Is Iraq An Underappreciated Risk In Oil Markets?

Iraq’s record oil exports could be hampered by the growing political turmoil seen 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. In addition, Iraq continues to fight over ownership of oil in the Kurdistan region, adding to the industry’s challenges.

Iraq’s oil industry had been reporting positive trends in recent monthswith production levels around 4,400 million bpd of crude oil, and exports reaching highest levels in 50 years, for a value of 11,070 million dollars. The rise in exports was largely due to a shift in Russia’s global reliance on other oil powers in recent months. iraq hold on 145 billion barrels of oil, which makes it the fifth largest oil state in the world. And oil is vitally important to Iraq’s economy, with oil revenues contributing about 90 percent of the country’s income.

However, rising political tensions across the country are now threatening these positive oil trends. In recent weeks, Iraq has experienced its worst political violence since 2019, as the conflict between the different Shiite groups intensifies. Street fights in central Baghdad have killed at least 30 people. The conflict centers 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 gain greater control over the country’s oil wealth, as well as political dominance in the Middle East region. The unrest began in October 2021 following elections for the Iraqi parliament, the Council of Representatives. Sadr’s party, which won the majority of 73 of 329 seatsformed a coalition with the main Sunni Arab and Kurdish parties, which together controlled a majority of seats, in an attempt to form a government.

Sadr was blocked by a group of Iranian-backed Shiite parties and his efforts ultimately failed when the Supreme Court declared that a lack of majority support meant a government could not be formed. In June, Sadr told his 73 members of parliament to resign in protest, then announced that he would quit politics. Tens of thousands of his supporters then took to the streets of Baghdad and southern Iraq burning down opposition offices and fighting Iranian-backed militiamen in Iraq’s security forces. Sadr eventually told his supporters to leave the area, further demonstrating the control he has over his militants.

While Iraq’s oil industry has been largely unaffected by previous instances of political instability, this recent upsurge in conflict is putting the sector in jeopardy. Fernando Ferreira, director of Rapidan Energy Group statement of the situation, “While Iraqi production is typically fairly resilient to unrest, the current political environment is extraordinarily toxic and poses considerable risk to the oil sector.” RBC commodity chief Helima Croft suggested this week that the protests could lead to one million bpd of oil withdrawn from the market if the conflict escalates.

Additional Political tensions continue to be felt in the Kurdistan region. (KRI) while trying to maintain its oil exports and revenues. Earlier this year, Iraq’s federal court found an oil and gas law regulating the oil industry in Kurdistan unconstitutional. Since then, the Iraqi government has increased its efforts to control the export of oil from the KRI.

Now, fears of being politically undermined have led oil companies operating in Kurdistan to plead with the United States to defuse tension between Iraq’s central government and the semi-autonomous region. The companies believe that an intervention is required to ensure that oil production between northern Iraq and Turkey remains stable. If the flow is stopped, it could lead Turkey to shift its dependence on Russia or Iran for its oil supplies. Also, the KRI’s economy could be at risk if it loses oil revenues.

Other concerns are also affecting the country’s oil industry, with concerns that a lack of investment in KRI’s oil sector could see its production cut in half due to the drying up of its wells and the need for further exploration in the region. Since the Kurdish Regional Government (KRG) relies heavily on its oil revenues to support the region’s economy, a drop in production could be devastating and could lead to further 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 Iraq’s capital and an intense struggle for the country’s resources, between the Iraqi state and the Kurdistan region, is putting Iraq’s oil industry in a volatile position. While the country must address its political situation to ensure the stability of its oil exports, the Kurdistan Region seeks political and financial support from outside powers to ensure the longevity of its oil industry.

By Felicity Bradstock for Oilprice.com

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