Iraq, Saudi on OPEC collision course over next oil curb
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Obama faces only hard choices in Mideast
By Amena Bakr and Peg Mackey
VIENNA | Wed Dec 12, 2012 5:52pm EST
VIENNA (Reuters) - A new rivalry at the top of OPEC has emerged, pitting up-and-coming Iraq against undisputed oil cartel heavyweight Saudi Arabia.
Having overtaken Iran as OPEC's second biggest producer, a rejuvenated Iraq is beginning to worry Riyadh.
At Wednesday's meeting of the Organization of the Petroleum Exporting Countries the opening salvos were fired in the struggle over who takes responsibility for cutting output if oil prices, comfortable for now at $109 a barrel, start falling.
OPEC agreed to retain its 30-million barrel-a-day output target and meet next on May 31, but many market observers think supply restrictions will be needed sooner rather than later if producers want to prevent slow global growth and fast-growing inventories sending prices tumbling.
After 20 years of war, sanctions and civil strife that left its oil industry in disarray, Iraq is no mood to consider curtailing output just as it starts to take off.
"Iraq will never cut production," said Iraq's OPEC Governor Falah Alamri. "Some countries that have increased their production in the last two years - they should do so. This is a sovereign issue, not an OPEC issue."
That was a clear reference to Saudi Arabia, which this summer lifted output to a 30-year high above 10 million barrels a day to prevent oil prices ballooning after Western sanctions on Iran halved its production.
The view from Riyadh, said delegates at the meeting, is that Iraq should contribute to the next round of OPEC supply curbs.
A senior Iraqi official warned that if Saudi pushed that line there would be "dark days ahead" for OPEC, saying Baghdad would not even consider output restraints until 2014.
"Every additional barrel that Iraq produces reinforces its confidence and its expectations that higher production is achievable - and it will negotiate on that basis," said Iraqi expert Raad Alkadiri of Washington consultancy PFC Energy.
"Now OPEC is dealing with a much more confident Iraq and Baghdad is looking at regional politics and is less willing to compromise."
"Iraq is impervious to arguments. It says that it was subject to sanctions for so long that it has a free pass to rebuild its economy," said Neil Atkinson, director of energy research at Datamonitor.
Output from OPEC is already down sharply from the highs of the summer when the Saudi surge took the 12-member group to nearly 32 million bpd. Production in November was down to 30.8 million with Saudi easing to 9.5 million.
But OPEC may need to ease further to balance the market in the first half of next year when, demand depressed by a stagnant economy, its own forecasts indicate the requirement for OPEC crude will come in at only 29.25 million bpd.
"We're concerned by the drop in demand and the high level of stocks," said Algerian Energy Minister Youcef Yousfi.
"There is rising oil from places like the United States and Iraqi output is rising quite sharply. There's a risk that we see a sharp drop in price next year," said Atkinson.
IRAQ RISES
The world's fastest growing crude exporter, Iraq expects more gains next year as foreign companies push production towards the highest level ever, Iraqi Oil Minister Abdul-Kareem Luaibi told reporters on Sunday ahead of the Vienna meeting.
Output began to rise in earnest in 2010 after Baghdad secured service contracts with companies such as BP (BP.L), Eni (ENI.MI), Exxon Mobil (XOM.N) and Royal Dutch Shell RDSa.L.
Flows have now reached 3.4 million bpd - up nearly a million bpd from when companies got down to work three years ago.
Luaibi said output in 2013 is expected to average 3.7 million bpd - just shy of an all-time high of 3.8 million, hit in 1979 with exports running at 2.9 million bpd, including 250,000 bpd contributed by the semi-autonomous northern Kurdistan Regional Government (KRG). While that may be ambitious, 3.5-3.6 million appears possible.
The changing shape of Middle East politics after the U.S.-led overthrow of Saddam Hussein in 2003 and the 2011 Arab Spring plays into OPEC dynamics.
"Political issues sit behind this rivalry," said PFC's Alkadiri. "Regional alliances are pitting Saudi Arabia, Iraq and Iran against each other."
That was illustrated at Wednesday's meeting by a quarrel over the appointment of OPEC's next secretary-general, the group's public face and head of its Vienna headquarters.
