U.S. Markets closed

Is Iraq An Underappreciated Risk In Oil Markets?

·4 min read

Iraq’s record-high oil exports could be hindered by the rising political turmoil being seen across the country. While political instability has typically had little effect on the country’s oil industry, growing unrest is now threatening Iraq’s oil output. In addition, Iraq continues to battle over oil ownership in the Kurdistan region, adding to the industry’s challenges.

Iraq’s oil industry had been reporting positive trends in recent months, with production levels standing at around 4.4 billion bpd of crude, and exports hitting the highest levels in 50 years, at a value of $11.07 billion. The increase in exports was largely due to a shift in global reliance away from Russia toward other oil powers over the last few months. Iraq holds around 145 billion barrels of oil, making it the fifth-largest oil state in the world. And crude is vitally important for Iraq’s economy, with oil revenues contributing around 90 percent of the country’s income.

However, growing political tensions across the country are now putting these positive oil trends under threat. In recent weeks, Iraq has seen its worst political violence since 2019, as the conflict between different Shiite groups intensifies. Street-fighting in central Baghdad saw the death of at least 30 people. The conflict is centered around a battle between competing Shiite factions. As the biggest sectarian group in Iraq, different factions are fighting for political power as each group seeks to gain a greater hold on 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 a majority of 73 of 329 seats, formed a coalition with the biggest 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 Iran-backed Shiite parties and his efforts ultimately failed as the Supreme Court declared that the lack of majority support meant no government could be formed. In June, Sadr told his 73 parliament members to resign in protest, later announcing that he was quitting politics. Tens of thousands of his followers then took to the streets across Baghdad and southern Iraq burning opposition offices and fighting against Iran-backed militia fighters in Iraq’s security forces. Sadr eventually told his supporters to leave the zone, demonstrating further the control he holds over his militants.

While Iraq’s oil industry has been largely unaffected by previous cases of political unrest, this recent upsurge in conflict is putting the sector under threat. Fernando Ferreira, a director at Rapidan Energy Group stated of the situation, “While Iraqi production is usually fairly resilient to unrest, the current political environment is extraordinarily toxic and poses a considerable risk to the oil sector.” RBC commodities chief Helima Croftsuggested, this week, that the protests could lead to a million bpd of oil being taken off the market if the conflict escalates.

Additional political tensions continue to be felt in the Kurdistan region (KRI) as it tries to hold onto its oil exports and revenues. Earlier this year, Iraq’s federal court deemed an oil and gas law regulating the oil industry in Kurdistan unconstitutional. The Iraqi government has since increased its efforts to control the export of oil from the KRI.

Now, fears of being politically undermined have led oil firms operating in Kurdistan to plead with the U.S. to diffuse the tension between Iraq's central government and the semi-autonomous region. The firms believe intervention is required to ensure oil output between the north of Iraq and Turkey remains stable. If the flow is halted, it could lead to Turkey switching its reliance toward Russia or Iran for its oil supplies. In addition, the economy of the KRI could be at risk if it loses oil revenues.

Other concerns are also affecting the country’s oil industry, with worries that a lack of investment in the KRI’s oil sector could lead to its production dropping by half due to its wells drying up and the need for greater exploration in the region. As the Kurdish Regional Government (KRG) relies so heavily on its oil revenues to support the region’s economy, a fall in production could be devastating and could lead to further instability in the region. But prospects are optimistic if the KRI can find more funding, with the potential for a 580,000-bpd increase 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 fight over the country’s resources, between the Iraqi state and the Kurdistan region, is placing 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 is seeking both political and financial support from external powers to ensure the longevity of its oil industry.

By Felicity Bradstock for Oilprice.com

More Top Reads From Oilprice.com:

Read this article on OilPrice.com