Iraq heads to China to boost its oil production

Shafaq News/ As some Western companies pull out of Iraq's oil sector, Iraq is looking to the East, particularly China, to boost its oil output to 7 million barrels per day by 2027, up from around 5.4 million barrels per day in mid-2023.

China is the largest buyer of Iraqi crude, importing about 35% of its oil, and the biggest foreign investor in Iraq's energy industry, holding stakes in several major oil fields. China's involvement in Iraq has been welcomed by the Iraqi authorities, who face domestic challenges such as outdated infrastructure, water shortages, and political disputes over oil production and exports.

China Petroleum and Chemical Corp, also known as Sinopec, has stakes in four major oil fields: Ahdab, Halfaya, Rumaila and West Qurna 1. Together with other Chinese companies, it owns direct stakes in about 24 billion barrels of reserves and produces about 3 million barrels per day of Iraqi oil, according to S&P Global Commodity Insights.

Other Asian investors have also expanded their presence in Iraq, including Indonesia's Pertamina, Japan's Japex and Itochu, which have acquired stakes in various Iraqi projects.

China is the largest importer of Iraqi crude, averaging 1.18 million barrels per day, or 35% of Iraq's crude oil exports. Iraq was the third largest oil supplier to China in 2023, after Russia and Saudi Arabia.

In contrast, some Western companies have withdrawn from Iraq's oil sector in recent years. Exxon Mobil transferred its 22.7% stake in West Qurna 1 to Iraq's Basra Oil Company, leaving PetroChina as the operator of the project. Exxon Mobil had also sold its 32% stake in the Bashiqa license in the Kurdistan region in 2021. Shell had exited the Majnoon field in southern Iraq in 2018.

However, some Western companies still remain in Iraq, such as BP, which manages the Rumaila oil field, and Eni, which manages the Zubair field.

The divestment of Western companies has increased China's influence over the Iraqi oil sector, and so far, China's involvement has been welcomed by the Iraqi authorities, as Chinese companies adhere to local regulations and run their projects smoothly, according to S&P Global Commodity Insights in a recent report.

Sarah Hijaz, head of the technical research department in the Middle East at S&P Global Commodity Insights, said, "Increasing production is possible from a geological perspective, but from a practical perspective it will be more difficult due to export capacity constraints.

Notably, Iraq is bound by the agreement of the OPEC+ alliance to produce 4 million barrels per day, although it increased its output to 4.27 million barrels per day in January, according to the latest survey conducted by Platts for the alliance's production.

Problems facing production

Iraq faces local challenges in increasing its oil production, such as limited export capacity due to aging and damaged infrastructure, and water scarcity.

The country's crude oil production has also been affected by disputes over the control of production in the semi-autonomous Kurdistan region.

Furthermore, Kirkuk-Jihan pipeline, which exports oil from the north, was shut down in March 2023. Iraq boosted production in other fields to make up for the lost output.

However, S&P Global expects that the production in the Kurdistan region could bounce back quickly if the Jihan pipeline dispute is settled, but so far, there has been no significant progress in the negotiations, despite sporadic reports.

Shwan Zulal, director of Carduchi Consulting, told S&P Global: "Oil exports from Kurdish oil fields are unlikely to resume soon unless the parties involved reach an agreement on their positions. None of them have made a major move yet."

Foreign oil companies in the Kurdistan region have reduced costs and kept selling crude oil to the local market at lower prices, getting upfront payments from global oil companies to cover their operating expenses.

Iraq's oil breakeven price

Iraq needs high oil prices and foreign investment to sustain its production and state budget in the coming years. According to S&P Global, Iraq's oil fiscal breakeven price, which is the minimum price needed to balance its budget, is $101 per barrel in 2023, $97 per barrel in 2024, and $103 per barrel in 2025.

These prices are much higher than the current market levels, which are facing downward pressure due to the increase of supplies from non-OPEC countries and the uncertainty of the global economy.

On February 14, Platts valued Iraq's main Basra Heavy crude, which is a heavy and sour grade of oil, at $77.97 per barrel.

Russian presence

Russia’s energy companies have continued their operations in Iraq, despite some Western companies leaving the Iraqi oil sector and Russia invading Ukraine. These include Gazprom, which is involved in the Badra field (central), Rosneft, which operates in Kurdistan, and Lukoil, which has a stake in West Qurna 2 and the newly discovered Eridu field.

Lukoil also recently extended its oil service contract with Iraq's Basra Oil Company for the West Qurna 2 field until 2045 and agreed to increase oil production from the field to 800,000 barrels per day.