Iraq strengthens hand at OPEC with oil deals

Iraq has manoeuvred itself into a strong position for future negotiations on output quotas with OPEC after awarding deals to international energy firms that would more than quadruple its output capacity.

Emerging from the shadow of war and keen to generate petrodollars to rebuild, Baghdad has deals on the table that would lift capacity to 12 million barrels per day in six or seven years.

That would add potential for another 9.5 million bpd to Iraq's output, a level of capacity only eclipsed by top oil exporter and OPEC's most powerful member Saudi Arabia.

Speaking on Reuters on condition of anonymity, one Iraqi oil industry observer, said: "Iraq has taken a fairly hard line on the quota system,

"It sees itself as rivalling Saudi Arabia. More so given the numbers bandied about by international energy firms at the bidding rounds."

Unlike OPEC's 11 other members, Baghdad is not subject to the output targets the group uses to set supply levels. OPEC exempted Iraq in the 1990s, when it was under sanctions.

Sooner or later though, OPEC will want Baghdad to realign supply policy with other members and stick to an output target.

Otherwise, Iraq could flood the market and undo OPEC's work to balance supply and demand at a price it deems reasonable to producers and consumers. That is currently around $75 a barrel.

Iraq, one of OPEC's founding members, had shrugged off talk of output curbs as it put some of its giant oilfields on the block during two bid rounds.

But Oil Minister Hussain al Shahristani said on Saturday that Iraq intended to work with OPEC to maximise revenues rather than pump flat out.

Iraq would be pumping below levels that would require it to rejoin the quota system for some time, Shahristani said. He declined to say what output level that would be.

"OPEC is going to have to give room to Iraq," said one senior Iraqi official. "Iraq has been deprived of its rightful oil sales for decades."

The size of OPEC quotas are related to reserves. Iraq's oil reserves are slightly smaller than Iran's, so a renewed quota for Iraq may be similar to that of its neighbour.

But international energy companies have signed up to deals that would give Iraq three times more capacity than Iran's 4.2 million bpd, so Baghdad would likely refuse to be saddled with that comparison, analysts said.

Samuel Ciszuk, IHS Global Insight’s Middle East energy analyst, said: "Iraq's relative size in the basic quota system should be recalculated."

"Iran is slowly on the way down while Iraq is on the way up, and Iraq is entitled to solidify that within OPEC. But it will be very tough negotiations. There will be a lot of political pressure on Iraq," he added.

Iraq still has security, political and logistical challenges that could unhinge its ambitious plan.

Scepticism that it will reach headline numbers is shared by some OPEC officials. Iraq would need to see substantial increases in output before OPEC reconsiders a quota, they say. However Ozm , unnamed OPEC offical said: "We'd need to see them pumping say three million barrels per day,"

But leaving quota talks until oil firms have made billions of dollars of investment and were in the midst of development could make it harder for Iraq to agree targets and enact them.

"I think there is a sense that OPEC has a 'head in the sands' approach to this and is putting off a difficult discussion," said the industry observer.

"It is convincing itself that Iraq can't hit any of these numbers. But if Iraq manages only a few hundred thousand barrels per day in the next few years, that's a big chunk of oil while the oil demand outlook is not that propitious."

Some of the fields Iraq has awarded are huge, accessible and cheap to pump. International energy firms could make quick, if relatively small, production gains in short order.

The oil contracts with international energy firms contain clauses to deal with the eventuality of output constraints, Shahristani said.

But invoking such clauses would undermine profits if other terms were left unchanged.

"They are very good clauses," said one executive at an international oil firm. "They state firms would be compensated without discrimination. But it would be tough. A lot of the profitability in the contracts is based on reaching the output target and staying there."

(Reuters)