OPEC faces showdown over Iraq oil production

For years the Organisation of the Petroleum Exporting Countries could rely on Saddam Hussein’s Iraq - production hamstrung by sanctions - to prop up crude prices. Now, at a meeting this week in Vienna, it must brace itself for a resurgent Iraqi oil industry with the potential to join cartel kingpin Saudi Arabia and non-OPEC Russia in the world’s top three.

Already Iran has raised the prospect of an OPEC price war, music to the ears of Iraq’s new masters in Washington, heavily dependent as they are on Middle East oil imports.

"Iraq for many years has been a huge factor supporting oil prices," said Gary Ross, chief executive of New York’s PIRA Energy consultancy. "That’s no longer the case. Now Saddam has gone, the perceptions of how OPEC can manage the market have changed."

That might mean good news down the road for industrialised economies, growth hampered for months by high energy costs.

In the short-term, with Iraqi exports off the market, OPEC should be able to stem a slump that has cut Brent crude from a peakof $35 per barrel before the war to $26 now, in line with producers’ price target.

Global stocks of crude and products are low and Iraq is not expected to restore pre-war output until later this year.

That gives oil ministers the breathing space to trim supply at Thursday’s Vienna meeting by enough to support prices during the spring downturn in demand.

They have two options: simply eliminate two million barrels per day (bpd) of excess production, pumped above official cartel quota limits mainly by Saudi Arabia to stop a war price spike; or go further, as Iran wants, and cut quotas.

"If they want $25 a barrel, certainly they need to cut back," said Roger Diwan, of Petroleum Finance Corp in Washington. "But they don’t need to cut quotas, just the overproduction."

OPEC sees second-quarter demand for its crude of 23 million bpd, after pumping 26 million bpd in March, excluding Iraq.

Ministers will want to restrict world inventory growth to less than two million bpd in the second quarter, requiring them to cut back close to official quota limits of 24.5 million bpd.

Thursday’s meeting comes too early for a new Iraqi interim authority, still in the making, to send a representative to Vienna.

That absence only serves to underline the threat Baghdad represents to the successful four-year Saudi strategy of rationing supplies that has boosted the price of Brent crude to more than $25 a barrel, on average, since April 1999.

Fears in OPEC of what lies ahead already are bubbling to the surface. Iran lost no time last week in raising the prospect of a showdown on quotas that might hit oil prices hard.

Iranian oil minister Bijan Zanganeh said the renewal of Iraqi production should be "controlled".

Hossein Afarideh, the head of Iran’s parliamentary energy committee, went further, warning of a price war if Iraq went beyond any newly-assigned quota. Iran and Iraq, at war from 1980-1988, shared output quota parity until 1990 sanctions were imposed on Baghdad for the invasion of Kuwait.

With the long-term potential to double production, Baghdad is thought unlikely to volunteer to restrain production as it tries to finance the rebuilding of an economy ruined by 12 years of sanctions.

Proposals by Iraqi expatriates, backed by the US, for foreign oil company production sharing agreements would go far beyond the limited investment allowed in Iran and Kuwait. Saudi does not permit any foreign upstream oil money.

Meeting in London recently under the US State Department’s Future of Iraq project, the expatriates recommended that the next Iraqi government stay in OPEC but refuse to accept a limit on production.

"The prime objective of oil policy should be the maximisation of oil export revenues," said a briefing paper to the policy advisory talks. "It would be up to OPEC to keep Iraq within the organisation by allowing it to produce at will."