By OGJ editors
HOUSTON, Feb. 8 -- Sabotage and technical problems will keep Iraqi oil production below capacity levels again this year, said a report from World Markets Research Centre, part of Global Insight Inc. (GI) of London.
"The scenario for 2006 and beyond is somewhat brighter, if only security can be maintained and improved in key oil-producing regions," GI analyst Catherine Hunter said in a Jan. 27 research note.
But for 2005, ongoing security problems and the temporary nature of a transition government are expected to delay the awarding of any long-term, large-scale projects until the installation of a permanent government in 2006.
Until then, the country's focus is likely to be limited short-term engineering, procurement, and construction contracts for upstream work and refining projects designed to increase production and refining capacity. That work will take 18 months to 2 years to complete.
"Major production-sharing contracts (PSCs) and international investment opportunities are unlikely to get going until 2008," Hunter said. "Contentious previous contract awards still have to be tackled by any permanent Iraqi administration."
Sabotage
Sabotage has cost Iraq directly and also in terms of lost opportunities in a year of high oil prices. By yearend, oil revenue was $17.1 billion on 1.9 million b/d of production.
Meanwhile, 250,000-600,000 b/d went into the Iraqi domestic market, where it generated no revenue, or was lost to pipeline sabotage, technical failures, and theft, Hunter said.
Additional revenue losses resulted from frequent incapacitation of pumping stations, crude oil pipelines, and export facilities, notably in northern Iraq.
The Iraqi Oil Ministry calculates the direct cost of sabotage at $8 billion since the US-led invasion, with $6 billion in sabotage damage during 2004 alone. This estimate excludes the cost of providing oil at no charge to the Iraqi domestic market.
"Most sabotage was registered in northern areas around Beiji and Kirkuk, reflecting rising ethnic tensions and increasingly coordinated opposition to the government in and around the Sunni heartlands," Hunter said.
By yearend 2004, the State Oil Marketing Organization (SOMO) gave up attempting to book long-term contracts for Kirkuk crude oil. In January, SOMO cut contract volumes exported from the Basra and Khor al-Amaya terminals by 10% (to 1.5 million b/d). Pipeline sabotage and technical difficulties in December and January increased the incidences of contract breaches.
"The situation highlights the pressing need for further Iraqi export routes, particularly in the south of the country, where the proximity of Basra and Khor al-Amaya presents the risk of simultaneous outages in the event of localized power cuts, feeder pipeline sabotage, and bad weather conditions," Hunter said.
Reconstruction efforts
Progress on rehabilitating oil facilities was disappointing last year, hampered by tense security conditions. Contractors spent up to 20% of their budgets on security rather than reconstruction work, she said.
"Even current production levels are in jeopardy because of long-term underinvestment in facilities and a reliance on short-term fixes to maximize output by both the previous and current administration," Hunter said.
The return of contractors to the southern region will determine whether further capacity increases are possible in 2005. Meanwhile, the prospect of increased output from northern oil fields appears to be remote until Sunni areas are pacified, she said.
"However, any technical advances on production capacity are still expected to be tempered by the impact of ongoing sabotage and equipment failures, limiting average production in 2005 to around 2.3 million b/d, despite technical capacity of nearly 3 million b/d currently and up to 3.3 million b/d at the end of 2005," Hunter said.
The Iraqi government has set a 3.5 million b/d production target by yearend. Hunter expects annual exports to average 1.8-2.1 million b/d, yielding revenues of $23-27 billion at an oil price of $35/bbl. She said that the lower end of the range is more probable.
