Opec may face Iraq oil challenge sooner than expected

The storm brewing on the Organization of Petroleum Exporting Countries (Opec's) horizon over future Iraqi oil output could engulf the producer group sooner than it would like.

Opec was unlikely to discuss Iraq at its meeting on March 17 but it may need to do so within a couple of years.

"There's only one issue, but it's a big one. It's a tsunami. Iraq," said Leo Drollas at the Centre for Global Energy Studies. After years of sanctions and war, Iraq is exempt from the output targets OPEC uses to set supply levels. 

But as Baghdad embarks on an unprecedented oil industry development, Opec will at some point need to bring Iraq back into the fold to prevent millions of barrels of new oil supply undoing its work to balance markets.

OPEC officials and analysts have said the issue is not urgent, as it could be years before Iraq makes significant increases to current output of around 2.5 million barrels per day (mbpd).     Baghdad's failure to reach past ambitious targets has fed the skepticism.

The consensus among analysts is that it would take around five years for Iraq to boost output by between 1 mbpd and 1.5 mbpd. But output gains could surprise Opec in their speed. "You could be looking at 1.5 million barrels in two years," said a senior executive at one of the oil firms involved in Iraq.

 "That could make a huge difference to the supply and demand balance." Iraq's deals call for foreign firms to boost output potential to 12 mbpd in seven years, which would leave it snapping at the heels of Saudi Arabia's capacity of 12.5 mbpd.

Iraq faces huge political, security and logistical challenges in reaching that target. The first test will be how the new government that emerges from elections will handle contracts signed by oil firms.

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