As the global crude markets were just beginning to cool off, damage to the oil export infrastructure and questions about the security of supplies from Iraq, dented the euphoria in the market that was setting in. Although the oil markets did not react violently to the developments in Iraq, as some had expected, yet some reversal in the oil market fortunes were immediately witnessed. After the Iraqi fighters damaged the two pipelines running to the southern oil terminals of Basra and Al-Amaya, US light crude climbed 22 cents and the Brent rose by 14 cents. This was despite the fact the in view of the OPEC decisions, markets were already starting to look fragile and still lower prices were expected. Until then the crude had almost lost some $5 a barrel from its peak of June 2. And prices reportedly dropped again, once the initial signals about the completion of the repair job were received by the market. The two damaged pipelines could carry over 1.5 million barrels a day to offshore terminals in Gulf.
Just a couple of days before the damage to the two southern pipelines, the important pipeline carrying crude from the oil rich northern Iraqi region of Kirkuk to the Turkish port Ceyhan was also damaged. Both the attacks resulted in almost complete halting of oil exports from Iraq, for almost a week, denting the sentiments of the markets that were then beginning to stabilize.
Security of supplies is one of the major concerns of crude markets in the world today and if anything happens to Iraq, it is bound to affect the market sentiments. The importance of Iraq in the overall global energy equation is hence under spotlight for the time being.
The Monthly Oil Report of the London based Center for Global Energy Studies (CGES) released on June 21, says: “Stability in Iraq holds the key to oil price movements over the rest of the year.” In a period when the strong oil demand growth has put considerable strain on oil capacity throughout the supply chain, stability in Iraq, as in other major oil producing areas, is of paramount importance to the global economy. And indeed there are reasons for the importance of security and stability in Iraq for the oil thirsty world.
The importance of Iraq could be gauged from the fact that Iraq has 115 billion barrels of proven oil reserves, next to Saudi Arabia only. Estimates of its oil reserves and resources vary widely, given that only 10% or so of the country has been explored so far. Estimates of possible reserves in the Western Desert region, regarded by many as the next oil frontier of Iraq, vary from 45 to 100 billion barrels.
With only 17 out of 80 discovered fields having been developed as yet, Iraq is a highly attractive oil prospect (one of the apparent reasons why Mr. Bush decided to have a go at Baghdad). Overall about 2,300 oil wells have been drilled in Iraq, of which according to some figures, only 1,600 are actually producing, compared to about 1 million wells in Texas alone.
Iran’s main export crude comes from two largest active fields of Rumaila in south and Kirkuk in north. The Rumaila field also extends a short distance into the Kuwaiti territory.
Due to technological constraints, and sanctions since the first Gulf war of 1990-91, Iraqi production has been below its potential ever since. Historically Iraqi production peaked in December 1979 at 3.7 million barrels a day, and then in July 1990, just prior to the invasion of Kuwait, at 3.5 million barrels a day.
Some say Iraq has the potential to produce almost six million bpd. However, in order to reach that figure a lot investment need to be made in the crumbling infrastructure of the oil industry in Iraq.
Thus despite its potential, Iraq is unable to produce crude at a higher level than present, unless huge investments are made into the infra-structure. But in a world with rising global demand, any hindrance to the oil flow from Baghdad could be disastrous. It could sabotage the already delicate global balance, analysts fear and rightly so.