DUBAI/LONDON (Reuters) – Iraq’s oil minister has raised questions over the country’s planned energy expansion by indicating Baghdad would consider OPEC output curbs that may keep supply well short of ambitious capacity targets.

After Baghdad signed contracts to add around 10 million barrels per day (bpd) to its oil supply, tough talks were expected within the Organization of the Petroleum Exporting Countries on an eventual output target for Iraq.

But Iraqi Oil Minister Hussain al-Shahristani seems to have jumped straight to the end game before even sitting down at the negotiating table with his fellow ministers.

In Vienna for an OPEC meeting last week, Shahristani said Baghdad would participate in OPEC agreements to curb oil supply when output reached 4 million bpd, some 8 million bpd short of Iraq’s envisaged target.

An OPEC quota for Iraq of around 4 million bpd would prove more supportive for oil prices in the medium term than was the prospect of the country remaining outside the system as it expanded supplies to near 12 million bpd.

With the group’s market share expected to rise in future, Iraq’s return to OPEC limits would strengthen its hand.

“Bringing Iraq into the quota system and managing the growth and sharing the growth is constructive to bullish for prices,” said Mike Wittner, global head of oil research at Societe Generale.

“The supply and demand trends are heading in OPEC’s direction and they should be able to reach agreement.”

Oil is trading around $80 a barrel now and investors expect it to trade at $91 by December 2018, suggesting little concern among investors that supply would be scarcer later this decade than it is now.

Iraq is one of OPEC’s founder members but has been exempt from quotas for years due to sanctions and war.

Baghdad holds ambitious deals with the world’s biggest energy companies to boost output to around 12 million bpd in around seven years from just 2.5 million bpd. The petrodollars are to bankroll Iraq’s reconstruction.

Oil executives said the prospect of an OPEC quota for Iraq early into that expansion raised big questions over the contracts.

“Either he doesn’t believe in the contracts he’s signed, or he’s saying it’s not his problem,” said an executive at an oil firm which recently signed a deal to work on Iraq’s fields.

“But it is his problem, because it is Iraq’s problem. They still have to pay for all this capacity.”

SKEPTICISM

Shahristani may soon be in no position to bargain for Iraq. He may be replaced when a new government is formed after Iraqi elections earlier this month.

Other Iraqi officials downplayed the issue, saying it would be a few years before Iraq reached 4 million bpd anyway.

“We are talking about 2.5 to 3 years for Iraq to reach 4 million bpd,” said Thamir Ghadhban, the top energy advisor to Iraqi Prime Minister Nuri al-Maliki.

In any case, increasing oil output rapidly was always likely to put Iraq at odds with the producer group’s aims to keep oil demand and supply in balance and bolster prices by limiting supplies.

Iraq’s OPEC quota used to be similar to that of Iran, which has a limit of 3.34 million bpd. OPEC quotas are based partly on reserves, and Iraqi reserves — the world’s third-largest — are a little smaller than Iran’s.

The subject is tricky for OPEC as the talks would need to balance the plans of many members to expand supplies and may need to address the unhappiness of some, such as Nigeria and Angola, with their current quotas.

But OPEC officials have stressed that the group would seek to accommodate Iraq. A smooth reintegration of Iraq would enhance the group’s image for market management.

“If and when Iraq gets to the stage where it needs a quota, OPEC will discuss it,” said an OPEC delegate. “It should not be a problem.”

BLOW?

That may not be the case for the oil companies expecting to expand Iraq’s oil industry.

After years of lacking easy access to the Middle East’s easy-to-produce oil, firms jumped at the chance to work in Iraq when Baghdad offered contracts on its biggest fields in two oil auctions last year.

The return rate on the contracts depends on firms hitting their targets fast. A cap on oil output would make that impossible and diminish returns. Deals would have to be renegotiated for oil firms to avoid losses.

“On the face of it, this could be a big blow to firms with contracts,” said Colin Lothian, senior analyst for the Middle East at consultancy Wood Mackenzie. “But more likely, Iraq will wait until production reaches 4 million bpd at least before it considers its position.”

There was provision in the contracts that does not penalise contractors for government-set output limits, Lothian said. The issue was whether, with lower supply, firms could still cover the costs and fee in the same timeframe, he added.

The clause was as good as any similar clause in other OPEC states where foreign firms operate, said the oil executive. It states that output limits would be shared equally among firms and that they would be “fully compensated,” he added.

But a quota as low as 4 million bpd would mean renegotiating all the contracts, and would leave oil firms with deals with little resemblance to those already signed, he added. The terms, already seen as tough by the industry, could worsen.

“Maybe Iraq would extend the life of the deals to 40 years from 20, but really, that sort of thing is not so good for oil firms,” he said.