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Iraq Wake Up Call For Oil Is A Yawn

Commodities / Crude Oil Jun 19, 2014 - 07:36 AM GMT

By: Andrew_McKillop

Commodities

Forward Looking Statements
The IEA's energy scenarios and forecasts for the next 21 years, to 2035, heavily feature long-term increases of oil supply from Iraq to help meet “soaring oil demand”, but the IEA's Factsheet for Oil Supply in Iraq, published 13 June, allows and enables some doubt. In particular this concerns the Agency's previous forecasts of “ever growing Iraqi supply”. In turn, the Agency's continued forecasting of world oil demand increasing by 12 - 15 million barrels a day by 2035 (from the IEA's estimate for early 2014 of about 90 Mbd) should be compared with the actual status and forward trends of oil in world energy. Overall, this raises plenty of doubt on the real need for increasing Iraqi oil supply.


As we can clearly see, coal and oil are now about level-pegging in world energy terms, and gas also plays a major role but BP data also shows how rapidly coal energy demand has been growing – while oil continues to decline as energy supply by percentage, and world oil demand grows at the uber-unimpressive rate of around 0.75% per year.

More surprising, at least at first glance, natural gas has stalled as a growing energy supplier, but regional variations on gas demand nuance this impression due to European gas demand showing an already four-year-long decline, but Asian demand, despite high prices, continues to increase.

Peak Oil Narrative
The IEA's narrative concerning Iraq oil is scarcely-disguised Peak Oil alarmism. Outside of Saudi Arabia and other GCC suppliers Kuwait, UAE and Oman, only Iraq is seen as able to maintain long-term annual growths of oil output. Regular claims by Iraq oil ministers and delegates to OPEC conferences that the country can maintain its 2011-2013 pace of oil production hikes including NGLs, of 25.8% in the the three years (using IEA data) are only claims. Future production increases at that rate – excluding adverse impacts from degraded security conditions and completely excluding the possibility of civil war – were already hypothetical. Iraq as of early 2014 has in fact only been able to dial back to late-1980's oil production levels.

Concerning crude oil, not NGLs and unconventional crude (which total less than 90 000 barrels a day on total oil output of about 3.37 Mbd), Iraq's production in first quarter 2014 had grown to slightly exceed its production in 1989. That is not exactly a breakthrough.

Claims that this output could be “almost doubled by about 2025” are simply that – claims.

The IEA's World Energy Outlook series however continues to claim that in Iraq, as elsewhere, supply from both unconventional oil and natural gas liquids (NGLs) “must be increased”. Worldwide, the IEA says this increase will have to be about 15 Mbd, as their combined share of total world oil supply jumps from 25% in 2012 to 33% in 2035. Despite popular belief that Iraq is home to large reserves of easily produced light sweet crude, the reality is that Iraq's lightest crudes are at 35 degrees API, called a medium-heavy crude, and much of its oil reserves and crude output is 22 degrees API – categorized very heavy crudes which are heavily contaminated by sulphur and heavy metals.

At least a half of Iraq's claimed total oil reserves of 143 billion barrels are heavy oils.

Iraq's future growth of output (excluding the country's almost unimportant NGLs and unconventional oil output) therefore depends on massive investment in heavy crude extraction and processing. In terms of science and technology to be sure – but for energy economics not at all - the IEA’s assumptions are highly plausible. Heavy crude extraction and processing for pipeline transport is no problem, in technical terms. But when we turn to energy economics we can note that nearly all (over 75%) of the rise in world oil output over the past few years has come from the US and concerns very light, zero sulphur shale oil not needing any special processing at all and able to be used “as is” in lower-cost refinery operating systems. The IEA admits that least until the end of the 2020's,  America’s “light tight” oil and Brazil’s deepwater production of light crude will continue to grow. As recently as 2010, the IEA made no references to these two sources of light low-sulphur crude. By 2020, we can take an easy bet, other sources of similar light low sulphur crudes – this time including NGLs in quantity – will become available, for example Africa onshore and offshore.

