How is the Mideast war impacting Iraq's oil industry?

Summary

BAGHDAD, March 15 — Iraq’s economy depends almost entirely on its crude oil sales, now seriously threatened by the Middle East war with Iran choking the crucial Strait of Hormuz. Oil exports and production have nearly come to a standstill with the waterway all but shut by Iran’s attacks and threats against shipping, and following repeated drone strikes on some of the country’s oil facilities. The war sparked by US-Israel strikes on Iran on February 28 has sparked chaos on global markets, and sent the price of oil soaring after the Islamic republic imposed control by force over the crucial artery. Like other oil exporters in the region, Iraq cannot get its crude through the strait, and while it previously exported an average of 3.5 million barrels daily, accounting for some 90 per cent of its income, that has dropped precipitously. Iraq has sought to calm fears by announcing that it is exploring alternative routes, but experts fear that its economy is too fragile to withstand such an enormous blow. How has Iraq’s oil sector been affected, and what could happen if the conflict continues? What is the situation now? - Before the war, Iraq exported most of its daily crude oil through its southern Basra ports and the Strait of Hormuz. “The war has effectively halted Iraqi oil exports: the closure of the Strait of Hormuz has stopped 94 percent of these exports,” said economist Ahmed Tabaqchali, a senior non-resident at the Atlantic Council. The remaining six percent from the autonomous Kurdistan region is at a standstill, with production paused due to attacks on oil fields, he said. “This situation has exposed longstanding structural weaknesses in Iraq’s oil export system,” Yesar Al-Maleki, an oil industry expert at Middle East Economic Survey, told AFP. Following years of underinvestment in its infrastructure, the industry is unable to cope with sudden disruptions, he said, and as a result is “facing the consequences”. “Onshore storage capacity quickly filled, leaving Iraq with little choice but to shut in production at several of its giant southern oil fields,” he said. Drone strikes have targeted oil fields, notably in Basra, and several foreign companies across the country have suspended production over security fears. An attack claimed by Tehran on two oil tankers off the Iraqi coast killed one crew member, with Iran saying that one of the tankers, flying a Marshall Islands flag, was American. The US embassy in Baghdad warned that Iran and Tehran-backed Iraqi armed groups may be planning to target American energy facilities. Iraq is still producing an estimated 1.4 million barrels, mostly for domestic use. What is the economic impact? “One of the problems with the Iraqi economy is its exclusive dependence on the oil sector,” a senior Iraqi government official said. For decades, the budget has been almost entirely covered by oil revenues. Maleki said oil revenues usually take two or three months to reach the government, and anticipated the full impact would only be understood in May. An immediate issue could be civil servants’ salaries. The state is the country’s largest employer, with more than nine million Iraqis, or one in five citizens, receiving a salary, a pension or public benefits, according to official figures. Iraq also relies heavily on foreign currency generated from crude oil sales to finance imports and stabilise the Iraqi dinar. Maleki said pressure on Iraq’s foreign currency reserves, and the stability of the US-dinar exchange, could also worsen. Possible solutions? Authorities announced this week that they are exploring several alternative routes for oil exports. These include using a pipeline connecting Iraq’s semi-autonomous Kurdistan to the Turkish port of Ceyhan, which is typically used to export oil from the autonomous region. Oil Minister Hayan Abdel Ghani promised a deal with Kurdistan to export approximately 200,000 barrels per day (bpd) via this pipeline. He also expressed hope that Kurdish exports of 210,000 bpd would resume. But Kurdistan’s leaders are only willing to sign such an agreement if Baghdad eases restrictions on access to dollars through banks to finance their own imports. However, these short-term solutions would represent just a fraction of pre-war exports. — AFP