From Deutsche Bank
Iraq Oil Infrastructure At Risk
The outbreak of violence in Iraq by Sunni rebels belonging to Islamic State of Iraq and the Levant (ISIL) has introduced new event risk for global oil markets... [T]he escalation in geopolitical risk in Iraq has so far been confined to the north of the country. As a result, it does not yet pose a significant threat to the country’s oil production since the northern region represents only a small proportion of total Iraqi oil production.
Of the major fields in the northern region, the Kirkuk oil field is under the control of Kurdish security forces, and is therefore secure for the time being. However, the possible impact to refining capacity is a greater concern as the country’s largest oil refinery (Baiji, 310kbd) is located near Mosul. However, current reports indicate this facility is operating normally.
In terms of its geographical reach, the ISIL projects its influence from strongholds in the western governorates of Al-Anbar and Nineveh, Figure 1. On Wednesday of this week, it was responsible for taking Mosul, the second-largest city in Iraq. The speed of ISIL progress and its fortification with newly acquired weaponry suggests that this may be more than a temporary incursion. In addition to Mosul, ISIL now occupies Tikrit, Dhiluiya and Yathrib and, according to Reuters, seeks to establish a Sunni caliphate on the border between Iraq and Syria.
While the west and north of Iraq is relatively sparse in its oil infrastructure, eastern and southern regions are of greater importance. If ISIL is able to make southward progress towards Baghdad this will heighten instability in the country and possibly threaten the smooth operation of existing refineries and oilfields. Of most concern would be any detrimental impact on investment in new capacity. The next phase of development for the country’s oil sector is meant to bring oil production closer to its planned targets of 4mbd by the end of the year and 5mbd over the medium term. The largest of these developments is the West Qurna 2 field which began operation at 120kbd in March 2014 and is expected to ramp up towards 1mbd by 2030. [ZH: readers may be surprised to learn that the largest stakeholder of West Qurna II, with a 75% ownership, is none other than Lukoil, i.e. Putin)
From a global oil perspective we expect the latest events in Iraq will sustain strong fundamentals for Brent crude oil. Indeed the slow recovery of Libyan crude oil exports alongside ongoing sanctions against Iran contrast with the strong growth in non-OPEC supply growth and specifically US crude oil production. We may therefore be witnessing the start of a more divergent supply picture between Brent on the one hand and WTI on the other.
Iraq oil infrastructure
In terms of crude oil production trends, Iraq produced 3.34mbd in April against a sustainable production capacity of 3.65mbd as estimated by the IEA. The country’s main export routes for crude are through the Iraq-Turkey Pipeline (ITP) system to the north, and via the port of Faw on the Persian Gulf. The ITP, also known as the Kirkuk-Ceyhan Oil Pipeline for its point of origin and terminus in Turkey, has a theoretical capacity of as much as 1.6mbd but a usable capacity of only perhaps 0.7-0.9mbd owing to damage caused by periodic bomb attacks over the past 10 years. The pipeline has been closed since 2 March for repair work.
The port of Faw is linked to two offshore tanker loading facilities, Al Basra and Khor al Amaya. Al Basra Oil Terminal has four berths and a capacity of 2.0mbd which could be raised to as much as 3.6mbd with an upgrade of pipeline infrastructure. Khor al Amaya has two berths and a capacity of 0.8mbd which could be lifted to 1.8mbd with a similar upgrade, according to Platts.
In terms of refined products, domestic refined product demand totals approximately 760kbd against domestic refining output of roughly 600kbd, making Iraq slightly short products supply. Refinery configuration is primarily hydroskimming (750kbd) with the Baiji refinery in the north being the only hydrocracker (310kbd). This is broadly representative of the breakdown of refinery capacity across the Middle East.
The latest escalation in Iraqi tensions has introduced new event risk for global oil markets. However, current options market pricing suggests oil markets are still attaching a low probability to an oil price spike over the coming months. We believe this sanguine approach to oil price spike risk reflects the fact that the major oil infrastructure in Iraq has not (yet) fallen into the hands of the militant extremists.