London (Platts)--9Oct2012/606 am EDT/1006 GMT

Iraqi oil output is set to more than double over the rest of the current decade, rising to 6.1 million b/d by 2020 and reaching 8.3 million b/d in 2035, the International Energy Agency said Tuesday in a special report on the Middle East country.

This 5.6 million b/d increase between 2011 and 2035, the central scenario in the report, makes Iraq by far the largest contributor to global oil supply growth, the IEA said, adding that Iraq was expected to account for some 45% of anticipated growth in global output.

The concentration of super-giant fields in the south of the country around Basra will provide the biggest production boost, the IEA said, although it added that substantial growth could also come from the north if the Kurdistan Regional Government and Baghdad resolve their differences over administration of the oil sector.

Boosting output capacity from the current 3 million b/d will require cumulative energy investment of more than $530 billion or more than $25 billion annually -- three times the estimated $9 billion spent in 2011 -- over the period, the IEA said.

This could lead to almost $5 trillion in oil export revenues between now and 2035, an annual average of $200 billion, it said.

THE COST OF DELAYED INVESTMENT

But the IEA warned that delayed investment could cost the country $3 trillion in lost national wealth and a much lower trajectory for oil production, which would reach just 4 million b/d in 2020 and 5.3 million b/d in 2035.

It said the anticipated increase could be at risk if efforts to modernize and reform the country's legal framework and institutions were delayed or frustrated, or if fluctuations in oil prices and revenues were to result in irregular capital spending.

"Adequate rigs will need to be available at the right time. Early investment in a challenging project to bring up to 8 million b/d of water inland from the Gulf to Iraq's southern fields will be essential to support oil production and to reduce potential stress on scarce freshwater resources," it said.

"Sufficient oil storage and transportation capacity will be needed to accommodate the expansion in output and diminish the risk of over-reliance on the southern seaborne route," it said, adding: "The infrastructure and investment requirements in our high case [scenario], which anticipates oil production of 9.2 million b/d already in 2020, are even more demanding."

The agency said that contracts already in place with international oil companies implied "an extraordinary increase" in output capacity to a level almost five times higher than current capacity.

"How this works out in practice will be determined by the speed at which impediments to investment are removed, clarity on how Iraq plans to derive long-term value from its hydrocarbon wealth, international market conditions and Iraq's success in consolidating political stability and developing its human resource base," it said.

"Reaching output in excess of 9 million b/d by 2020 would equal the highest sustained growth in the history of the global oil industry and this report anticipates movement towards possible trajectories for oil output lower than that implied by current contracts.

KEY SUPPLIER TO ASIA

The IEA sees Iraq becoming a key supplier to Asia's fast-growing markets, in particular China and, by the 2030s, overtaking Russia to become the world's second-biggest oil exporter.

The agency stressed the importance of gas sector development for Iraq, not only to reduce the dominance of oil in the domestic mix but also as an export revenue earner. But to achieve this Iraq must create incentives to develop its non-associated gas reserves, said the agency, which sees gas exports starting around 2020 and approaching 20 billion cubic meters by 2035.

Similarly, Iraq must keep pace with rising demand for electricity, the IEA said, noting that while power stations are producing more electricity than ever before, prolonged power cuts are still happening on a daily basis in many parts of the country.

"Over the period to 2035, Iraq needs to install around 70 gigawatts of generation capacity and move away from a predominantly oil-fired power mix to more reliance on efficient gas-fired generation," it said, adding that without this transition Iraq was likely to forgo around $520 billion in oil export revenues and see domestic oil demand more than 1 million b/d higher in 2035.

The agency said gathering and processing Iraq's associated gas, most of which is currently flared, would be a vital step in developing the gas sector but not enough to meet projected demand of more than 70 billion cubic meters in 2035 as gas becomes the main fuel in power generation.

"Iraq's gas balance and its opportunity to have a surplus for export depend on creating incentives to develop its non-associated gas resources," it said.

"The resources and market opportunities are there to expand exports further, as Iraq can potentially provide a very cost-competitive gas supply to neighboring countries, to European markets and -- via liquefied natural gas -- to Asia."

The IEA said successful development of Iraq's hydrocarbon potential and effective management of resulting revenues would be crucial in fueling the country's social and economic development.

On the other hand, it said, "failure will hinder Iraq's recovery and put global energy markets on course for troubled waters."

--Margaret McQuaile, margaret_mcquaile@platts.com
--Edited by James Leech, james_leech@platts.com

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