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Iraq Is Still a Game Changer, and OPEC Should Be Scared

U.S. growth in oil production has grabbed investors’ attention, but Iraq still remains important to the global oil picture.

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Iraq is the bad boy of the global oil scene, callously pursuing its interests despite its impacts on others. Investors who want to understand how the global oil picture develops over the next few years need to be aware of Iraq's ambitions. The country risks incurring OPEC's ire as it seeks to grow production significantly over the next few years. At the same time, the country has inflamed tensions with the autonomous region within its borders, the Kurdistan Regional Government, or KRG, over oil sovereignty. Initially, oil and gas companies, lured by Iraq's enormous reserves, were willing to go on a first date, but the KRG's also-lucrative reserves and more attractive legal and operating environment have stolen many of Iraq's original suitors. Today, Iraq has made limited progress on a number of key initiatives since 2011 and faces significant infrastructural and institutional constraints if it wants to achieve its recently reduced target of 9 million barrels per day of production by 2020. We believe 5.5 million-6.5 million bpd by 2020 is more likely, but continued delays could mean as little as 4 million-5 million bpd of production. Still, in an environment of surging U.S. production, Iraq's barrels threaten OPEC's relevance like never before.

The Current and Near-Term Field Outlook
Iraq's oil production has certainly improved since 2009, but there has been a wide variety of outcomes and challenges both at the project and at the field level. Production levels have grown modestly, but projects have also stalled, with setbacks in the Common Seawater Supply Facility, export capacity, pipeline upgrades, and hydrocarbon laws. The Iraqi government is also admitting defeat to some extent, as it has introduced new goals of 9 million bpd by 2020 instead of 10 million-11 million bpd of production by 2017. We still think Iraq's new goals are unachievable, and despite some early successes, we believe that virtually all of the Iraqi fields will fall short of their production plateau goals by 2020.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.