Iran dropped its nomination to back Iraq's candidate against Saudi Arabia but neither Riyadh or Baghdad would give way and Libya's Abdullah al-Badri was reappointed for another year.
"It is clear that both sides view the issue in the context of growing sectarian and regional tension in the Middle East, making the issue even more difficult to resolve than usual," said PFC Energy.
FRACKING HEAT ON OPEC
Adding to the heat on OPEC is the dramatic rise in oil output from the United States, spurred by hydraulic fracturing, or fracking, of shale reserves.
The U.S. Energy Information Administration said on Tuesday that U.S. output will increase 760,000 bpd in 2012, the fastest pace since commercial oil production began in 1859.
"It is obviously something we are looking at very carefully because it is increasing and we expect it will have a major impact on OPEC producing countries," said Nigerian Oil Minister Diezani Alison-Madueke.
After years outside OPEC's quota system because of low output, Iraq was brought into the fold a year ago when OPEC set its 30 million bpd target for all 12 producers. But unlike previous OPEC deals no individual quotas were assigned.
That suited Saudi Arabia, leaving it free this year to balance the markets by using its spare capacity as it saw fit.
But in the event of a build in inventories that hits prices, OPEC may need to restore quotas if it is to enforce a credible production cut.
That is likely to prove very difficult, not just because of Iraq but because Iran is very unlikely to accept a quota anywhere near its sanctions-constrained production. Venezuela too could resist a lower quota after disputing independent estimates of its output for years.
"Quotas would become a big issue if we see a price drop and then everyone would have to come to the table," said Datamonitor's Atkinson. "That would cause enormous problems for Iran and Venezuela."
OPEC can only hope that a difficult decision is postponed by a continued stand-off between Western powers and Iran over Iran's nuclear program, and the threat of Israeli military action, keeping oil prices high.
That could mean a repeat of 2012, with oil prices supported in 2013 for fear of an attack on Iran, even if demand is poor and market fundamentals weaken.
"Lady luck has been a huge help for OPEC because the macro numbers do not add up to 2012 being a successful year," said oil brokers PVM. "She has come in the form of geopolitical tensions and supply uncertainties which have kept speculative interest in oil lively and stimulated stock building."
(additional reporting by Alex Lawler, Reem Shamseddine, Emma Farge, editing by Richard Mably, William Hardy)
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UPDATE 2-BP proposes cuts to Iraq's Rumaila target-sources
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Thu Dec 13, 2012 8:42am EST
By Aref Mohammed and Ahmed Rasheed
BASRA, Iraq Dec 13 (Reuters) - Oil major BP is close to reaching a deal with Iraq to cut the final production target for the supergiant Rumaila oilfield to between 1.8 million and 2.2 million barrels per day (bpd), oil ministry and industry sources said.
Officials from BP, Iraq's state-run South Oil Co. (SOC) and its oil ministry have been in talks for the past four months, studying BP proposals to lower the target of 2.85 million bpd, which they agreed to in 2009.
The negotiations are the latest sign of trouble in Iraq's southern oilfields, where logistical bottlenecks and weak infrastructure have eroded investor interest at the same time that the autonomous Kurdistan region in the north attracts oil majors.
Soon after signing multi-billion service contracts with foreign oil majors, Iraq had said it aimed for an overall production capacity of 12 million bpd, but the OPEC member has reduced that target to 8.5-9 million bpd.
"BP has submitted three figures to lower Rumaila production. Iraq has initially accepted to cut output, and a final deal is expected by year-end," a senior SOC official who is involved in the discussions said.
"BP's offer included cutting Rumaila production to 1.8 million barrels per day and extending this final plateau until 2029," the official added.
The final plateau period is the time during which peak production is sustained after it is first reached in 2017.
"We aim to discuss and agree a full field development plan in 2013. Any discussions we have with the government are commercially confidential," a BP spokesman said in response to a request for details.
Rumaila, the workhorse of Iraq's oil industry which BP operates with China's CNPC, has estimated reserves of 17 billion barrels and currently produces around 1.35 million bpd - more than a third of Iraq's total output of 3.4 million bpd.
