Five things to know about how Iraq’s turmoil affects oil markets

HOUSTON — Sarah Haggas is the Middle East regional manager for the energy team at global consulting firm IHS. She spoke with FuelFix Friday morning about how turmoil in Iraq by militant group ISIS is affecting the energy sector.

1) We’ve already seen reports that Exxon Mobil and BP have evacuated some of their facilities in southern Iraq, even though the violence is concentrated in the north. Is that premature?

Haggas: I think it’s probably standard operating procedure. They have a quality of care for their employees, and they don’t want to put them somewhere that’s a risk. A lot of it is precautionary measure to make sure employees are safe.

We haven’t heard any reports of any production being disrupted in the key oil and gas heartland in the south. My thinking is it’s really a precaution at this stage. They’re not anticipating the violence to reach them in the short-term, but they want to make sure everyone is safe and reassured.

I think they can still operate on quite a reduced staff. They’re keeping key personnel. It’s mostly non-nationals being evacuated. Some companies have said they haven’t evacuated anyone yet. They’re just monitoring the situation and they’ll look at a later date to see if they warrant it. Some companies have decided they’d rather do it now than wait for the situation to develop.

2) There have been conflicting reports that ISIS has captured the country’s largest refinery. If they have, is this a problem internally in Iraq, or does it have broader implications outside the country?

Haggas : I think it’s more of an internal issue than an external issue. It’s the largest refinery in Iraq. A large majority of their production is exported out as crude oil. That’s unaffected by the refinery. Most of the exports go from the southern terminal, from the port of Basra. That’s obviously unaffected by the refinery, since it’s non-refined product.

Domestically, it would have an impact if that refinery was to be shut down. That provides a lot of refined product to the local market and also to fuel power plants. That would mean electricity shortages down the line. As we understand it, the refineries store large amounts of fuel, so I don’t think the supply stops automatically. It wouldn’t be an immediate effect, but if refining was shut-in for a long time, it would affect the domestic supply of refined products.

3) We recently saw Brent oil prices hit their highest level in months. There’s this juxtaposition between the risk traders see, and the reality that oil production hasn’t been disrupted. Will those prices continue to rise anyway?

Haggas : My understanding is a lot of the financial analysts work really on what they perceive is going to happen. They automatically feel there’s a great deal of fighting in Iraq that might ultimately affect the supply. It’s more forward-thinking. I think if things go back to normal, prices could go back to normal.

The markets are trying to preempt what’s going to happen rather than react to what’s going on at the moment. I think a lot of it is speculation rather than knowledge of what’s going to happen.

4) So should we worry about the southern oil fields?

Haggas: It depends on the scale. A country with a lot less production is Syria, but it’s had a massive drop in production. It was 300,000 barrels per day, and now it’s 20,000. That’s kind of just showing the effect long-term violence can have on a country.

It depends on how localized the conflict is. If it stays in the north, the situation would probably stay similar to what it is now. If it goes country-wide … historically, Iraq has had a lot of conflicts, and it affects its production. It really depends on what sort of scale we’re talking about here.

We have seen in other countries that prolonged violence that covers a large amount of the country — that production is ultimately affected. In Syria, a lot of fighting has happened in areas with quite large oil production anyway. We’ve heard accounts that the rebel fighters are occupying the oil fields there. It has been part of their target, to take control of those oil fields.

5) What about the oil fields controlled by the Kurds? Are they at risk?

Haggas: There’s been no cessation of operations in Kurdistan. They’re defending their borders. The amount of staff we’re talking about is lower levels than in the south. It’s a lot of exploration, and the fields are earlier in their producing life.

As we understand it, the Kurdistan region is saying they haven’t been affected at all, and operations are still underway, and they’re managing to export their oil. They go north through Turkey. Obviously they’re closer to the violence, but we haven’t seen any changes at the moment.

In Kurdistan, Exxon Mobil has operations. They have an exploration license, but they don’t have any production. Gulf Keystone, a UK company, is producing. DNO, a Norwegian company is there, and so is Genel Energy, a UK-Turkish company. There’s also Hess, OMV, and quite a few small- to mid-sized companies. It’s more exploration focused. There’s production, but it’s at a much lower level in the south.