount from the southern fields, but with about 500 thousand barrels per day from Kurdish fields. However, this view is not only a medium-term view. Antiques expectations in the short term much greater difficulties. The Ministry of Natural Resources and the Ministry of Oil has been unable to resolve their problems quickly, output may remain in 2016 at the level recorded in the third quarter of 2015.

This would make longer-term forecasts are less optimistic. The continued low oil prices and the war on terrorism and the Department of 3.5 million displaced people and public expenditure abroad of control and debt rising international oil companies, are all reasons for one to suspect that Iraq will be able to achieve its goal of producing 7.1 million barrels a day by 2020. This is not insurmountable, but the goal seems elusive.

Louay Khatib

Brookings Center