Part of Iraq's biggest oil refinery was in flames on Wednesday. What is happening?
The forces under the banner of the Islamic State in Iraq and Syria have been fighting with the Iraqi military for control of the oil refinery in Baiji, which can refine up to 310,000 barrels a day. The Kurdish news agency said Tuesday that ISIS extremists had surrounded the refinery, that workers were evacuated and that Iraqi military forces were still there. Agence France Presse said that ISIS launched an attack before dawn on Wednesday. BBC News reported Wednesday that the Iraqi military claimed to have driven off the Islamic militants, killing 40 of them, while another official had told Reuters that the ISIS forces were still in control of three-quarters of the refinery. Various reports said that ISIS mortars had hit a spare parts warehouse or an oil storage tank.
Tribal militants allied with ISIS negotiated a deal on June 10 with security forces guarding the refinery to keep it operating. Iraqi security forces remained, but militants surrounded the refinery complex and controlled the fuel outflows. This peculiar truce ended last Friday when the Oil Ministry shut off the crude flows from Kirkuk, where Kurdish forces had taken charge.
How important is this refinery?
It is the biggest supplier of motor fuel for the northern part of Iraq and accounts for about one-third of the nation's refining capacity. Iraq has 11 very small refineries and three substantial ones. Aside from Baiji, the other sizable ones are the Daura refinery near Baghdad, which can process up to 210,000 barrels a day, and the Basra refinery, which can process about 140,000 barrels a day, according to the Columbia Center on Global Energy Policy.
The fighting over the Baiji refinery is most likely to affect fuel supplies in areas currently under control of the Islamic extremists, including their own forces. That’s probably one reason ISIS forces have not fired heavy weaponry or done more damage. To further its plans to build an Islamic state, ISIS wants to use the refinery, not destroy it. It could tap small oil fields under ISIS control near Mosul. The fuel supply lines for the Iraqi military are more secure.
Has the fighting in Iraq disrupted its oil exports?
Very little. About three-quarters of Iraq's oil production is in the southern part of the country, where foreign oil companies have been helping to rehabilitate and expand output at giant oil fields that were discovered as long as half a century ago. Iraq's oil output in February reached 3.6 million barrels a day, the highest level since before Saddam Hussein came to power in 1979. In May, it produced 3.4 million barrels a day. The country has become the world's seventh-largest crude oil producer and is OPEC's second-biggest crude producer. It accounted for more than 3 percent of world supplies. Most of that oil still flows out the Basra terminals and onto tankers in the Persian Gulf.
Other major oil fields are located in the Kurdish autonomous region in the northeast. And Kurdish forces have filled the void left by the Iraqi army last week and occupied the town of Kirkuk and the giant oil field of the same name. There are smaller fields near Mosul.
What about pipelines?
The main oil-related casualty of the fighting has been the disruption of the Kirkuk-Ceyhan pipeline that runs through Turkey. This has been the target of repeated attacks and has been shut down since March. Though it has a capacity of 1.6 million barrels a day, according to the Columbia Center on Global Energy Policy, it has rarely carried more than 400,000 barrels a day. Most analysts had been forecasting exports through the pipeline to rise to 250,000 barrels a day, but the fighting has erased that possibility.
The Kurdish Regional Government has completed construction of a separate export pipeline that would send crude oil through Turkey to Ceyhan. The pipeline has a capacity of about 300,000 barrels a day and can be expanded, but it has carried only about 100,000 barrels a day or less in recent months. The Kurds have exported additional amounts by truck.
Two other export pipelines have been idle for more than a decade. One goes through Syria and the other across Saudi Arabia.
Will this affect the price of gasoline in the United States and other parts of the world?
The fighting over the Baiji refinery has had no significant impact on international oil markets, which remain little changed today, albeit at a very high price per barrel. The refinery did not export any oil products. But the intensified fighting has made oil traders and oil companies nervous; though far from the fighting, BP, which is working in the Rumaila field, has evacuated nonessential personnel. And international prices have increased since the ISIS advance accelerated. The price of Brent crude oil, the main international benchmark, and the price of West Texas Intermediate, the U.S. benchmark, have risen about $4 to $5 a barrel over the past week. Every dollar increase in the price of a barrel of crude works out to about 2.4 cents a gallon at the pump.
In the longer term, however, the civil war in Iraq threatens forecasts that the country would sharply increase its oil production and help meet the world's growing thirst for petroleum products. The International Energy Agency said in October 2012 that Iraq's oil production could hit 6.1 million barrels a day by 2020 and could climb as high as 8.3 million barrels a day by 2035. The forecast was based on the fact that Iraq's oil reserves are the fifth-largest in the world and most of the reservoirs are shallow and easy and inexpensive to develop. But the IEA was also assuming a level of stability that now seems even more remote than before.