The IEA also continues to believe, or at least to forecast that OPEC supply “must grow”. Apart from output growth in the US, Brazil, Canada and Kazakhstan (Azerbaijan is omitted), it is OPEC which must do the “heavy lifting”. Inside OPEC and excluding Saudi Arabia, Iraq is the star player for “potential output increase”.

Will Global Oil Demand Contract?
The IEA completely excludes that forecast. For the OECD countries however, it has no alternative but to note the developed nations group continuing to reduce its total oil consumption. This was well over 50 Mbd in 2005, but today is about 44.5 Mbd. The difference is more than twice the total oil consumption of Germany. To be sure, both China and India could return to high and fast annual growths of oil demand, but this is no longer sure and certain. On the demand side not only economic recession, but energy efficiency gains and non-oil fuels development for national industry and transport will eat into previously-projected oil demand growth.

Global oil import demand is not exactly the same thing as global demand, either. The supposed metric of oil prices – if oil import demand is robust oil prices should stay firm or rise – no longer has real significance due to heavy and constant manipulation of oil and other energy markets by financial players. Iraq's supposed future role as the “export supplier of last resort” (after Saudi Arabia and Russia of course) depends on global oil import demand holding firm, or rising.

Present global oil import trends are highly complex due to factors including bunkering (for shipping and air transport) and re-export of both crudes and refined products. Probable net total worldwide oil import demand is around 50 Mbd and net total imports by the OECD group – which is declining – likely stand at about 24 Mbd. Neither of these figures are necessarily set to grow by large amounts, and for the OECD group the only discussion is by how much net oil import will contract to 2035.

Iraq Returns to Haunt
It is almost certain that the handwringing and posturing – from Obama downward – about Iraq's slump into a grisly and bizarre civil war is intensified by IEA-correct ideas and notions about world oil and export supply, and the role of Iraq in it.

The IEA has decided that world oil demand has to and will increase, and that world oil import demand will also rise. However, pretending that Iraq has a “special role” is exaggerated. The IEA's own briefing of 13 June shows that Iraq, in Q1 2014, supplied almost exactly 4% of world total oil output, and OECD net total imports of Iraqi oil according to the IEA stood at exactly 1.00 Mbd in Q1 2014 (also close to 4%).

This is hard to present as awe inspiring oil import dependence on Iraq. Imports by OECD Europe from Libya, for example, were running much higher than that before the overthrow and killing of Muammar Gaddafi! Any cut off of Iraqi oil exports will have a much more serious impact on non-OECD countries including China and India.

To be sure the US has invested a lot of political capital – and probably more than $700 billion of US taxpayers' money, counting war costs – in Iraq and could expect some ROI. However and outside US political elites, the West no longer wants to know about Iraq after the US, UK and its allies' disastrous foreign policy failures over the past decade. Images of ISIS public executions are not consumer-friendly. Nobody wants to know.

Ironically however, the simple fact that the US has had to ask Iran for help keeping Iraq together promises major paybacks in the oil domain and arena, due to Iran's own oil sector being heavily in need of new investment and new technology. Bringing Iran in as “new ally of the West”, in Iraq, makes sanctions against Iran even more laughable than they previously were.

In turn however this will not change oil supply/demand fundamentals due to the real context of world energy and oil. With the benefit of hindsight, it is clear that previous Peak Oil-influenced forecasts of imminent (or long term) oil shortage also included the hypothesis of continued major growth of oil demand. On the supply side it is sure, certain and proven that cheap first-generation, conventional oil is declining, but oil prices of above $75 have changed the reserve and supply balllgame. Prices above $100 a barrel almost certainly guarantee near-term overproduction and oversupply of oil and falling prices, unless oil markets stay heavily manipulated.

Iraq is in any case unlikely to achieve and sustain oil output at much better than its 1989 level in the short term. Dialing back further, to the 1970s, it could or might attain its output of those days, of more than 4.5 Mbd, but under present and emerging civil war conditions that is a pipedream. Forget about Iraq.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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