Mediterranean has surplus oil supply.
Recently, I attended a seminar on oil markets and the Middle East where it was revealed the Mediterranean now very much has a surplus of oil supplies. European oil demand is either stagnant or falling and US demand may need a long time to recover among signs of increasing domestic supplies of crude oil and biofuels. On the supply side, the Mediterranean is no longer the safe haven of North Africa, Iraq and other Arab Gulf countries' producers to ship their oil to the West. There are increasing supplies from Russia and the Caspian Sea countries through the Black Sea or Turkey.
Oil exports from some Gulf countries to Western Europe have almost halved in the last ten years and the majority of them are not passing through the Mediterranean.
As the future oil demand growth will essentially come from Asia, it is no wonder the operator of the twin Sumed pipelines is studying the feasibility to reverse the flow of one line to deliver surplus Mediterranean crude to the Red Sea and onward to Asia.
Originally Sumed, which runs from Ain Sukhna on the Gulf of Suez to Sidi Kerir on the Mediterranean, provided an alternative to the Suez Canal to deliver crude from the Gulf to Western markets. It went through many expansions to reach the capacity of around 2.5 million barrels a day (mbd).
The system has so far transported close to 18.6 billion barrels of oil or an average of around 1.5 mbd. But there are indications there is much reduced flow in the system. The Opec Statistical Bulletin suggests less than 0.5 mbd may be passing through the pipeline system. Saudi Arabia expects further declines in the volumes to the Mediterranean.
Russia and the Caspian countries may no longer increase their supplies to the Mediterranean as they have also discovered their interests in the East. Russia's and Kazakhstan's oil now flows by pipeline to China and further to the Pacific Coast.
So where does this leave Iraq's exports? In 2008 exports were close to 1.86 mbd and its destinations were 41 per cent to North America, 27 per cent to Europe and 32 per cent to Asia. Therefore, according to the expected outlook, Iraq's exports have to head east if and when its exports increase.
According to the results of the two bid rounds conducted by the Iraqi Ministry of Oil in 2009, Iraq production is projected to reach 12 mbd in six to seven years time. Notwithstanding whether this rate is achievable or whether the market can support such an increase, it is really difficult to see how that oil will get to the market. Commitments of the firms winning the bid rounds do not include any expansion of export facilities and if later requested it will be covered by supplementary costs and agreements.
Iraq never planned for more than five to six mbd of exports when all its traditional exports routes to the Gulf, Saudi Arabia, Turkey and Syria are refurbished and utilised.
However, its two Gulf terminals can only export 1.5 and 0.5 mbd respectively and even if refurbished to the original design capacity, a difficult task, they cannot support more than 3.2 mbd combined.
Even if the export system to Turkey is refurbished its maximum capacity can be 1.6 mbd but it is doubtful if it will ever work at this rate given the situation in the Mediterranean. The Iraq-Saudi Arabia pipeline of 1.6 mbd capacity, seems to have been forgotten because of the worsening relations between the two countries since 1990. The export system through Syria is old and occupied by Syrian exports and in any case it goes to the oversupplied Mediterranean.
If Iraq is able to sort out, refurbish and modernise all the above routes, it will still be short of an export capacity of some 3 mbd.
All the Iraqi expansion must target the Gulf due to the direction of the market but the claims of Iran and Kuwait about their territorial waters will not help.
By Saadallah Al Fathi, former head of the Energy Studies Department, Opec Secretariat in Vienna.