January 27, 2023

WWW.ENERGYINTEL.COM

Iraq's Output Flat Despite Strong Demand in Europe

  • European refiners are seeking more Basrah crude as an alternative to Russia's Urals, but Iraq's export constraints limit this opportunity.
  • Iraqi production is set to fall in February, with 10 days of planned maintenance at Lukoil’s 400,000 b/d West Qurna-2 field.
  • Baghdad’s efforts to squeeze Kurdish exports are showing signs of success as more buyers shun the grade that was pegged at a discount of around $20/bbl to Brent.

Iraq’s crude output was flat in December at 4.39 million barrels per day, according to Energy Intelligence estimates. A rise in exports from the Kurdistan region was offset by a fall in refinery runs, while shipments from Basrah changed little.

Opec’s second-largest producer is finding solid demand in Europe for its main export grade as a replacement for displaced Russian crude, particularly while Mediterranean refiners shun rival Kurdish crude, also known as KBT.

Officials at the state marketing company Somo insist, however, that these trade flow reconfigurations do not mean Iraq is losing market share in Asia, where they say Basrah demand remains strong.

Reflecting that sentiment, a Somo tender for 2 million barrels of February-loading Basrah Medium was awarded to an unknown buyer earlier this month at a premium to the official formula price (OSP).

Exports Flatlining

Basrah exports in December averaged 3.26 million b/d, which happens to be the main Iraqi export terminal’s effective capacity. This is up a fraction from November. The uptick came despite a fall in Iraq’s refinery runs of 80,000 b/d in December — mainly due to a scheduled turnaround at the Baiji refinery — which could have freed up crude for exports, absent these infrastructure constraints, and allow Somo to capitalize on demand for sour crude.

Iraq's December 2022 Production
('000 b/d)Vol.
Basrah exports3,262
Domestic refining640
Direct crude burn15
Less spiked condensate, fuel oil-50
KRG output415
Smuggling20
Exported from Kirkuk via Turkey†72
Exported from Kirkuk to Jordan*10
Stockbuild5
Total4,389

The February Basrah program envisages a sharp fall in exports due to the giant West Quran-2 oil field undergoing a full 10-day shutdown for maintenance from Feb. 20. This will take 400,000 b/d offline, according to Iraq’s Opec representative, Mohammed Saadoun.

The short program did not prevent Somo from issuing the tender for a 2 million bbl cargo of Basrah Medium on behalf of the Basrah Oil Co., which was sold at a premium to the OSP of 40-50c/bbl, Saadoun, who is also Somo’s head of market research and strategic planning, told Energy Intelligence.

The cargo was allocated to BOC as part of its equity entitlement, he explained, similar to the barrels allocated to Iraq’s equity producer, which amount to around 9% of total Basrah volumes and which, unlike the cargoes allocated to term customers, can be sold on a destination free basis.

European Bonanza

The surprisingly high volume of destination-free Basrah cargoes heading to Europe — 48%, according to Saadoun, versus 39% to Asia — appears to confirm Iraqi claims about the structural rise in European demand for the medium and heavy, sour crude.

Total Basrah volumes to Europe have averaged around 20%-25% since June, according to the Somo official, but he notes that is up from an average 15%-19% over the past five years. Underscoring the trend, some of Somo’s European term customers requested a 300% increase in their contractual volumes this year.

However, EI export data also shows a clear fall last year in Basrah flows to India, the biggest buyer of displaced Russian barrels (see chart).

Created with Highcharts 9.0.0(million bbl)DESTINATIONS BY COUNTRY/REGION FOR TOTAL IRAQI CRUDE LOADINGSChinaIndiaEuropeSouth KoreaTurkeyUnited StatesOtherNov'21Dec'21Jan'22Feb'22Mar'22Apr'22May'22Jun'22Jul'22Aug'22Sep'22Oct'22Nov'22Dec'2201k2k3k4kSource: Energy Intelligence

European interest in Basrah crude appears to have been partly helped by the number of Mediterranean buyers no longer taking KBT, following a letter Somo sent in August warning them of legal action. Former buyers understood to have stopped include Greek refiners Hellenic and Motor Oil, Italy’s Saras and Spain’s Cepsa.

As a consequence, discounts for KBT have widened — to $19-$20/bbl to Brent, according to Saadoun, which compares with Somo’s February OSP for Kirkuk, effectively the same grade, of Brent minus $3.25/bbl — and more Kurdish cargoes are heading to Israel. The latter took five in December, the equivalent of around 150,000 b/d, tracking data indicates, although it is difficult to know exactly how much Israel takes given efforts to disguise the trade, including by ship-to-ship transfer.

Chinese buyers are also taking more KBT, with exports resuming in October for the first time since January 2021, and two cargoes, including a VLCC, heading to China last month.

Basrah Exports by Destination
('000 b/d)Vol.
India983
China977
Europe574
US 285
South Korea284
Turkey126
Other Asia32
Total 3,262

No Quick Basrah Fix

The Basrah export terminal’s capacity could rise to 3.4 million b/d in the second half of the year, when an upgrade to a flexibility hose at one of the four single point moorings (SPMs) is due to be completed. This should lift capacity by up to 150,000 b/d.

That is 100,000 b/d less than what was forecast last month, reflecting the troubled outlook for Iraq’s oil sector. The next big export project in the works is to change the subsea pipeline supplying the defunct Khor al-Amayah terminal and connect it to a fifth SPM.

“That means we can add at least 1 million b/d. But the project needs at least 2 to 3.5 years,” Saadoun said.
Simon Martelli, London