George Kerevan: Iraq fires potential oil boom

The current political unrest in Iraq is likely to have a major influence of the price of North Sea output , writes George Kerevan

How is the Iraq crisis affecting North Sea oil? Reminder: the UK Office for Budget Responsibility is using $100 a barrel as its reference for predicting the oil revenues until 2018-19.

So far, the markets haven’t been panicked by the capture of western Iraq by Sunni insurgents dominated by the Isis group. North Sea Brent crude jumped to a nine-month high of $115 a barrel on 19 June, after Isis seized control of Mosul. Since then it has settled back to $114. That’s roughly where it was a year ago when president Obama threatened to bomb Syria.

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Why the superficial calm? One explanation is that Iraqi oil exports don’t come from the areas captured by Isis. They come from Shia-dominated regions to the south, or through Kurdish territory to Turkey. There’s even a sporting chance the Kurds – having used the impotence of the Baghdad regime to seize control of the northern Kirkuk oilfield – could increase exports.

However, that’s hardly the end of the story. According to Seth Kleinman, European head of energy research at Citigroup in London: “The market has worked itself into an extraordinary level of complacency” regarding Iraqi oil supplies. Iraq is slated to provided 60 per cent of all future increases from Opec. Lose Iraqi oil and the global energy situation will be in chaos.

Reuters, the main business news agency, reports some analysts are predicting Brent could spike at $150 if the crisis worsens. Bear in mind that Reuters’ backroom analysts crunch the very numbers for North Sea oil relied on by the UK Office for Financial Responsibility to calculate how much revenue would come to independent Scotland.

Behind the scenes, global capitalism is quietly preparing for the worst. Last week US hedge funds started betting heavily on US oil prices going up. The number of these “long trades” hit a record high. And that was before Isis overran more border crossings with Jordan and Syria. Yesterday, oil company share prices jumped by 9 per cent on the London Stock exchange.

The chances of Iraqi oil supplies being disrupted are huge. There are at least three potential flashpoints.

• Baghdad has threatened direct military action against the autonomous Kurdish state if the Kurds take more oil.

• Turkey, having given Isis access to attack the Assad regime, now finds the jihadist worm has turned. The first thing Isis did on entering Mosul was to take Turkish diplomats hostage. Remember, Isis wants to restore the old Ottoman caliphate. We could see a border conflict between Turkey and Isis – with oil pipelines a target.

• The de facto partition of Iraq, and America’s obvious impotence, leaves Shia Iraq as an Iranian protectorate.

Iran will use this new power in the region to unleash its proxies against the hated Saudis and Israelis. The kidnapping of three Israeli school students by pro-Iran Hamas militants is only the start. In Saudi Arabia, an aging king is refusing to name a successor from the younger generation and there is unrest among the Shia community.

Which brings us back to the North Sea. No-one can predict the course of oil prices. However, current low estimates are frankly bonkers, given the strategic meltdown that has just taken place in the Middle East. America has lost the ability to influence events and that will eventually get through to the markets.

Current North Sea oil production has been constrained by past underinvestment. Westminster governments – obsessed with the easy tax pickings from the banking industry – let the North Sea oil industry run down. The Department of Energy and Climate Change (DECC) has only 50 specialist staff working on oil and gas development issues. Norway has over 200.

Fortunately we are now seeing record levels of new investment. But increased output could take a while because skilled labour and exploration equipment have been diverted overseas. That’s why the OBR can claim an independent Scotland might see oil revenues actually dip in 2016. Would this create a budget crisis on Day One of independence? Hardly: if oil prices rise sharply as a result of the Middle East crisis, an independent Scotland would be petroleum rich in the medium term. It is that medium-term financial strength that will determine Scotland’s international credit rating.

High oil prices provoke a hunt for alternatives. Where would that leave Scotland? Fortunately, we are hardly deficient in renewable energy sources. What about imported shale oil? The hard truth is America will keep its own oil, leaving Europe in the lurch. Developing European shale gas will take decades, even if politically acceptable.

The big issue concerning shale oil is that it costs America $80 per barrel to produce. In the North Sea, oil is still profitable but costs nearer $100pb – which is why the profit-hungry major oil companies have abandoned the region to smaller independents. These wildcatters lack the financial muscle to develop North Sea assets quickly, or exploit the vast oil and gas riches in the Atlantic.

Industry guru Sir Ian Wood, in a report for the Westminster government, argues that North Sea output can be massively increased. He proposes a powerful new regulator to knock industry heads together to create (cheaper) shared infrastructure. But this plan has holes. First up, the new body will be created out of the failed DECC in London. Second, the real barrier to growth is access to investment cash.

Which is why I have come round to the conclusion that state needs to do what the Norwegian government did a generation ago and involve itself directly in the ownership and exploitation of North Sea and Atlantic oil and gas. The only government that will do so is an independent Scottish one.

So far the debate regarding oil and independence has been framed in purely tactical terms: will there be enough oil cash to pay the welfare bills? Scotland needs to think about oil strategically – as a vital political and economic asset in a dangerous world. Ownership of oil is power. Iraq proves it.