But crumbling infrastructure, red tape and a lack of clear oil legislation have stunted investor interest and made it difficult for Iraq to achieve its ambitious production plans.
Royal Dutch Shell in March also started talks with Iraq to slash its production target at Majnoon oilfield, the first company to begin negotiations with the government to reduce unrealistic output goals.
"We have to re-negotiate the final production target not only with BP or Shell, but with other companies also," an oil ministry official said. "We don't have suitable infrastructure to deal with future mega production."
LOWER TARGETS
A lower target suits Baghdad, officials say, because the government worries that adhering to existing agreements will result in large volumes of unused capacity and deplete more than half of its proven reserves over the life of the 20-year agreements.
Cash is also a concern for the government, which had estimated an investment of some $180 billion would be needed to finance its original countrywide production targets.
"Out of BP's three figures, the 1.8 and 2 million barrels per day have found their way onto the discussion table. We are weighing all economic and technical aspects and will decide on a single figure at the end of this month," said another oil official who helped draft the Rumaila service contract.
Iraqi officials said the Rumaila oilfield had shown significant signs of fast-track production growth but also of a lack of adequate oil pipelines, storage and crude production facilities and that accepting the BP proposals made a target reduction necessary.
Production from Rumaila is expected to hit 1.450 million barrels per day in 2013 from 1.350 mln bpd now. For 2013, a development program has been set to drill new 110 oil wells, including injection wells to help sustain production, an oil industry source close to Rumaila activities said.
While negotiating to cut production targets for its southern oilfields, Baghdad has seen majors including Exxon and Chevron sign deals with the Kurdistan Regional Government in the north. Those agreements have increased tensions with the central government over control of Iraq's oil reserves.
Exxon has told the Iraqi central government that it wants to pull out of a $50 billion oil project in the south, while it focuses on exploration deals with the Kurdish region.
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Iraq launching road show for Iraq-Aqaba oil export pipeline in London Friday. Cos registered to attend +100 including all major banks.
Iraq, Jordan to Build Oil Pipeline
Posted on 26 September 2012. Tags: Aqaba, Jordan, oil exports, pipelines
Iraq and Jordan have agreed to build a pipeline to supply Jordan with crude oil and natural gas, according to Petra, the Jordan News Agency.
Iraqi Oil Minister Abdul Karim Luaibi [Elaibi] said that the pipeline would carry crude oil to the Jordanian refinery in Zarqa for use in Jordan, and to the port of Aqaba for export.
The agency quotes an Iraqi official as saying that authorities in Baghdad have already signed a contract with an international consultant company to prepare a report on the project, which has a planned capacity of 1 million bpd.
Jordan and Iraq also agreed to increase the volumes of crude oil provided to the Kingdom from 10,000 barrels per day to 15,000.
The Jordanian Minister of Energy and Mineral Resources, Alaa Batayneh, said that Jordan has only received 25 per cent of the quantities the two countries agreed on due to logistic issues and technical reasons related to standards of oil requested by the refinery.
He added that a joint committee, to be chaired by ministers from both countries, will convene every six months, while subcommittees, to be headed by secretaries general, will meet every three months to follow up on implementing the memorandum of understanding.
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Iraq Boom Hands Naimi 2013 Oil-Supply Challenge
By Grant Smith & Mark Shenk - Dec 15, 2012 3:47 AM GMT+1030.
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Iraq’s biggest jump in oil production since 1998 is increasing the burden on Saudi Arabia to lower crude exports to prevent price declines next year.
The kingdom curbed crude output in November to a 13-month low, according to OPEC. Iraq plans next year to pump as much as it did when Saddam Hussein came to power three decades ago, its oil minister said Dec. 9. Supply will also rise in Libya and Nigeria while the U.S. experiences an oil shale bonanza.
Enlarge image
Ali al-Naimi, Saudi Arabia's oil minister, needs to keep prices high enough to fund social spending plans without incurring the wrath of consumers for hurting the global economy. Photographer: Vladimir Weiss/Bloomberg
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Saudi Arabia reduced its output to 9.67 million barrels a day last month. Photographer: Phil Weymouth/Bloomberg
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“Saudi Arabia’s dilemma is that while it is the key OPEC player willing to cut back oil production in order to sustain prices at desired levels, it is also accommodating Iraq’s rising output and market share,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York. “Ultimately, there will need to be an agreement between the two as how to balance these ambitions.”
