With Russian oil heading eastwards, the West is looking at all possible avenues to boost oil supply. To this extent, Iraq can, perhaps, play a major role.

In its latest weekly report, shipbroker Gibson said that “whilst many members of the OPEC+ group are struggling to achieve its allotted output quota, one country that has been able to is Iraq. In April, the country managed to achieve crude production of 4.43 million bpd, an additional 282 kbd from March, (+6.8% MoM). Whilst this was only 16 kbd over Iraq’s quota, it points to continual output growth from OPEC’s second largest producer. The country is allowed under the OPEC+ pact to raise output to 4.5 million bpd from June and has ambitions to significantly increase exports in the years ahead. Demand for Iraq’s crude is also shifting, with European refiners increasingly eyeing Basrah Medium and Basrah Heavy as alternative feedstocks to Urals, whilst India (Iraq’s largest customer) is transforming itself into one of the largest importers of Russian crude over the past 2.5 months. Iraqi exports could further shift if heavy grades from Iran and Venezuela are allowed to return to the markets this year”.

Source: Gibson Shipbrokers

According to Gibson, “IEA data shows Iraqi production has been steadily rising since July 2021, as OPEC+ agreed to unwind prior output cuts across the group. Total crude production is still 2% below January 2020 levels as Covid-19 restrictions reduced oil demand. This rising output may be a sign that Iraq’s oil industry is well positioned to take advantage of the improved oil demand outlook. The Iraqi oil ministry has also announced it plans to raise total crude production to 6 million bpd by the end of 2027; this would require raising output by a further 1.57 million bpd from April 2022 levels. Given this deadline is approximately 6 years away, it would require adding an additional 314 kbd every year until 2027 which is the current output trajectory. Rising investment would not necessarily make this an unreasonable target but is still fairly optimistic given the struggles of some of its OPEC peers in terms of boosting production. The issue of some western companies leaving Iraq in the previous years due to concerns about the country’s investment environment highlights some of the challenges in achieving higher upstream investment in Iraq’s maturing oilfields”.

The shipbroker added that “another important factor is Iraq’s export infrastructure. The key Basrah Oil Terminal has been underdoing upgrades in its export capacity. The addition of an extra 250 kbd brings total operational capacity up to 3.5 million bpd. To facilitate any future increases in production and exports, it will be crucial to raise the export capacity of Southern Iraq’s deep-water ports, which will require further investment. The other option is to boost capacity along the Northern Kirkuk-Ceyhan pipeline to channel crude into the Mediterranean. However, current political disputes with Iraqi Kurdistan make this unlikely. In the short term, Iraqi flows to China are likely to be pressured as Covid restrictions continue to impact Chinese crude demand, whilst displaced Urals becomes more attractive for Chinese refiners. Some of the additional crude may stay within Iraq as the new Karbala refinery comes online and gradually increases intake up to 140 kbd, to meet rising domestic products demand and power generation needs”.

Meanwhile, “another aspect to consider is whether the large purchases of Urals by Indian refiners will have a notable impact on their demand for Iraqi grades. Although this would leave more Iraqi barrels for those shunning Urals from their refining systems. Whilst this shows there are still uncertainties as to how much global oil flows will be reshaped after the invasion of Ukraine; it also shows how important finding alternative supply sources are for traditional Urals buyers. While the Iraqi data suggest a positive production outlook, it will still have to ensure the national stability required to make its plans a reality, one should also exercise caution moving forwards”, Gibson concluded.

Marex Media