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Gold and Energy Advisor's Real Wealth

Real Wealth #328  09/21/2015 1:42 PM EDT

Iraq #2 Oil Producer in the World Warns its Oil Production Could Drop Dramatically

Number of Operating Iraqi Oil Rigs Plummeting Iranian Oil Production at $90 a barrel means it can't make up the shortfall!

Low oil prices and the insurgency by ISIL (DASH) is finally starting to catch up with Iraq’s oil production. The Iraqi Oil Ministry that has numerous oil production and development deals with a myriad of international oil companies that the country is slashing development and production expenditures in 2016.

In a September 6, 2015 letter sent from Iraq's Oil Ministry to Organization of the Petroleum Exporting Countries’ that the efforts by the  world's No. 2 producer with four million barrels a day is becoming increasingly difficult.  

The letter —addressed to “all the country's oil contractors” which include...Eni SpA of Italy, Russia’s Lukoil Holdings, Anglo- Dutch firm Royal Dutch Shell PLC and U.K. giant BP PLC to submit conservative funding requests for fiscal 2016. All of these foreign companies maintain and expand Iraq’s fields with government money and are reimbursed for production with oil.

The sharp drop in Iraqi' oil-sales revenues, the Iraqi government must sharply reduced the funds that can be made available to the Ministry of Oil. According to an high ranking Oil Ministry official,  Abdul Mahdy al-Ameedi... The sharply lower world price for Crude “ will...reduce the funds available for the reimbursement of petroleum costs to our contractors.”

While Mr. Ameedi also wrote that the Iraqi oil ministry didn’t expect that lower funding would  “reduce production from the levels that were [already] stipulated.” The reality of the claim is VERY MUCH in question.

Iraq has been hit hard economically by the nose-dive in crude prices that have fallen to less than half their recent highs; falling from $114 a barrel to less than $50 a barrel. A huge drop in price in just one year.

Adding to production cost reality a increasingly confrontational dispute with the Kurdistan regional government has literally cut off those supposedly shared revenues from that region of the country from Iraq's central government. Monies the central government in Baghdad need to  fight a increasingly costly war with Islamic State (ISL/Dash.

In August, Iraq’s oil export revenue was estimated to be about $3.8 billion, down from $4.9 billion in July and $5.3 billion in June, according to the Iraq's official numbers.

Many Oil analysts around the world have been warning that the plummet in the price of oil would create short-term and long-term budget problems that could undermine the country's could oil production. There's a real chance that Iraq’s in ability to pay oil companies and protect foreign workers from the from the dozens of terrorist sub groups of ISIL could lead to no new development of the country’s oil fields in 2016 beyond. The threat of even the essential maintenance needed could be catastrophic.

Consider British Petroleum the biggest operator of southern Iraq’s large Rumaila field, where production was 1.3 million barrels a day at the end of 2014. The economics and dangerous environment threaten to stop a multibillion-dollar field expansion and development that could add as much 800,000 barrels a day in production by 2020 - at this point that project looks doomed.

A BP spokesman has been quoted this past month that the company’s short-term focus is on maintaining current production levels. He said longer term, the company is working with Iraq to fully develop the field to 2.1 million barrels a day. When confronted by reporters about the size of  the country's ability to fund the company's budget he said it “is really a question for the [Iraq] government.”

Another Oil company speaking off the record official admitted that he is worried that energy output could drop off significantly -- if spending is reduced. The worst-case scenario according to him is the lack of investment in new production could prompt his and other companies doing business in Iraq to declare force majeure— allowing his and other firms to pull back and even stop production without legal liability because of forces beyond its control.

Oil companies are being clobbered not only sharper lower oil prices but also high costs for security, labor and insurance that are absolutely needed in maintaining an operational presence in Iraq so expensive that even modest cuts in the Iraqi budget,  result in the majority of oil companies deciding to pull out of Iraq or slim down their operations with fewer employees.

The signs that Iraqi production is already heading off the cliff can be seen by simply looking at the sagging numbers in operating oil rigs that slumped to 44 in July, down from 96 in June 2014.

In a market report released this past Friday, the International Energy Agency said Iraq was producing more than its sustainable capacity of 4.1 million barrels a day. It was a empty observation that ignored the building crisis in maintaining production.

Iran is not capable of producing NEW oil supplies as long as oil is trading at less than $90 a barrel! 

There's a lot of propaganda about how lifting oil sanction of Iran will allow them a windfall in new funds. The reality is that new Iranian oil development and production will cost around $90 a barrel. Iran is not in the position to lose $40 a barrel on its production. The country's oil production and infrastructure requires an investment of over $300 billion in the next several years to properly equip and produce. With oil under $50 a barrel, it's not at all likely that Iran is really a export threat.

All of this means that as oil production adjusts to $50 even $65 oil, we are very likely to start seeing production declines that will signal we've seen the bottom in oil prices in 2016.

The time to bottom fish in domestic, cheap oil producers like APC, APA, LNG etc is approaching. The sharp decline in the world price for crude will eventually deliver a sharp snap back in price, 

Always Watching Your Chickens!

James DiGeorgia, Publisher, Editor


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