Iraqi oil output declining as of 2018 in Morgan Stanley’s view

CLAUDIA CARPENTER

DUBAI (Bloomberg) -- Iraq’s crude production will start to decline in 2018 because of a slowdown in investment due to lower oil prices and a costly war on Islamist militants, according to Morgan Stanley.

OPEC’s second-largest crude producer will pump 4.18 MMbopd in 2017, with output then falling to 4.132 million in 2018 and to 4.127 million by 2020, Haythem Rashed, a Morgan Stanley analyst in London, said in a Sept. 2 report. The bank had previously forecast rising output every year to 4.6 MMbopd by 2020.

Iraq’s production has climbed 1 MMbopd by July from a year earlier, becoming the strongest contributor to global supply, Morgan Stanley said. The removal of export constraints in the south, increased pipeline capacity in the semi-autonomous Kurdish region and the separation of heavy and light crude streams all contributed to growth, according to the report.

“With these infrastructure and crude marketing tailwinds now largely played out, we see limited prospects for further production growth,” Rashed said in the report.

Islamist Militants

Iraq, with the world’s fifth-biggest oil reserves, has been rebuilding its energy industry after decades of war and sanctions, while fighting a costly war against Islamic State militants who seized a swathe of the country’s northwest. The nation needs to keep increasing crude output because lower oil prices have curbed government revenue. Oil prices slumped since last year as the Organization of Petroleum Exporting Countries defended market share against booming production in the U.S.

With oil prices down 41% in the past year amid fighting Islamic State militants, the Iraqi government’s finances face “significant pressure,” Morgan Stanley said, citing an International Monetary Fund estimate that its foreign reserves will drop by more than 50% by the end of next year.

The number of Iraq’s oil-directed rigs has declined 50% in the past year, and some of Iraq’s largest oil fields cut capital expenditure spending by about 30%, the bank said in the report.

The Persian Gulf country had been ramping up production and exports with the help of companies, such as BP, Exxon Mobil and Royal Dutch Shell. Morgan Stanley raised its estimate for production this year by 119,000 bbl to 3.88 million, and for next year by 79,000 bbl to 4.17 million.

“We understand from meetings with majors, service companies and energy lawyers that the government has asked operators to reduce activity on oil fields in order to moderate the cost recovery burden,” Morgan Stanley said.