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Assaults on Iraqi oil fields sow worry over global gas prices

June 26, 2014 at 6:15 PM EST
Both Iraq's government army and fighters from ISIL have claimed to have the upper hand in a week-long battle for Iraq's biggest oil refinery. The clashes have stopped oil production at the Beiji complex, but amid the chaos, the price of crude exports has risen by only $2.35 a barrel. Gwen Ifill talks to Gianna Bern of Brookshire Advisory and Research and Greg Priddy of the Eurasia Group.
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GWEN IFILL: As Iraq continues to fracture, there are new concerns about the security of its considerable oil production facilities. Only last month, the country’s crude oil production reached 3.6 million barrels a day, the most since Saddam Hussein took over in 1979. That made Iraq the seventh largest producer in the world.

Fighting at Iraq’s biggest oil refinery has raged for a week, with the government army battling fighters from ISIL, the Islamic State in Iraq and the Levant. Both sides have claimed to have the upper hand at Baiji, located about 130 miles north of Baghdad.

An Iraqi military spokesman yesterday:

MAN (through interpreter): The refinery is under the control of our valiant armed forces. ISIL militants could not impose control over a meter. Actually, the fighting has been under way for seven days now, and the result is 92 dead bodies of ISIL militants scattered in the vicinity of the refinery.

GWEN IFILL: The clashes have stopped oil production at the Baiji complex, which had been able to refine up to 300,000 barrels a day. Today, yet another site came under attack. ISIL fighters assaulted the town of Mansouriyat al-Jabal, home to four currently inactive natural gas fields.

But amid the growing chaos, the price of crude exports has risen by only $2.35 a barrel, closing at just under $106 a barrel today. Fuel supplies within Iraq are also under strain. In the northern city of Irbil, lines for gasoline stretched more than a mile on Sunday.

MAM WALI, Irbil Resident (through interpreter): The current situation affects the people’s life and their work. People have business to do. I had to leave my shop and queue here to supply my car with fuel.

GWEN IFILL: The turmoil comes just four months after Iraqi oil production had reached its highest levels in more than 30 years.

Joining us for some analysis of what this fresh upheaval in Iraq means for the energy markets is Greg Priddy, director of the global energy and natural resources at Eurasia Group, a political risk research and consulting firm. And Gianna Bern, the president and founder of Brookshire Advisory and Research.

As you watch this, Greg Priddy, how nervous does this upheaval make you about what happens with oil prices and with gas prices?

GREG PRIDDY, Eurasia Group: Well, I think the market has initially probably overestimated the impact of this a little bit, in the sense that most of Iraq’s oil production is in a relatively small geographic area around Basra. That is in…

GWEN IFILL: In the southern part.

GREG PRIDDY: In the southern part, which is overwhelmingly Shia population.

So the militants doing fighting in the north would have very little local support there, and there’s really nowhere for them to hide or operate.

In the north, you have had the Kirkuk volumes that go out to Turkey to the Mediterranean. It’s about 230,000 barrels a day. And that’s been offline since early March. So that loss has already happened.

GWEN IFILL: Gianna Bern, how much of this oil production is intended for internal use, domestic use in Iraq, and how much of it is intended for export?

GIANNA BERN, Brookshire Advisory and Research: Well, the vast majority of Iraq’s production is intended for export.

As you just mentioned in your — just a minute earlier, Iraq’s production has reached about 3.3 million barrels per day, and it’s come a long way from where its production was several years ago. So the vast majority of it is meant, I would say a good 3.3 million barrels, for export, most of which is coming out of the southern parts of the country.

GWEN IFILL: OK. So where is that going? Let me stay with you for a moment. Where is that going? It’s coming from the southern part and going to — not to the U.S. Where’s it going?

GIANNA BERN: Asian — Asian markets are big — big importers, so China, Japan, Korea. Your Asian markets are very significant. European markets are likely to be impacted should this spread further.

I think the important thing to mention right now is that where it’s at and where crude oil prices are at today, the market has really contained this impact. So the market has absorbed all of this information, all of this activity, and really the market hasn’t reacted the way we might have thought several years ago, and — which is a good thing, so — but it’s important to note that here the activity and the fighting has not reached some critical areas.

So, for now, it’s wait and see. And the market has digested all of this information pretty nicely in fact. Crude oil prices — and I think the important one to keep in mind here is the Brent. Brent prices closed about $113 per barrel today. So WTI closed at about $106 per barrel today. So Brent is much more likely to be impacted by any activity in Iraq.

GWEN IFILL: Greg Priddy, how different is this than what we saw last time? We’re going to through a lot of deja vu here watching what’s happening in Iraq militarily and internally.

