Abu Dhabi ( CNN ) -- We are seeing the deadliest sectarian violence in Iraq since 2008 and that is causing major setbacks for Baghdad 's aspiration to challenge Saudi Arabia as the top oil producer . The latest figures from Iraq 's ministry of energy illustrate the direct link between the violence and the country 's oil output . In May , monthly production hit nearly 77 million barrels in the two major regions Basra and Kirkuk . That sunk , the ministry said , to fewer than 70 million in June as daily production tumbled to less than three million barrels a day . According to the U.N. , the death toll jumped from 595 killed in April to 963 in May -- and more than 1,000 were killed in July . This is a quick turn of fortunes after Iraq surpassed neighboring Iran as the second largest oil producer within OPEC last year , hitting a peak of 3.4 million according to Standard Chartered Bank in its latest report on the country . A couple of years ago , Iraq said it would achieve daily production of 12 million barrels a day by 2020 . The ministry lowered those expectations to nine million and strategists say that remains ambitious . One would think that Iraq would do everything to guard its prized facilities . Pipelines have been attacked , some fields missed production targets , and the cost of production has risen . The inability to protect those fields suggests that the general security situation is worse than expected in many corners of the country . But this goes well beyond sectarian violence and the Sunni-Shiite divide that has wracked this country for the past decade . The central government , under Prime Minister Nouri al-Maliki , opted to take a tough line when putting up giant fields for auction in the last few years . Instead of production sharing agreements ( PSAs as they are known ) when international oil producers take a percentage of each field , Baghdad went with service contracts -- paying companies only for services such as workers and technical advice . Oil executives suggest that earns them well below $ 5 a barrel , when North Sea Brent is trading well above $ 100 , and where it has been for a record three years running . With little upside potential in those fields , there is little appetite for risk either on the production side or when it comes to security -- hence the challenges we are seeing as the violence stretches into a fourth month . While this is a tricky country to navigate as the situation grows more uncertain , it is fair to say the oil majors do n't want to be shut out of this market longer term . Emerging market oil producers have taken the same view -- both the Chinese and Russian producers have been active on the ground , as well regional players from the Middle East . Majid Jafar , CEO of Sharjah based Crescent Petroleum in the UAE , says the current level of Iraq 's proven oil reserves -- 141 billion -- may be too conservative . `` I for one think once they are fully explored they could even be higher than Saudi Arabia , number 1 , '' Jafar said when we toured his natural gas facility in the Kurdistan region earlier this year . That is saying a great deal , since OPEC pegged the kingdom 's reserves at 265 billion barrels in 2012 . `` The issue is how to develop those reserves and that is where the challenge lays . There are infrastructure issues , security issues in other parts of the country but the big challenge is policy , '' said Jafar . A major policy roadblock remains a national oil law which will govern how revenues are carved up throughout the country . Crescent Petroleum took an early risk to go back into Iraq in 2007 , but did so in the Kurdish region where the investment laws and production sharing agreements are in place . Iraq is earning over $ 90 billion a year at current production levels , nearly matching the budget for the central government . The problem , those who follow the country suggest , is not enough is going back into building a first class network for distribution . Read more : Who 's behind the bloodshed ? Read more : Can Iraq meet its oil potential . Read more : Iraq scores its first oil find in decades .
Iraq is experiencing the deadliest sectarian violence since 2008 and oil production has fallen . Global oil companies in Iraq are paid for their services rather than getting a share of profits . This means the companies have little appetite for risk , CNN 's John Defterios says . There are fears Iraq is not investing enough in its oil distribution network , he says .