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Boston, MA -- (SBWire) -- 10/21/2013 --Increasing risks and the ramp up of a new of major upstream project highlight both the potential and perils of the Iraqi oil sector. Production performance and exports continue to fall victim to both politics and infrastructure constraints, even as substantial planned investment is planned for both Iraq and the autonomous Kurdistan region. As the political and security situation worsens, Iraq may miss out on some of the gains we have priced in over the coming years. Even as the Baghdad-Erbil relationship remains stubborn to resolution, progress on key projects such as the Basra Gas development and a planned Iraq- Jordan pipeline underscore a number of opportunities for oil and gas in Iraq.

We highlight the following trends and developments in Iraq's oil & gas sector:

- While low lifting costs, large reserves and ease of production from large onshore fields reduces the below-ground risks associated with Iraq's upstream, unappealing licensing terms, regulatory uncertainty and ongoing security concerns continue to undermine the post-war oil industry. Baghdad's last licensing round drew just three successful bids. Without improved terms and increased international oil company (IOC) interest, Iraqi oil production will remain well below potential, in our view.
- Rising Iraqi volumes must also be balanced with rising non-OEPC volumes elsewhere. In light of OPEC's stated preference to maintain prices in the US$100/bbl range, the pressure to bring Baghdad back into the production quota system is likely to rise alongside its output.
- Our forecast is for strong growth in oil output, underscoring the country's substantial hydrocarbon potential. we are holding onto our current 2013 forecast of 3.3mn barrels per day (b/d) given the new volumes likely to come online over the remainder of 2013 and into 2014, which looks to be more promising for the oil sector, although we note that significant downside risks remain. With both aboveand below-ground challenges adding uncertainty to our outlook, project delays such as those at the Majnoon field, downward revisions to production targets at major fields, and the exit of key IOCs from the south suggest that while Iraq's oil production will increase over the course of our forecast period, forecasting output will remain volatile.
- The ongoing dispute between the Iraqi government in Baghdad and the Kurdistan Regional Government (KRG) in Erbil remains a threat to the development of the oil sector in the north and the south, with the central government pressing firms to choose between the two.

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