But is there any deja vu, any lessons to be learned from what we saw happen before?

GREG PRIDDY: Well, with the previous crises in Iraq, with the invasion, it went offline for quite a while. But that was in an era when the market also was rising for other reasons, because there wasn’t a lot of new production coming online and spare capacity was thinned out by that.

What we have had now in the last couple of years is a situation where U.S. production’s been rising very strongly, as well as the number of other countries around the world, including Iraq, and those — and the Southern Iraq production — and that has kind of offset the losses that we have had from politically driven events in — with Iran sanctions, with the losses from Libya, and now with the losses from Northern Iraq.

It’s essentially balanced it. And crude prices have been relatively stable over the last couple of years.

GWEN IFILL: When you say U.S. production has been on the rise, you’re talking about shale production, fracking production?

GREG PRIDDY: Yes, that’s been most of the increase, with a little bit of offshore.

GWEN IFILL: And has that offset our reliance, therefore?

GREG PRIDDY: Well, it’s really one world market. So the price is set globally. It doesn’t matter — it’s fungible. So it doesn’t matter very much who imports from where. Even if the U.S. wasn’t buying that much from Iraq — and it does buy a little bit — you know, an outage in Iraq would still have a big impact if it happened.

GWEN IFILL: Let’s talk about one area in the north, Gianna Bern, about the Kurdish area and the area around Kirkuk, which is oil-rich, and which the Kurds now say they want to control.

If they maintain control over these areas, over these oil fields, and don’t give them back to the central government in Baghdad, does that change the face of the market?

GIANNA BERN: Well, it all depends on how this plays out. I mean, right now, this is all hypothetical, but, I mean, the important thing to note here is that Iraq is now the second largest producer in the OPEC organization.

So that places them in really a very unique spot when you think about where they have been and how they have progressed over the last several years. There was a time when Iraq was producing as much as Kuwait, which is about two million barrels per day. And with some very significant foreign investment, they have really grown their position. They have grown their production, and now here we have them at the second largest producer in OPEC.

And that’s a remarkable story for them by itself. So, as they move into the north and as the fighting and the insurgence begins to spread, it remains to be seen how much will go offline. But, for right now, they’re holding steady, and it looks — it appears as though the government is being able to contain any significant production from being able to go offline.

GWEN IFILL: Well, Greg Priddy, let me ask you this question about the Kurdish regions. If they maintain control over those areas and do not devote — they had a deal with Baghdad about how they would share this and they would be able to get some sort of payment for it. Now they’re saying that deal is off. Does that affect the production line at all?

GREG PRIDDY: Well, I think the Kurds are potentially the big political winners here, because this increases their leverage with Baghdad a lot. The fact that they have control over security at the main Kirkuk oil fields now, and they’re probably going to keep that, that means that given that the pipeline out to Turkey that exists right now is not going to come back up, because it’s in ISIL-held areas, building an alternative from Kurdistan could eventually get that volume back online.

And that definitely adds to their negotiating leverage in dealing with Baghdad on their own exports. So there’s no guarantees there, but that makes it more likely that you would see some sort of a deal, because Baghdad needs them at this point.

GWEN IFILL: Let me ask you both one final question about the future.

Gianna Bern, is — does the trajectory that you see here, with the upheaval, with the disruptions, does it change the path that Iraq was on to greater — even greater oil production? There were high hopes and high numbers attached to the potential for the future.

GIANNA BERN: I think, for the moment, it definitely brings that back into question, as to how much they can really increase, given the current — the current dynamics in the country and the instability.

So, yes, I think it will we all have to ask, where do they go from here? And are they able to increase production, hold it steady? And I think, if they were able to hold it steady, it would actually be — that may be as good as we could hope for the moment.

GWEN IFILL: Greg Priddy, is there a long-term concern, in addition to this short-term upheaval?

GREG PRIDDY: Well, I think there’s definitely kind of a little bit of a chilling impact on the willingness of companies to go into Southern Iraq, but the security situation there, we don’t think it’s going to be prohibitive.

Not only do we think that the oil is not going to go offline immediately as a disruption event, but there’s still going to be ongoing activity there. So, LUKoil, for example, is bringing on a lot of new production at West Qurna-2 in the south this year.

And I think production, if there’s not a big disruption event, production actually could end the year up, and you could see a little bit of growth in the next few years, at least not anywhere as close what the government of Iraq is projecting.

GWEN IFILL: So, we will watching this on several different fronts.

Greg Priddy of Eurasia Group and Gianna Bern of the Brookshire Advisory and Research, thank you both very much.

GREG PRIDDY: Thank you.