Saudi Arabian Oil Minister Ali Al-Naimi needs to keep prices high enough to fund social spending plans without incurring the wrath of consumers for hurting the global economy. Iraq, now the second-biggest supplier in the Organization of Petroleum Exporting Countries, has a different priority: to rebuild its industry after decades of war and sanctions.
Arab states are spending billions of dollars on housing and local projects to allay popular unrest after uprisings toppled leaders in Libya, Egypt and Tunisia and sparked a civil war in Syria. Saudi Arabia has committed more than $600 billion in social and infrastructure projects in coming years.
Iraq Surge
Iraq’s production surged 650,000 barrels a day this year to 3.35 million, the biggest annual gain in 14 years, according to data compiled by Bloomberg, amid assistance from foreign oil companies that are paid a fixed amount per barrel produced, regardless of international price levels.
The Middle Eastern state plans to boost output to an average 3.7 million barrels a day in 2013 and at some point in the year match the 1979 record of 3.8 million, Oil Minister Abdul Kareem Al-Luaibi told reporters in Vienna on Dec. 9.
The nation has been free of strict OPEC quotas since 1998 and the resumption of any allocation is a “sovereign issue” rather than a decision to be made by an organization, Falah al- Amri, Iraq’s governor on the OPEC board, said on Dec. 12.
Brent crude traded as high as $109.48 a barrel today on the ICE Futures Europe exchange. It may sink to $88 by June if OPEC fails to rein back supply, according to Leo Drollas, chief economist at the London-based Centre for Global Energy Studies, which was founded by former Saudi Oil Minister Sheikh Ahmad Zaki Yamani in 1990.
Iran Sanctions
Saudi Arabia’s task will become more difficult should Iran resolve its standoff with the international community over nuclear research and resume pumping oil at normal rates. Sanctions against the Islamic republic, once OPEC’s second- biggest producer, have cut its exports by 50 percent, according to the International Energy Agency.
While acknowledging its output will exceed customer needs in 2013, OPEC refrained from cutting its group target at a meeting in Vienna two days ago, judging prices were high enough for now. Iraq, Iran and Saudi Arabia also failed to agree on the appointment of a new OPEC secretary-general, opting instead to keep Abdalla El-Badri in the role for a further year.
Saudi Arabia reduced its output to 9.67 million barrels a day last month, according to a monthly report from OPEC that cited secondary sources for its data. In its own direct communication to OPEC, the kingdom said November production was even lower, at 9.49 million.
Minimum Level
The country can tolerate crude oil prices falling no lower than about $90 a barrel, according to Jamie Webster, a Singapore-based consultant at PFC Energy.
The CGES estimates that Saudi Arabia’s budget-balancing price is $95 a barrel, more than $10 below current levels. Arab Light, Saudi Arabia’s largest export grade, was at $107.22 today, according to data compiled by Bloomberg.
National Commercial Bank, the nation’s largest lender by assets, said in a Nov. 27 report that the kingdom’s budgeted oil price for next year is $65.
Demand for OPEC’s crude will shrink to 29.7 million barrels a day in 2013, the organization’s secretariat said in a statement at the end of its meeting in Vienna. That’s 300,000 barrels a day less than its official target and 1.1 million a day below November’s actual output, OPEC data show.
Iran Slump
Iranian oil production, which slumped to 2.65 million barrels a day in October, the lowest level since February 1990, may climb if a new government can come to an agreement with Western nations, according to JBC Energy GmbH.
The country pumped as much as 6 million barrels a day in the 1970s before the Islamic revolution, which was followed by U.S. sanctions and the 1980-1988 Iran-Iraq War. Iran’s insistence on atomic research led to a toughening of sanctions this year, including an embargo by the European Union and reduced insurance cover for supertankers carrying its oil. An Iranian presidential vote is scheduled for June.
Libya, rebuilding its oil industry after last year’s uprising against Muammar Qaddafi, plans to raise output to 1.7 million barrels a day next year from about 1.5 million a day this month, Oil Minister Abdulbari Al-Arusi said in Vienna.
