Iraq readies for fight over Opec quota allocations

Iraq has set the stage for a fight with fellow Opec members about production levels, warning it has been “deprived of its fair share” of oil output for long time.

The warning by Hussein Sharistani, Iraq’s oil minister, comes after Baghdad invited foreign oil companies back into the country to develop its vast oil reserves. The return of the international oil companies promises to bring Iraq’s oil production from 2.5m barrels a day to as much as 12m barrels a day within a decade.

Sharistani said that Iraq’s output will not enjoy any “significant” increase next year or even in 2011. But he made clear that Iraq will fight for a larger quota soon.

Baghdad’s Opec quota has been suspended since, under Saddam Hussein, it invaded Kuwait in August 1990. In theory, the country is free to pump as much as it can.

Sharistani’s demand did not surprise anyone at Opec’s Angola meeting.

What surprised delegates from other countries and analysts was the criteria Baghdad wants that the cartel follows to set the new quotas. And with little else to discuss – the ministers have already agreed that the cartel should maintain its production unchanged – most delegates and analysts are talking about Iraq’s pretensions.

Sharistani said that Opec needs to set “the basis of the [quota] allocation” around 2011. “Countries’ needs for reconstruction should be one of the top criteria, in addition to countries’ capacity of production, countries’ reserves.”

The petition that “revenues needs” is taken into account is a radical departure from previous Opec’s quotas distribution exercises. In the past, the cartel has mostly used technical factors such as production, investment projects, local consumption or reserves.

But Baghdad could point out that those technical factors have been often “re-adjusted” to take into consideration political reasons. For example, Iran’s quota was lifted in 1998 to gain Teheran’s support for a round of production cuts.

Baghdad is not alone is asking for a larger quota based on the need to rebuild the country after a war. Angola is asking exactly the same. But as an industry observer noted in Luanda, allowing for an extra 300,000 b/d from Angola and very different to accepting 3m b/d extra from Iraq.

The cartel’s best hope is that rising global oil demand will accommodate Iraq’s production increases. But if consumption does not rise fast enough over the next decade, the increase in Iraq’s output could challenge Opec’s politics as others could be forced to reduce their own production levels to make room for Baghdad.

Lawrence Eagles, head of commodities research at JP Morgan in New York, said that the key issue was how the extra oil output will be absorbed by the producer group.

“Ultimately, Saudi Arabia, which was the main beneficiary of lower output in the wake of Saddam Hussein’s invasion of Kuwait, will bear most of the accomodative burden in lowering its own output,” he said.

PFC Energy, the Washington-based consultants, said that Iraq was likely to fight for achieving an Opec quota similar to that of Saudi Arabia, or about 8m b/d. “The issue of accommodating Iraq is one that cannot be kept off the table indefinitely,” it said.

“Ironically, during the fiftieth anniversary of the founding Baghdad Conference, OPEC members will also be confronted with the need to begin formulating Iraq’s re-entry into the production quota system,” PFC Energy added.

Related links:

Opec preview: Angola keeps on pumpin’ (FT Energy Source, 21/12/09)