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Iraq seeks a reset

The new Baghdad government asks for much in return for a pivot towards Saudi Arabia and the US

It is no surprise that May’s first official foreign visit by the oil minister in Iraq’s belatedly approved new government was to Riyadh. The country badly needs Saudi leniency in Opec+ cuts as well as financial assistance in solving its gas supply woes.

Fortunately, the kingdom is likely to be receptive to the new US-friendly Iraqi prime minister with the aim of keeping the Baghdad regime out of the sphere of its arch-enemy Iran. A Saudi pledge to contribute to the development of the country’s largest non-associated gas field is important in that respect. Weaning Iraq off Iranian gas is a high priority, particularly in Washington.

The demand and price collapse in the aftermath of the Covid-19 pandemic left Iraqi federal crude exports earning a mere $13.80/bl and a combined $1.4bn in April, less than a quarter of January revenues on similar sales. The government had little choice but to support the Opec+ deal—which requires an Iraqi cut of around 1mn bl/d from April’s 4.7mn bl/d total production—to try to support prices.

But no plausible price recovery takes Iraq back to anywhere near its anticipated oil sales revenues. The now obsolete 2020 draft budget—an urgent rewrite of which is Ali Allawi’s unenviable task as head of both the finance and oil ministries—assumed an average price of $56/bl and federally controlled output of around 4.2mn bl/d, including 250,000bl/d from the Kurdish north. Even then, the budget foresaw a $40bn deficit.

To make matters worse, the technical service contracts (TSCs), signed in haste a decade ago under very different market conditions, under which IOCs produce most of Iraq’s oil from its major southern fields, oblige the government to compensate operators for mandatory shut-ins. Unsurprisingly, renegotiation of the deals is included in the new administration’s governing programme.

Relations with many IOCs have been rocky for years. For differing reasons, they also support contract revisions, mainly to reduce over-ambitious production targets and timetables. Reports indicate that IOCs have agreed to trim only a collective 300,000bl/d, while c.350,000bl/d will be cut from fields managed by the oil ministry’s various corporates, mainly Basra Oil Company.

Mitigating the cuts

But Allawi’s plea for leniency in Iraq’s Opec+ commitments is likely to have found a receptive audience. Riyadh pledged in early May to cut an additional 1mn bl/d unilaterally, nominally to encourage others to comply, but implicitly to compensate for the improbability of certain pivotal members, chiefly Iraq, implementing their promises.

The Saudi government badly wants Iraq’s incoming prime minister, Mustafa Kadhimi, with his close American ties and insistence on reasserting Iraqi sovereignty, to succeed—and is disinclined to deepen the fiscal crisis confronting his fledgling administration. Allawi also met Saudi finance minister Mohammed al-Jadaan, presumably seeking more direct financial assistance. A loan request is pending with the IMF.

A corollary problem for Iraq in cutting crude production is a commensurate reduction in associated gas—which the government had belatedly been succeeding in capturing and distributing, mainly for use in power generation. The Shell-led Basra Gas Company, which has rights to associated gas from the Rumaila, Zubair and West Qurna 1 oilfields, achieved a 1bn ft³/d supply milestone in 2018.

1mn bl/d — Iraqi oil output cut

But a substantial gas supply-demand gap remains, requiring Iraq to continue to expend political and financial capital importing both gas and electricity from Iran. The US has waived sanctions to allow the exchange to continue, mindful of the social and political instability that previous power blackouts have stirred up. But it has also been putting intense pressure on Baghdad to nurture alternatives, ideally domestic.

Previous attempts to enlist foreign companies in gas development have been largely unsuccessful and hopes of such investment materialising on a purely economic basis amid the current global slump in capex spending are scant. The 5.6tn ft³ Akkas field, the largest in federal territory, albeit unfortunately located in the restive north-western heartland of the IS terrorist group, was relinquished by Korea Gas Company following the militants’ invasion, leaving the asset tantalisingly unexploited.

The potential for Saudi Aramco to step in to assist with gas development in the Western Desert was first publicly mooted in April last year, but the trail went cold. Riyadh was at that point unlikely to be keen to assist a Baghdad administration considered politically beholden to Tehran. But Allawi claims to have received a new promise in this regard, which, if fulfilled, could play a major part over the medium-term in bridging the gas ­supply gap. 

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