Oil Production Elevated Despite Increasing Violence

BMI View: Despite increasing levels of political violence in Iraq, we believe that oil production will not be severely affected in 2014. That said, we cannot preclude a return to full blown civil war, a situation which would lead us to revise down our oil production forecasts.

Recent events highlight increasing political risks in Iraq. Iraqi special forces have clashed with hundreds of Sunni militants in the cities of Fallujah and Ramadi in the Western province of Anbar - a traditional stronghold of radical Sunni militants - since December 30. Members of al-Qaeda linked Islamic State of Iraq and the Levant (ISIS), a radical Islamist group which has become increasingly emboldened by the ongoing sectarian war in neighbouring Syria, have been heavily involved in the fight. At one point on January 2, ISIS reportedly controlled half of the two cities. Although the army subsequently re-entered areas of Fallujah, approximately a quarter of it has remained under the control of ISIS, as of January 3.

Violence was sparked by Iraqi security forces having taken down a Sunni Arab protest camp in Ramadi on December 30, reportedly killing at least 10 people. The move came after Iraq's Shi'a Prime Minister Nuri al-Maliki said the camp was "a headquarters for the leadership of al-Qaeda". Tensions also flared up as a result of the arrest on terrorism charges on December 28 of Ahmed al-Alwani, a Sunni member of parliament, after clashes during his capture killed at least six people.

Violence On The Rise
Iraq - Civilian Deaths

BMI View: Despite increasing levels of political violence in Iraq, we believe that oil production will not be severely affected in 2014. That said, we cannot preclude a return to full blown civil war, a situation which would lead us to revise down our oil production forecasts.

Recent events highlight increasing political risks in Iraq. Iraqi special forces have clashed with hundreds of Sunni militants in the cities of Fallujah and Ramadi in the Western province of Anbar - a traditional stronghold of radical Sunni militants - since December 30. Members of al-Qaeda linked Islamic State of Iraq and the Levant (ISIS), a radical Islamist group which has become increasingly emboldened by the ongoing sectarian war in neighbouring Syria, have been heavily involved in the fight. At one point on January 2, ISIS reportedly controlled half of the two cities. Although the army subsequently re-entered areas of Fallujah, approximately a quarter of it has remained under the control of ISIS, as of January 3.

Violence was sparked by Iraqi security forces having taken down a Sunni Arab protest camp in Ramadi on December 30, reportedly killing at least 10 people. The move came after Iraq's Shi'a Prime Minister Nuri al-Maliki said the camp was "a headquarters for the leadership of al-Qaeda". Tensions also flared up as a result of the arrest on terrorism charges on December 28 of Ahmed al-Alwani, a Sunni member of parliament, after clashes during his capture killed at least six people.

Recent events in Iraq highlight growing sectarian tensions, as the Sunni minority - comprising approximately 30% of the total population - feels increasingly sidelined by Maliki's government. Sectarians tension led to a total of 7,157 civilian fatalities in 2013, exceeding the 6,787, in 2008 according to the UN ( see chart below).

Violence On The Rise
Iraq - Civilian Deaths

Sectarian Violence Remaining Intense In 2014

We expect levels of violence to remain elevated in 2014, a situation which will be exacerbated by the ongoing political crisis in the country. 44 Sunni members of the Iraqi parliament resigned on December 30 in protest against the use of force by the government in Anbar and al-Alwani's arrest. The influential Shi'a Cleric Moqtada al-Sadr had also warned Maliki against using force to end protests, asking Shi'as in the south of the country not to participate in what he described as a "blatant aggression on their brothers". In addition, although parliament voted on November 4, 2013 on a new electoral law, the legislation has already come under intense criticism. As a result, we flag the risk that parliamentary elections, which are set to be held on April 30, 2014, could be delayed. Such scenario would be advantageous for hardline Islamist organisations, which have historically benefited from political wrangling among the country's nationalist parties to gather strength and increase popular support for their actions.

Grim Prospects For Political Stability
MENA - Short-term (LHS) and Long-term Political Risk Rating, Out of 100

Oil Production Remaining Elevated

Despite increasing risks to stability, we reaffirm our core view that Iraq's political blocs will once again reach some form of agreement which will prevent the country from descending into outright civil war. Given that much of the violence is currently taking place in the West of the country, while the majority of oil fields are located in southern and north-east Iraq, investment in the country's energy sector will continue in 2014. We forecast total hydrocarbon production increasing by 9.1% in 2014, compared to our estimate of a 4.5% increase in 2013.

Production Outlook Upbeat
Iraq - Total Hydrocarbons Production

That said, given the myriad of political risks which the country is facing, we cannot preclude that increasing political instability could eventually lead to a return to full blown civil war in 2014, and the possible partition of the country along sectarian lines over a longer term horizon. Under such scenario, oil production could be severely affected, a situation which would lead us to revise down our oil production forecast.

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This article is tagged to:
Sector: Country Risk
Geography: Iraq
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