Iraq May Not Be Able to Fulfill Its OPEC Cutback Obligations

Iraq reportedly may have problems implementing its 210,000 bpd reduction commitment due to obligations to international oil companies.

The chinks in the armour of the Organization of the Petroleum Exporting Countries' (OPEC) cutback agreement that critics feared would occur during the implementation phase are becoming evident, if Iraq is anything to go by: CNBC reports that it is uncertain if the country can live up to its 210,000 barrel per day (bpd) reduction commitment in the face of obligations to international oil companies.

Jessica Brewer, principal analyst for Middle East and North Africa upstream oil and gas at Wood Mackenzie, explains that "Of the Middle East producers that agreed to the cuts, [Iraq] is probably the one that has the most [international oil company]-operated production; there are a lot more parties involved, which makes it more complex."

Iraq's contracts with the firms contain provisions requiring them to be compensated when production is curtailed for reasons beyond the drillers' control, and Brewer says the OPEC agreement could trigger these provisions.

The analyst went on to note that there are no indications Iraq, which is OPEC's second biggest producer, has reached a deal to reduce production with companies such as BP, Exxon Mobil, and Royal Dutch Shell - which is a significant concern because an OPEC compliance panel is meeting in Vienna to assess reductions made by the cartel's members on January 21.

Brewer suggests that the only viable option for Iraq is also a slim one: making its required cuts in state-operated fields in the northern part of the country; but unfortunately for the Iraqi government, this region is controlled by the Kurdistan Regional Government, which may not be willing to cut production because its government badly needs the revenue.

Meanwhile, more bad news for those hoping that OPEC's cumulative cutback goal of 1.8 million bpd will help rebalance global supply and demand comes in the form of Libya, which is re-opening the last major export terminal that had been blocked due to fighting.

According to an official at the state-run National Oil Corp., resumption of activity at the Zawiya terminal means that all nine of Libya's main oil ports will be exporting and contribute to the country's plans to almost double output this year (it currently pumps 700,000 bpd of oil, up from 580,000 bpd in November and 520,000 in October).

NOC Chairman Mustafa Sanalla said just before Christmas that output would reach 900,000 barrels a day early this year and 1.2 million barrels a day by the end of 2017.

These developments are presumably not surprising to critics such as Kevin Book, managing director of ClearView Energy Partners, who recently said in response to the notion of OPEC members following through on their cutback promises, “It's inevitable - somebody's going to cheat"; and Tom Kloza, global head of energy analysis at Oil Price Information Service, who said the cutbacks will more likely amount to a total of only 700,000 bpd, because the cartel "plays some games with the numbers."