Iraq added more uncertainty to the integrity of the OPEC deal this week, hinting that it would not make cuts to oil production immediately next month as the agreement requires. Iraq’s State Organization Marketing of Oil (SOMO), the state-owned oil marketing company, said that it would cut production by 200,000 to 210,000 bpd, in line with what Iraq agreed to as part of the Nov. 30 OPEC deal.
However, SOMO said in a statement that those reductions would occur in the first half of 2017, which would fly in the face of the January 1 deadline that OPEC has promised. Iraq was one of the most hesitant OPEC members in the lead up to the Vienna meeting, arguing that it needed to produce as much oil as possible in order to finance its war with the Islamic State. The willingness of Iraq to sign on to the cuts was crucial to success in Vienna. Now that commitment is being called into question.
Adding more fuel to the fire of speculation is the fact that BP just reported that production at the Rumaila oilfield in southern Iraq is rising. BP said Rumaila’s output is now at 1.45 million barrels per day, the highest rate in 27 years. The field has now produced 3 billion barrels of oil since its joint venture with PetroChina and South Oil Company of Iraq began in 2009. The consortium achieved this goal by a massive water injection program in order to boost reservoir pressure.
The ratcheting up of output is evidence that Iraq may not adhere to its commitment by January. Argus Media reports that the export schedule out of southern Iraq “shows no indication that state-owned marketer Somo plans to cut January production from its Basrah stream.” Moreover, exports slated for January are estimated to be higher than the record level of exports – 3.41 mb/d – achieved in November, just ahead of the OPEC meeting.
Complicating matters is that unlike Saudi Arabia, Iraq has a significant private sector presence. BP is one of a several international companies operating in Iraq. The Iraqi government will likely have to cut output from state-owned fields rather than order international firms to cut back, which would not only scare away investment but also require compensation. Nevertheless, higher private sector production will require deeper cuts from state-owned fields. The dilemma raises questions about Iraq’s willingness to meet its promised cuts as part of the OPEC agreement.
This is the first sign of potential “cheating.” If Iraq misses its target and a few others follow suit, the effectiveness of the OPEC deal could start to unravel.