Iraq’s Civil War Threatens Structure Of Global Energy Supply For Years

By Ambrose Evans-Pritchard

June 13, 2014 ·

Iraq’s Civil War Threatens Structure of Global Energy Supply For Years

Brent crude jumped above $113 a barrel as the Islamic State of Iraq

and the Levant raced towards Baghdad

Spectacular advances by Jihadi forces across northern Iraq have raised

the spectre of a Sunni-Shia conflagration in the heart of the Middle

East, triggering a surge in oil prices and throwing into doubt the

structure of global energy supply for the next decade.

Brent crude jumped above $113 a barrel as the self-described Islamic

State of Iraq and the Levant (ISIL) raced down the Tigris Valley

towards Baghdad with sophisticated weaponry, seizing on its momentum

after the historic capture of Mosul. Oil prices are approaching levels

last seen during the Arab Spring.

“Iraq is turning into a nightmare. There are real risks that this

movement will spread to other countries. Our economies are too weak to

pay for oil at $120, and they can’t stand $140 if it spikes that

high,” said Chris Skrebowski, a veteran oil analyst and former editor

of Petroleum Review.

Iraq is Opec’s second-biggest producer, though output has slipped 8pc

to 3.3m barrels a day (b/d) since February due to sabotage of the

Kirkuk-Ceyhan pipeline to Turkey. Ole Hansen, from Saxo Bank, said a

fall in Iraqi output to levels seen in the last Gulf war would cause a

$20 price spike. “The entire economic recovery could stall, and we

could even slip back into recession in some regions,” he said.

The International Energy Agency is counting on Iraq to provide 45pc of

the entire increase in global oil supply by the end of the decade,

badly needed to meet growing demand in China and India. This requires

vast investment – rising to $540bn by 2035 as output tops 8m b/d – but

such outlays are implausible as the state slides towards sectarian

civil war.

A risk alert put out on Thursday by IHS said the West Tikrit and Ajul

oil fields and other energy assets in the North are at “severe risk of

being raided or targeted for sabotage”.

The highways linking Baghdad to Basra are also at risk, and cargo

travelling almost anywhere in the north is vulnerable to bomb attacks.

The government claims to have stopped an assault on the country’s

biggest oil refinery at Baij but IHS said the plant is still at

“severe risk”.

Iraq’s oil minister, Abdul Kareem Luaibi, said most of country’s crude

was pumped from “very, very safe” regions in the Shia South. He

insisted that Iraq would meet plans to boost output to 4m b/d by the

end of the year, the highest since the late 1970s.

Such assurances count for little as the Iraqi security forces melt

away in the face of lightning strikes by the army of Sunni extremists,

a group of up to 5,000 warriors that is too radical even for Al-Qaeda

and harks back to the 8th century Caliphate.

ISIL forces have seized Tikrit, the stronghold of ex-dictator Saddam

Hussein, and were reported to be closing in on Dhuluiya, 50 miles from

Baghdad. The city of Fallujah has already fallen, a poignant reminder

of how little the US has achieved after spending $1 trillion on its

misadventure in Iraq. The city was captured by US and British forces a

decade ago with heavy casualties in the toughest battle since the

Vietnam War.

The army has abandoned the oil-rich region of Kirkuk in the north to

the autonomous forces of the Kurdish Peshmerga, leaving it unclear

whether the unitary state of Iraq actually exists.

Helima Croft, from Barclays, said ISIL has already conducted bombings

deep into the Shia south as far as Basra and may step up attacks on

energy infrastructure. “The south of the country is not beyond the

geographic reach of the extremist groups. We believe the government

will be hard pressed to devote funds to complete vital oil

infrastructure upgrades when it must devote ever-increasing resources

to stem the security threat,” she said.

Michael Lewis, from Deutsche Bank, said the pitched battles have

created a “new event risk” for global oil markets, leaving it far from

clear whether developments such as the West Qurna 2 field will be

completed as planned.

The unfolding drama comes at a time of near paralysis in Libya, where

militia conflicts have cut output to less than 200,000 b/d, barely a

fifth of the potential.

There is a tentative deal in the works but it will take months to

crank up output. “Libyan crude is very waxy. If you leave the taps off

for 12 months it precipitates out. You can’t just turn it back on

again,” said Mr Skrebowski.

China has been boosting its strategic petroleum reserve at a record

pace, tightening the global market just as disruptions in Azerbaijan,

Colombia, Mexico, South Sudan and other non-Opec suppliers cut output

by 500,000 b/d, enough to tip the balance in a global market of 92m

b/d.

The IEA called on Opec to raise output by 900,000 b/d even before the

drama in Iraq. The cartel has ignored the pleas, deciding on Wednesday

to keep its quotas unchanged at 30m b/d. Most Opec members need prices

near $100 just to cover their budgets.

Elizabeth Stephens, from Jardine Lloyd Thompson, said the ISIL Jihadis

fund themselves by control over Syria’s oil fields, selling $18m of

crude each month to the Assad regime. “Perhaps we should be

encouraging Assad to buy from the West, but that would be an

embarrassing change of policy,” she said.

The world is ever more dependent on bringing Iran back into the fold.

An end to sanctions would allow Tehran to sell an extra 1m b/d, with

potential for much more as investment revives.

Iraq’s breakdown is a tragedy, brought to a head by years of

corruption under premier Nouri al-Maliki and his failure to abide by

power-sharing accords with the beleaguered Sunnis.

Zaineb Al-Assam, from IHS, said the Iraqi army is too demoralized and

poorly equipped to defend the state, leaving to it Shia militias such

as the Mahdi Army of Sadr City to protect their zones. This in turn

risks setting off a sectarian spiral.

Iraq’s fragmentation greatly increases the risk of intervention by

Iran, Turkey and other outside powers, turning the crisis into a

full-blown struggle for dominance between Sunni and Shia Muslims.

The echoes of Europe’s Thirty Years War between Catholics and

Protestants in the 17th century are growing ever louder.