Increased production from Iran, Iraq and Libya could impact on global oil prices and spark friction between OPEC members regarding who will produce what in the coming years
Opec has stated that it could see a surge in production of around two million barrels of crude oil per day (bpd) this year if Libya, Iraq and Iran are able to improve on their 2013 oil production levels.
Regional demand is sky rocketing, but there is now a danger that OPEC production could outstrip demand, leading to a fall in the price of crude and uncertainty amongst OPEC member’s over how much each member will produce.
Speaking at a London Conference, OPEC’s secretary general, Abdullah al-Badri, played down the suggestion that increased regional production would have a destabilising effect on prices, or that there would be any confusion over each individual country’s production quota.
Al-Badiri’s confidence in OPEC’s ability to maintain steady prices is not shared by everyone in the industry. Zack Hodge, chief executive officer at Kore Strategic Solutions, believes that any spike in production would impact on oil prices.
“A surge in exports from Libya, Iraq and Iran would inevitably cause a fall in prices, assuming that the projects to improve output in the three countries were completed on time,” he said.
With countries like Iraq, Iran and Libya producing significantly less oil in 2013 than their permitted quota, the shortfall was made up by other OPEC states, such as Saudi Arabia, the UAE and Kuwait. If OPEC is to avoid a deflationary effect on prices, it will have to offset any rise in production from one state with a reduction in the quota of another.
With oil prices hovering around the $110 mark since April 2011, the market has enjoyed a period of relative stability, compared to the meteoric rise in prices seen in 2009.
However, Saudi Arabia has cut the Official Selling Price (OSP) for Arabian Crude for the last four consecutive months, signalling an attempt to maintain market share amid increased supply from Iran and Iraq. The danger is that member states could descend into a vicious cycle of increased production and reactionary price cuts.
Of the three countries expected to contribute to the spike in production, Iraq set the most ambitious targets. Speaking at a conference in London earlier this month, Iraqi deputy premier Hussein Shahristani stated that Iraq aimed to increase production levels to 4.7 million bpd by 2015, up from 2.45 million bpd in January 2014. Shahristani also claimed that Iraq would deliver a massive nine million bpd by 2020.
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Whether or not Iraq can deliver on this monumental pledge remains to be seen.
“The question is can they get their assets to deliver within the time frame? Iraq has stated that it will triple its output by 2020. Considering the challenges for delivering projects on time this is a huge ask,” said Hodge.
Shahristani said that Iraq would renegotiate its quota with OPEC once Iraqi production hits five million bpd.
The easing of sanctions against Iran is the second factor in this three-pronged boost to OPEC production. Iran’s current production output was estimated to be 2.75 million bpd for January 2014. The easing of sanctions will play a big role in increasing this figure in the coming year.
Iran has recently invested $8 billion in refurbishing four of its key oil refineries, with an eye on dramatically increasing production capacity. Tehran is gearing up to deliver increased production levels in 2014, but some analysts remain sceptical about the extent to which this increase can be achieved.
“Iran is not immune from the challenges associated with project overrun. OPEC would need confirmation of completion dates having been achieved. Iran is trying hard to woo the world,” said Hodge.
The final factor for OPEC to consider is Libya, whose eastern ports are currently occupied by armed rebels. Ongoing talks are aimed at reinstating the 600,000 bpd of oil exports to kick start the Libyan economy, as the government considers its military options.
Many industry analysts remain sceptical about whether Libya’s efforts will bear fruit. Nick Nooren, area manager for MENA at Lloyds Register, said that realising these ambitions could take time.
“I’m not too sure how quickly Libya will be able to add value back in to the OPEC production levels. The situation is so sensitive, with high levels of unrest,” he said.
However, should this hypothetical spike materialise on all three fronts, OPEC will be forced to trim production levels elsewhere.
The question remains as to how willing Saudi Arabia, Kuwait and the UAE will be to reduce their own production quotas to accommodate the increased input from Iraq, Iran and Libya.
