Unrest in one of the world’s most prolific oil-producing countries is again heating up, threatening to disrupt oil and gas operations as well as the market.

The latest political conflict in Iraq has already resulted in bloodshed and death, including the massacring of Iraqi soldiers among others, as militant insurgents move to overtake cities in the north—already claiming Mosul—and rebel against the Shiite-led government, according to media reports. So far, attacks by the Islamic State in Iraq and Syria (ISIS)—the al-Qa’ida-spawned group also known as the Islamic State in Iraq and Levant (ISIL)—have mainly been concentrated in the north and central provinces, instead of the more thriving oil production areas south of Baghdad near Basra and in the Kurdistan region.

Still, the brewing crisis is being blamed by some for the recent rise in global oil prices, and analysts say the situation has the potential disrupt the oil supply chain if vulnerable infrastructure is targeted. At the moment, however, the conflict is expected to have a limited impact, if any, on oil production, according to some energy experts, because of stepped up security intended to protect the hydrocarbon flow.

However, that could change if the turmoil moves farther south.

“Although ISIL’s ability to launch some isolated attacks in the south has increased as a result of their increasing presence in Iraq, their ability to target oil infrastructure remains limited due to the high security presence Iraq has around these facilities,” said Jamie Ingram, MENA analyst for IHS. “Therefore, the impact on Iraq’s oil production should be relatively negligible.”

Similar sentiments were shared by Barclays Capital, which said activity is stable in the south, where Iraq’s oil production and service activity is dominate. But “this area does not appear to be outside the reach of the insurgents given the periodic bombings in and around Basra in recent months.”

According to the U.S. Energy Information Administration (EIA), Iraq has five “super-giant fields”—containing more than 5 Bbbl—in the south that account for 60% of the country’s proven oil reserves. Known hydrocarbon resources are mainly located in the south’s Shiite areas and the Kurdish region of the north, which holds an estimated 17% of the country’s oil reserves, the EIA said.

“Northern midstream infrastructure has been a repeated target for insurgents, and road restrictions have created challenges in moving people and equipment,” Barclays said in a research report.

“Still, these issues appear to be more of a nuisance than anything, and oil services and drilling activity remains rather limited in the north; we do not expect a significant impact on results near term from the escalation in violence,” the firm continued. “However, the industry has been positioning for an expected ramp in activity in Kurdistan, and the ongoing violence in northern cities could lead to delays in project startups. On the other hand, the fighting may ultimately strengthen the Kurds’ hand in their push for autonomy, spurring additional foreign investment.”

Kurdistan role

There has been some fighting near the oil-rich town of Kirkuk; however, the Kurdish Peshmerga forces were strong enough to avert ISIL’s attacks. The ability of the Kurdistan region to stave off attacks may have even boosted the regional government’s negotiating position in its continuing clash with the central government in Baghdad, in Ingram’s opinion. The two have been at odds over the Kurdistan regional government’s (KRG) right to export oil and its share of the country’s budget, which the KRG believes should be higher.

“Given the importance of the Kurdish Peshmerga forces in any attempt to push back against ISIL, this gives the Kurdistan government considerable leverage in these negotiations as well as in ongoing negotiations over the formation of a new Iraqi government following the recent parliamentary elections there,” said Ingram, who spoke in a video about the situation’s implications on energy security. He later added that exports from the Kurdistan region “should flow unimpeded through the recently inaugurated independent pipeline into Turkey as a result of the [KRG’s] more intensive security measures, which should prove to be sufficient against any incursions into the region.”

About 3.37 MMbbl/d of crude oil are produced in Iraq, according to the International Energy Agency (IEA). The country exports about 2.67 MMbbl/d, based on the recent shipping data, with most export crudes coming from the Rumaila field—the country’s largest—and Kirkuk fields.

Vulnerable infrastructure

While the immediate energy impact of the crisis has been limited, the potential risk could grow if the conflict escalates into the south. In commentary released jointly Monday, a trio of IHS energy experts said the political upheaval puts Iraqi infrastructure and production at risk.

“We assume that Iraq’s main producing fields in the south will remain secure for now,” the experts said. “However, the militants could seize control of pipelines or other infrastructure links in the oil supply chain. We do not consider this a high threat at present, but such infrastructure as well as producing assets will be a tempting target if the ISIS offensive moves into higher gear.

“An increasing risk of supply outages in Iraq comes against a backdrop of an already tight global demand/supply balance that has markets already on edge.”

Currently, OPEC spare capacity is about 3 MMbbl/d, which IHS said is near the lower end of the market’s comfort zone. The conflict comes as Saudi Arabia, Kuwait and the United Arab Emirates continue ramped-up production, partly to offset about 3.5 MMbbl/d of supply offline globally, while North American production continues its upward climb, according to the analysts.

“Given expected high Saudi Arabian production this summer, any additional outage could take the tight summer market and push prices sharply higher,” IHS said. “By way of comparison, Iraqi crude exports averaged about 2.6 [MMbbl/d] in May, nearly equal to all of the world’s spare production capacity.”

IHS predicts any new supply outages in Iraq could send global oil prices toward $120, possibly prompting some countries to tap their own strategic reserves.

Bloomberg reported that Brent rose 4.4% last week as the situation unfolded in Iraq, while West Texas Intermediate jumped 4.1%.

“At this moment, not a single barrel of oil has been displaced compared with the situation a week ago,” Maria van der Hoeven, executive director of the IEA, said in the article. “But of course we can see that the market is worrying.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.