Is Iraq an underestimated risk on the oil markets?

Iraq’s record oil exports could be hampered by growing political unrest across the country. While political instability has generally had little effect on the country’s oil industry, growing unrest now threatens Iraq’s oil production. Additionally, Iraq continues to fight for oil ownership in the Kurdistan region, adding to challenges for the industry.

The Iraqi oil industry had reported positive trends in recent monthswith production levels of approximately 4.4 billion bpd of crude, and exports highest levels in 50 years, worth $11.07 billion. The increase in exports was largely due to a shift in global dependence from Russia to other oil powers in recent months. Iraq holds firm 145 billion barrels of oil, making it the fifth largest oil state in the world. And crude is vitally important to Iraq’s economy, with oil revenues contributing around 90% of the country’s income.

However, growing political tensions across the country are now threatening these positive oil trends. In recent weeks, Iraq has seen its worst political violence since 2019, as the conflict between different Shiite groups intensifies. Street fighting in central Baghdad left at least 30 people dead. The conflict is centered around a battle between competing Shia factions. As the largest sectarian group in Iraq, different factions battle for political power as each group seeks to further grab the country’s oil wealth, as well as political dominance in the Middle East region. The unrest began in October 2021 following elections to Iraq’s parliament, the Council of Representatives. Sadr’s party, which won the majority of 73 of 329 seatsformed a coalition with the largest Sunni and Kurdish Arab parties, which together controlled the majority of seats, with the aim of forming a government.

Sadr was blocked by a group of Iranian-backed Shiite parties and his efforts ultimately failed as the Supreme Court ruled that a lack of majority support meant no government could be formed. In June, Sadr told his 73 members of parliament to resign in protest, later announcing he was quitting politics. Tens of thousands of his supporters then took to the streets of Baghdad and southern Iraq, torching opposition offices and battling Iranian-backed militia fighters within the Iraqi security forces. Sadr eventually told his followers to leave the area, further demonstrating his control over his militants.

While Iraq’s oil industry has been largely spared previous political turmoil, this recent upsurge in conflict threatens the sector. Fernando Ferreira, director of Rapidan Energy Group statement of the situation, “While Iraqi production is generally quite resilient to unrest, the current political environment is extraordinarily toxic and poses a considerable risk to the oil sector.” RBC commodities chief Helima Croft suggested this week that the protests could lead to one million bpd of oil taken off the market if the conflict escalates.

Additional political tensions continue to be felt in the Kurdistan region (KRI) as it tries to hold on to its oil exports and revenues. Earlier this year, the Iraqi federal court ruled unconstitutional an oil and gas law regulating the oil industry in Kurdistan. The Iraqi government has since redoubled its efforts to control the KRI’s oil exports.

Today, fears of being politically undermined have led oil companies operating in Kurdistan to plead with the United States to ease tensions between Iraq’s central government and the semi-autonomous region. The companies believe that intervention is necessary to ensure the stability of oil production between northern Iraq and Turkey. If the flow is interrupted, it could lead Turkey to change its dependence on Russia or Iran for its oil supplies. In addition, the KRI economy could be threatened if it loses oil revenues.

Other concerns are also affecting the country’s oil industry, with fears that a lack of investment in KRI’s oil sector could cut its production in half due to its wells drying up and the need for further exploration in the region. Since the Kurdish Regional Government (KRG) is so heavily dependent on its oil revenues to sustain the region’s economy, a drop in production could be devastating and lead to greater instability in the region. But the outlook is optimistic if the KRI can find more funding, with the potential for a Increase of 580,000 bpd by 2027, with 530,000 available for export, if investments are made. However, without investment, this figure drops to 240,000 bpd available for export.

The combination of political unrest in the Iraqi capital and an intense struggle for the country’s resources, between the Iraqi state and the Kurdistan region, puts the Iraqi oil industry in a volatile position. While the country has to deal with its political situation to ensure the stability of its oil exports, the Kurdistan region is seeking both political and financial support from external powers to ensure the sustainability of its oil industry.

By Felicity Bradstock for Oilprice.com

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