Jamie Webster, Director, Downstream Research at IHS Energy explains how the Islamic State in Iraq and Syria remains focused more on sectarian battles, including establishing a new Sunni political entity, than attacking oil infrastructure, suggesting longer-term instability but leaving physical oil markets intact for now.
Months of attacks on the Kirkuk-Ceyhan export pipeline took it out of service in mid-March. Pipeline flows in months prior to the final attack ranged from 192 mb/d to 293 mb/d. As the downed pipeline is in ISIS-controlled territory it is unlikely this pipeline will be coming back into service anytime soon.
ISIS attacks on the 290 mb/d Baiji refinery do not appear to reflect a desire by the group to hit oil infrastructure, but rather to secure stocks (likely temporary unless alternative crude supply can be attained since Baiji’s Kirkuk source is now controlled by the KRG’s Peshmerga forces) of fuel for trucks and generators to advance further south. The attacks instead are sectarian in nature, with Baghdad appearing to be a much bigger (and nearer) prize than the oil regions far to the South. For Baghdad and Southern Iraq, the Baiji refinery is not a critical supply source, as it instead relies on the 115 mb/d Daura refinery.
To impact crude oil production or exports out of Iraq, ISIS will need to show a substantive shift in its attack focus, bypassing Baghdad and heading far South to attack key infrastructure. Such an offensive move will require substantial fuel, and will be difficult to sustain as the Sunni-based enabling forces (cooperating groups) that allowed ISIS to move so quickly in its early June attacks, will not be present in the Shia-controlled regions between their current positions and key oil infrastructure.
Moreover the Shia majority in this region will be highly motivated to resist any ISIS/Sunni attacks. While we do not currently see any push to move through the region, any successful attack would likely have significant and possibly long-lasting impacts on oil production.
The same factors that caused Iraqi oil production and export volumes to be very volatile in the past few years—a lack of infrastructure redundancies (pipelines, pumping, storage, etc) —also make the region vulnerable to attack. For now, its remoteness to ISIS is the key protecting factor keeping the system isolated from similar attacks in the North.
Our long-held forecasts for Iraqi production growth showed little upside expectations for this year, and for now we are not anticipate making production revisions at this time. Monthly Iraqi production has ranged from 2.9 mmb/d to 3.4 mmb/d so far in 2014, and we anticipate what little growth that has occurred in 2014 is unlikely to be matched later this year. For now, the oil markets are beginning to adjust to a newly unstable, but still producing, Iraq as it waits for the next significant turning point out of the country.
