Doubts hang over Iraq's OPEC compliance amid Saudi supply struggles

Dubai — Iraq has been under severe pressure from its OPEC counterparts to get serious about cutting its crude production to comply with its OPEC quota, but the attacks on Saudi Arabia's oil facilities nine days ago may give it a reprieve.

Saudi production remains below normal levels, with the kingdom prioritizing meeting export obligations, which will lead to a drop of around 1 million b/d in refining throughput, according to its energy minister, Prince Abdulaziz bin Salman. Given that some of the repairs could take months, Saudi Arabia could secure some crude supplies from its neighbors, including Iraq, to boost its domestic refining runs.

But that could entail Iraq pumping above its agreed output level. S&P Global Platts reported last week that Saudi Arabia had approached Iraq for crude volumes of around 10 million barrels for loading in October or November. Iraq has denied the report and said it intends to fully comply with its quota, but analysts aren't fully convinced.

"Most of Iraqi crude was already allocated to buyers, so any replacement would presumably have to come from increased Iraqi output, unless they are going to buy up all the spot volumes and drive up prices," Robin Mills, CEO of Qamar Energy, told Platts.

Previously Iraq asked for understanding in the market for its history of non-compliance, citing the need for oil revenue to help it rebuild its economy. But after renewed pressure from Abdulaziz, Iraq said at an OPEC/non-OPEC monitoring committee on September 12 it is prepared to fully comply with its quota of 4.51 million b/d.

Skepticism remains. To meet its quota, that would require significant cuts from its August production level of 4.78 million b/d, according to OPEC.

"The likelihood Iraq would fully adhere to its OPEC quota even after the recent meeting was always low, although reducing output from current levels was reasonable to help prompt a slight price uplift," Niamh McBurney, senior analyst at Verisk Maplecroft, told Platts. "With the attack on Saudi, and the potential for outages for weeks, perhaps months, Iraq is ultimately the best placed OPEC supplier to try and fill the supply gap even if the Basra Light grade doesn't meet the needs of Arab and Arab Light customers."

Saudi grades

The Saudi grades most affected by Saturday's attacks are Arab Light and Arab Extra Light, both of which are popular in Asia and Europe. Production of Arab Light and Arab Extra Light averaged 5.50 million b/d and 1.53 million b/d in 2018, respectively, according to Platts estimates.

Trading sources said Saudi Aramco had already notified some of its customers that it may have to substitute Arab Medium and Arab Heavy grades for some of the supplies.

Basrah Light is similar in quality to Arab Heavy, a key feedstock for Saudi refineries.

Arab Heavy is classified as a medium sour crude, with a specific gravity of 27.80 API and a sulfur content of 2.75%, while Basrah also is of medium sour quality, with 28.80 API and 3.16% sulfur.

Iraq has the operational flexibility to increase its output to meet Iraqi demand. At the moment, capacity is around 5 million b/d, according to the country's oil minister, Thamir Ghadhban, and Iraq will likely welcome any reason to generate greater revenue, analysts said.

"I think everyone wasn't holding their breath that the Iraqis would suddenly cut the 175,000 b/d promised in Abu Dhabi," Mohammad Darwazah, director of geopolitics and energy at Medley Global Advisors, told Platts. "Looking to buy a tender from Baghdad in theory shouldn't remove Iraq from its obligations - but that could be read differently in Baghdad."

Part of the question centers on how likely Saudi Arabia will need Iraqi supplies, and this depends on how quickly crude stocks deplete and how fast repairs can be completed. If repairs are completed according to schedule, Saudi oil inventories could likely cover the loss.

Keeping exports prioritized will also mean that Saudi Arabia is forced to draw down on inventories during a period when spare capacity is limited, and importing Iraqi products could ensure the kingdom is not forced to drain its strategic reserves.

Medley Global Advisors expects the Saudi loss to be around 50,000 b/d by the end of September. Saudi Arabia has been unclear on repair timelines, citing target dates for capacity ramp-up, rather than production. Aramco said initially that operations would take around 10 weeks to be restored, while reports from the Wall Street Journal cited contractors who stated the works could extend to months past this date.

"If the Saudi supply gap continues until the end of the year, Iraq will become the main swing producer -- which is good for demand for its crudes, and good for the Iraq government looking at its budget for 2020," McBurney added.

--Miriam Malek, miriam.malek@spglobal.com

--Edited by Claudia Carpenter, claudia.carpenter@spglobal.com