Nigeria, Africa’s largest producer, expects output to reach normal levels in the first quarter, Oil Minister Diezani Alison- Madueke said after the Vienna meeting. Output was hampered in the past months by floods, theft and pipeline leaks that forced several producers, including Exxon Mobil Corp. (XOM), Royal Dutch Shell Plc (RDSA), Total SA (FP) and Eni SpA (ENI), to halt pumping, curbing national production by as much as 500,000 barrels a day.
Outside of OPEC, the U.S. is producing oil at the fastest rate in almost two decades, using horizontal drilling and hydraulic fracturing, known as fracking, to unlock shale resources in North Dakota, Texas and Oklahoma. The nation pumped 6.85 million barrels a day in the week to Dec. 7, the most since January 1994, and met 83 percent of its energy needs in the first eight months of 2012, the Energy Department said.
Al-Naimi, Al-Luaibi and other OPEC ministers plan to meet next on May 31, by which time the group will have a better notion of how economic growth and supply are affecting 2013 prices.
OPEC has “rolled over the whole discussion you need to have about the Iraqis, on how to bring in production,” PFC’s Webster said in Vienna. “The timing of the discussion is going to be dictated by the market.”
To contact the reporters on this story: Grant Smith in Vienna at gsmith52@bloomberg.net Mark Shenk in Vienna at mshenk1@bloomberg.net
To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net
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The Governor's Solution: How Alaska’s Oil Dividend Could Work in Iraq and Other Oil-Rich Countries
Todd Moss, editor
11/05/2012
#Oil2Cash
Reliance on natural resource revenues, particularly oil, is often associated with bad governance, corruption, and poverty. Worried about the effect of oil on Alaska, Governor Jay Hammond had a simple yet revolutionary idea: let citizens have a direct stake.
The Governor’s Solution features his firsthand account (PDF) that describes, with brutal honesty and piercing humor, the birth of the Alaska Permanent Fund dividend, which has been paid to each resident every year since 1982.
Thirty years later, Hammond’s vision is still influencing oil policies throughout the world. This reader, part of the Center for Global Development’s Oil-to-Cash initiative, includes recent scholarly work examining Alaska’s experience and how other oil-rich societies, particularly Iraq, might apply some of the lessons. It is as a powerful reminder that the combination of new ideas and determined individuals can make a tremendous difference—even in issues as seemingly complex and intractable as fighting the oil curse.
Contributors: Todd Moss (Center for Global Development), Jay Hammond (governor of Alaska 1974–1982 and creator of the Alaska Permanent Fund Dividend), Scott Goldsmith (University of Alaska-Anchorage), Nancy Birdsall (Center for Global Development), Arvind Subramanian (Peterson Institute for International Economics and Center for Global Development), and Johnny West (journalist and founder of Open Oil).
20% discount code: KCB2
The Governor’s Solution is available for purchase in paperback now.
Free chapter: Diapering the Devil: How Alaska Helped Staunch Befouling by Mismanaged Oil Wealth by Governor Jay Hammond
For review or exam copies, please send a note to publications@cgdev.org with details about the potential review or the course you are teaching.
The Governor’s Solution: How Alaska’s Oil Dividend Could Work in Iraq and Other Oil-Rich Countries is available for purchase through Hopkins Fulfillment Service, P.O. Box 50370, Baltimore MD 21211-4370. Tel: 1-800-537-5487.
6 X 9, 135 pp. paper, 978-1-933286-70-9, $17.95
=======================
Reuters: Iraq ups its selling game on path to oil's top tier
http://uk.reuters.com/article/2012/12/21/iraq-oil-idUKL5E8NKD2B20121221
Fri Dec 21, 2012 11:46am GMT
* Total, BP renew Basra Light crude volumes for 2013
* Not all sold yet; buyers wary on price, quality-sources
* China to increase 2013 Iraqi purchases
LONDON, Dec 21 (Reuters) - Iraq is sharpening a push to sell its swelling crude output and sit at oil's top table with Saudi Arabia, sweetening terms for contract buyers next year, its customers say.
