Page 6 - DMEA Week 04 2020

DMEA COMMENTARY DMEA
Iraqi oil at risk from external events
Iraq’s location makes it vulnerable to attacks on its oil industry by Iranian proxies and it also faces a possible threat from any non-renewal of US waivers for vital fuel imports from Iran
IRAQ
WHAT:
Iraq’s oil industry is at risk from recent events in the region
WHY:
Iraq’s location makes it vulnerable to collateral damage from the US-Iran quarrel.
WHAT NEXT:
The potential outcome of recent actions is not clear but the risks are apparent to all.
THE death of Iranian commander Qassem Suleimani on January 3 from a US drone strike has had an impact on both Iran and Iraq. It has also jeopardised the future of Iraq’s oil produc- tion growth.
Heightened security risks in the wake of Suleimani’s death could persuade the interna- tional oil companies (IOCs) currently active in Iraq – such as Exxon Mobil or BP – that investing in infrastructure projects that are key to Iraq’s oil production ambitions is not worth the trouble. Iraq’s fiscal terms were already viewed as notori- ously tough inside the oil industry, and routine maintenance at the country’s ageing oilfields is only getting harder. Now, the increased risk of Iran lashing out through its powerful militia proxies in Iraq to stoke unrest could be the last straw.
The prospect of a withdrawal of US troops further raises the stakes. Shortly after the drone strike Iraq’s parliament voted to expel US troops, calling the attack a violation of the country’s sov- ereignty, since it happened on Iraqi soil. A with- drawal remains highly questionable, since many Sunni and Kurdish members of Parliament didn’t participate in the vote and US President Donald Trump has threatened sanctions if Iraq follows through. The outcome of these actions means that Iranian counter-measures might enjoy greater impunity and also increases the odds of a resurgence of Islamic State militants in areas where oil drilling or refining is done.
All of this presents a negative outcome to IOCs. As they survey an imperilled Iraq, they might step back from crucial investments in infrastructure such as the Common Seawater Supply Project (CSSP), a multi-billion dollar scheme to extract more crude oil from ageing fields by pumping seawater into them. Experts say the CSSP is vital to Iraq’s plans to lift oil pro- duction above the current 4.5mn barrel per day (bpd) level. But now oil companies might be ask- ingthemselves:isitworthit?
According to Paul Stevens at Chatham House, “It is now very unlikely that the crucial ‘common seawater supply project’ being run by Exxon – essential for expanding production capacity – will go ahead in the near future.”
Looking to Iraq
In the wake of Suleimani’s death, analysts raised and then quickly dismissed the possibility that Iran might close the Strait of Hormuz, a pivotal chokepoint for the passage of oil tankers, or per- haps intensify its proxy campaigns in Yemen or Lebanon. Those options risk inviting a military response from the US or allies such as Saudi Arabia or Israel, although many believe Iran could still carry out attacks against individual oil product tankers in the Strait of Hormuz, echo- ing tactics that foreign intelligence services say it undertook last year.
Instead, all eyes have turned to Iraq. For Tehran, provocation in Iraq is the most feasi- ble way to intensify a proxy campaign against the US. Iran’s foreign minister said it had “con- cluded” its retaliation against the US after firing missiles at a US airbase in Iraq, but experts are unconvinced, saying indirect counter-measures are likely. “Iraq is the most cost-effective strategy to expand control and continue its ‘shadow war’ with the US given its intelligence footprint and political assets,” averred Ahmad Mehdi of the Oxford Institute for Energy Studies (OIES) ear- lier this week. “Tehran has every interest to whip up anti-US sentiment and further de-legitimise the protest movement in a bid to strengthen its hand.”
Iran does not have to take any additional actions to damage Iraq’s future oil production. The mere prospect of it doing so has already proved damaging, since it dampens investors’ enthusiasm.
“In the medium term, heightened security concerns might make it more difficult for Iraq to build production capacity,” the International Energy Agency (IEA) said this week, being the most influential of several groups saying much the same. Rystad Energy’s Matthew Fitzsim- mons noted that “any spending plans in Iraq are likely to be under review given the current circumstances.”AndPaulStevens,inacommen- tary for Chatham House, wrote that “Iraq’s future production has already been damaged as inter- national oil companies are withdrawing staff for safety reasons” – with worse to come.
No country wants to hear that foreign inves- tors are losing interest. Iraq may be especially
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w w w. N E W S B A S E . c o m Week 04 30•January•2020