Iraq, Iran reserves boosts signal OPEC power realignment

By Margaret McQuaile

October 18 - On October 4, Iraqi oil minister Hussein al-Shahristani announced a 25% increase in Baghdad's proven oil reserves to 143.1 billion barrels from 115 billion barrels. The 28.1 billion barrel increase would have put Iraq ahead of Iran as holder of the world's second-largest conventional crude oil reserves after Saudi Arabia.

But exactly a week later, Iran came out with its own announcement, oil minister Masoud Mirkazemi saying Tehran's crude reserves stood at 150.31 billion barrels, a 12.31 billion barrel increase.

When Shahristani arrived in Vienna on the eve of OPEC's October 14 meeting, he described the Iraqi reserves boost as "conservative."

Referring to the Iraqi figures, he said: "...these have been very carefully estimated, not only by our own reserves department in the ministry of oil, but also by the oil companies that have signed contracts with us. These figures are actually quite conservative."

Asked to comment on the Iranian reserves boost announcement, Shahristani said: "My reaction to Iran is to congratulate them."

As Iraq's capacity expansion plans have taken shape over the past year or two, there has been speculation as to whether the old issue of quota parity with Iran would re-emerge.

Quota parity

For much of the 1980s, Iran had insisted that its OPEC quota should be twice that of Iraq, which wanted quota parity with its then arch foe. Tehran's mantra was two Iranian barrels for every Iraqi barrel.

Then, in November 1989, with Iraq's crude export capacity rising via a twin pipeline from its northern fields to Turkish Mediterranean port Ceyhan, Iran came out with a stunning announcement: It would accept quota parity for Iraq, with whom it had fought a long and bitter war between 1980 and 1988.

As it turned out, parity didn't last long, because just a few months later, Iraq invaded Kuwait and exported no crude at all until a deal was reached with the United Nations in late 1996 to sell oil for food and aid.

Already blighted by years of sanctions on Baghdad, Iraq's oil industry suffered further when the United States launched a war on the regime of Saddam Hussein in early 2003.

Iraq has not been subject to OPEC output controls since 1990. Now, however, as it works to build up its production capacity through big service contracts with international oil companies, Iraq's eventual return to the OPEC quota system is becoming a talking point.

Shahristani has said in the fairly recent past that Iraq has no intention of accepting a quota until its production reaches 4 million b/d. Its current capacity is around 2.5 million b/d and the country is targetting an ambitious level of as much as 12 million b/d within six or seven years.

Speaking to reporters on October 13, however, Shahristani said Iraq had no intention of returning to OPEC's quota system any time soon. "Iraq is not included in the quota allocation and it will remain so for some time," he said.

He made no reference at all to the parity issue. In fact, when asked what level of OPEC quota Iraq expected to be given in the future, he said: "No one is going to give us anything. We are going to decide what we are going to produce."

"Based on the world demand, it is in our national interest to make sure that production from all members will not affect prices, and of course Iraq, as a founding member, is interested in coordinating with other members within OPEC on production levels," Shahristani continued.

"But we think Iraq has been deprived of its fair share of the world energy market, oil market, for many years and has to be compensated in addition to its reserves and production capacity."

A day later, when asked about Iraq's output goals, Shahristani said: "It's a target, 12 million b/d within six to seven years is only a target. We are not going to flood the market."

Iran, for its part, played down the parity issue, oil minister Mirkazemi saying the two countries were not competing against each other.

"We don't have any competition with Iraq. Each country has its own policy about oil and they will follow it. It has nothing to do with Iraq, there is no competition," he said.

"For example, maybe Iraq will have a target of 11 million b/d. We will not necessarily do the same strategy. It is a sovereign right to decide your own strategy," he said.

Mirkazemi also said Iran would probably announce a further increase in its proven oil reserves once an internal group completes work to assess the size of recent discoveries.

"The group for the last six months has done intensive review and research and this research will continue for the next six months and probably even this figure will be increased," he said ahead of the OPEC meeting.

"These are natural calculations. We have to review our calculations and data. For the last year, couple of years, we have had four or five new explorations," he said.

"It is natural that we will review and update these figures. We will continue the research for the next six months and there is a probability the number will be increased," he said.

But the minister said the higher reserves figures did not mean Iran would automatically increase its oil output.

"This does not mean we will increase production. We will produce whatever we are required [to produce]. This does not mean whatever is explored will be exported," he said.

New technologies

Washington-based consultancy PFC Energy, meanwhile, noted that the source of Iraq's new reserves estimate is unclear, though it pointed out that an upward revision had been expected at some point, given international oil company activity and the application of new technologies.

But PFC also saw the announcement as a clear signal that Iraq would only accept a quota substantially above that of Iran.

"Iraq's initial production target of 10 million b/d in part signaled that it no longer saw its quota tied to that of its eastern neighbor -- particularly as Iran's ageing reservoirs are set to go into decline, or at best continue to hold steady. The upward revision to the reserve estimates serves only to confirm Baghdad's view that its only peer within OPEC is Saudi Arabia," PFC said.

PFC saw a significant increase in Iraqi production within a relatively short period of time.

"While Baghdad's official target capacity of 11-12 million b/d may not be realized -- privately Iraqi oil officials acknowledge plans for a plateau output of around 6 million b/d by 2015 -- contract structures and a relatively benign operating environment in the short term should enable significant increased Iraqi volumes at the same time the rest of OPEC is called upon to maintain or even further curtail output," it said.

Former Venezuelan oil minister Alirio Parra agreed that Iraq was "without doubt" bidding to become OPEC's number two producer after Saudi Arabia, and that its move signals a future power shift, "a realignment," within the group.

Parra said it was "entirely realistic" given the work currently being done that Iraq should achieve "half of the planned volume" within in the next five or six years.

"And that is going to be a shock to OPEC," he said. "Once they've got six million [b/d], you're talking about different forces appearing in the organization."

But, Parra added, pointing out that OPEC was formed in Baghdad, "don't forget that the Iraqis are staunch supporters of OPEC." He believed that Iraq would push to produce as much as it feels it is entitled to, but within the OPEC quota system "and within market realities."

On the quota front, meanwhile, PFC made the point that OPEC saw its current volume allocations as "targets" based on actual production, having suspended several years ago its real quotas, which are linked in part to underlying reserves assessments.

"But the Iranian and Iraqi claims nonetheless have salience in OPEC's current deliberations, if only to underscore the need to agree to a mechanism to bring Iraq back into the formal quota system in order to ensure effective management of markets in 2011," PFC says.

Iraq's Shahristani, meanwhile, said in Vienna that the country intended to increase oil production to 2.75 million b/d in 2011 and exports to around 2.2-2.3 million b/d.

The plan is to install three new single point moorings in the Persian Gulf to help accommodate increases in exports over the coming years, and the first of these is due to installed before the end of next year.

Once all three SPMs are installed, Iraq will be able to export some 5 million b/d of crude from the Gulf, with further export capacity available through the existing northern pipeline to Turkey and a planned new pipeline to Syria, according to Shahristani.

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