Iraqi Oil Minister Abdul-Kareem Luaibi held court to oil executives in Vienna's Hotel Imperial last week on the sidelines of an OPEC meeting. Some buyers have said they were concerned by higher prices and variable quality.
"The Iraqis have become more active and serious in their marketing effort," said a Western oil executive from a firm that buys from Baghdad. "They're willing to be very competitive on pricing and want to solve existing problems."
The world's fastest growing oil exporter is working to expand market share and is emerging as a rival to Saudi Arabia in the Organization of the Petroleum Exporting Countries, as Iran's output is reduced by Western sanctions.
Baghdad is targeting crude exports of 2.9 million barrels per day (bpd) next year, up from 2.62 million bpd in November, as investment by foreign oil companies pushes production towards its highest level ever.
Some clients have complained of high official selling prices (OSPs) and variable quality of the Basra Light and Kirkuk grades, raising the prospect Baghdad could struggle to shift all the crude in 2013 term contracts.
Initially, BP and Total wanted to reduce their 2013 volumes of Basra. However, both are expected to take similar volumes to 2012, about 135,000 bpd each, trade sources said. BP will also receive unspecified volumes as repayment for its investment in Iraq's upstream industry.
"The Iraqis say they will stabilise the quality of Basra and understand they will need to be competitive on price," a second Western executive said. "They have to somehow place their additional production."
The quality of Iraq's Basra and Kirkuk crudes has been variable due to the erratic flow of Kurdistan oil into the Kirkuk stream and the start-up of new fields in the south. These concerns persist, deterring some buyers.
"I don't think Iraq has termed up all," a third executive said. "They know the prices are out of line mostly because the quality has been too variable for both Kirkuk and Basra. Until they resolve it, I don't think many will up their volume."
Some companies have trimmed Kirkuk volumes for 2013. ENI and Total each plan to take 10,000 bpd less of Kirkuk in 2013, industry sources said. Less Basra will be heading to the United States, where Chevron has cut its volumes, a source added.
"The issue is simply price. The OSP is too high, made worse by the variations in quality and unreliability in Basra deliveries," said a fourth executive. "Given there is some slack in the market, no one will pay over the odds."
An Iraqi oil official declined to comment for this story, and BP, Total, Eni and Chevron declined to comment on their plans to buy Iraq oil.
MORE TO CHINA
Just two years into the oil expansion drive, which had been held back by decades of wars and sanctions, Iraq has vaulted past Iran to become OPEC's second-largest producer behind Saudi Arabia.
That growth has not been lost on Riyadh, and a reinvigorated Iraq has led to a new rivalry at the top of OPEC, according to officials at last week's meeting of the producer group.
"This was bound to happen. Iraq has to sell more crude and get a bigger market share," a Western oil company source said.
"And they want to understand how to do it in a practical way."
Opportunities for Iraq and Saudi Arabia to sell more into Asia - particularly China - were created after Iran's exports plunged by more than 50 percent, or over 1 million bpd, due to international sanctions aimed at halting its nuclear programme.
Chinese state refiner Sinopec will nearly double the amount of term crude it buys from Iraq next year to 270,000 bpd as it looks to replace oil from Iran, trade sources said.
But cuts by other refiners mean China's total volume under one-year contracts with Iraq will rise by just 8.2 percent to 568,000 bpd next year. That still leaves Iraq some distance behind Saudi Arabia in terms of market share.
There are signs Baghdad may become more aggressive on pricing to the Far East - perhaps a concrete step it is delivering on officials' pledges over pricing.
Despite an increasing supply, Basra Light has been more expensive for Asian buyers than a rival crude from Saudi Arabia, Arab Medium, prompting buyers to grumble.
For January 2013, however, Iraq chose to leave its Basra Light price to Asia unchanged, while Saudi Arabia increased the prices of its Arab Light, Medium and Heavy crude to customers in the East.
Concern about pricing is likely to linger nevertheless.
"It's one thing to get the top people to say they want to fix it, but quite another to get the people who actually set the OSPs to fix it," an industry source said. "It looks like it won't happen overnight." (Additional reporting by Muriel Boselli and Giancarlo Navach; Editing by Jane Baird and William Hardy)
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