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Iraq may need to justify OPEC fudge: Fuel for Thought

Iraq is compliant with neither the spirit nor the letter of the OPEC-led agreement to cut oil production from January 1 this year. The question is whether it should be. With OPEC and non-OPEC technical experts set to meet to discuss faltering conformity, OPEC’s second largest producer may feel more than justified in its position, but among members those claims have a hollow ring.

With millions of internally displaced people within its borders and the cost of being still at war with IS on its home soil, Baghdad has more reasons than most to expect tolerance as it needs funds to rebuild its nation.

However, the country has tried to present a semblance of compliance by cutting crude oil exports rather than production.

Adding up Iraqi production barrels isn’t as straightforward as it seems. For instance, since the start of 2016, Iraq’s Ministry of Oil has included production from the Kurdish region of Iraq as being ‘Iraqi oil’.

Given its lack of control over this roughly 580,000 b/d output, Baghdad could legitimately claim that, at the very least, KRG oil should be treated separately.

Moreover, Iraq carries a unique burden in that nearly a third of its exported oil is allocated as payment in kind to international oil company contractors involved in the development and operation of its producing fields.

Although Iraq had pushed hard for an exemption, similar to Nigeria and Libya, it eventually agreed to a production level of 4.351 million b/d, a cut of 210,000 b/d from the secondary source estimate of its production in the base month of October 2016. But it averaged 69,000 b/d above its quota from January through June, according to data from the S&P Global Platts OPEC survey, one of six secondary sources used.

Iraq crude oil production

Iraq had been exempted since July 1990 from any OPEC cuts or deals in recognition of the years of war, sanctions, and internal strife that it has suffered, but now as OPEC’s second largest producer it was under immense pressure to do its part. The resulting agreement appears more of a begrudging compromise than a full-fledged commitment.

Indeed, Iraq recognized the potential impact of the production cuts so inflated its published production data to create a cushion that would allow it to agree to a deal without any real effect on production levels.

It was an early indication that Iraq would only ever be a reluctant partner. Iraq became a prisoner of this strategy and continued to publish the inflated figures and send them to OPEC.

By October last year, secondary source estimates were quoting total Iraqi crude production at 4.561 million b/d, 189,000 b/d less than the official figure. Owing to the glaring gap, the oil ministry stopped publishing its usual monthly composite figures and removed all the archive tables from its website.

This policy continued until the publication of monthly production figures for May and June 2017. The source of the inflation was double counting the production from the Avana dome of the Kirkuk oil field and the Bai Hassan oil field, which amounted to 275,000 b/d. Both production sources had been annexed by the KRG in late 2014 in the aftermath of IS’ advance. Output from these fields was counted once in North Oil Company figures and once within the KRG figures.

Production or exports?

Having agreed to the use of secondary source estimates of its crude production at the November 2016 OPEC meeting, Iraq stated its intention of full compliance, stressing also that it would not reduce output from the fields contracted to the IOCs. This meant that the burden of compliance would fall entirely on state oil fields and the federal budget.

However, soon afterwards, the oil minister and other Iraqi officials made repeated statements that the cuts applied to exports not production, despite the official OPEC statement being clear that the reductions apply to production.

Baghdad’s calculation appears to be that OPEC, having spent so much effort persuading Iraq to participate at all, would not confront it on the issue so long as Iraq reduced the amount of oil it pushes out into world markets.

Iraqi exports rather than production do indeed appear to have fallen. Iraq’s official figures for May and June 2017 show production averaging 4.557 million b/d in these two months; in other words production remains 206,000 b/d above the agreed level. However, total Iraqi exports have fallen from a fourth quarter 2016 average of 3.989 million b/d to average 3.798 million b/d in first-half 2017, a cut of 191,000 b/d. This might be regarded as 91% compliance, although it is only a reduction of 108,000 b/d, or 51% compliance, with the export rate of October 2016.

Baghdad’s strategic consideration that a reduction of crude exports rather than production would be sufficient to satisfy OPEC had appeared to be holding water, even though the wording of the OPEC deal leaves no room for ambiguity. But even with OPEC’s recent emphasis on exports’ importance side by side with production measures—OPEC ministers in July said export data would also be used as a metric for compliance without concrete details—it is uneasy with Iraq agreeing to one thing but doing another.