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Iraq stares into revenue abyss

Plummeting oil prices and stagnant production have thrown government finances into chaos

The steep drop in global oil prices has plunged Iraq into a budgetary crisis. Iraqi oil minister Thamir Ghadhban appealed to Opec secretary general Mohammed Barkindo in mid-March for an emergency meeting to address the situation, with oil having slid to lows not seen since before the US invasion of Iraq nearly 17 years ago.

Saudi Arabia’s decision earlier in the month to launch a price war—just as the coronavirus pandemic was causing demand to collapse—is wreaking financial havoc on producers worldwide. The Saudis abandoned the Opec+ output cuts, in place for some three years, as a result of Russian refusal to sign up to deeper curbs.

The depressive effect of Covid-19 was already throwing Baghdad’s fiscal plans into disarray even before the Saudi-Russian face-off sent oil prices spiralling. Iraq’s failure to diversify has left the federal government—which has been functioning in only a caretaker capacity for more than four months—reliant on crude exports for over 95pc of its revenues.

Iraq is widely assumed to have been pumping at close to its operational capacity throughout the [Opec+] deal

The 2020 budget, yet to be passed by parliament, assumes an average oil price of $56/bl, and even then projects a deficit of around $40bn. Sales of Iraqi crude in February earned an average of only $51.37/bl, according to oil ministry data—$8.77/bl less than in January and slashing monthly revenues by $1.11bn.

This month’s outcome will be far worse. Meanwhile, Riyadh went into battle on 7 March with a declaration of intent to raise production to a record 12.3mn bl/d—a hike of some 2.5mn bl/d—accompanied by deep discounts to official selling prices. While doubts exist about Saudi Arabia’s ability to sustain such output rates, the kingdom undoubtedly has a capacity cushion far beyond that available to competitors—Iraq included.

Limited flexibility

The Iraqi oil ministry’s February statistics might ordinarily have been a cause for modest celebration, with exports rising slightly to just shy of 3.4mn bl/d. The government’s oil marketing organisation has also reportedly indicated its intent to raise overseas sales to 3.6-3.7mn bl/d in April. However, the scope to sustain or increase such rates is limited by a lack of spare upstream capacity and infrastructure constraints, chiefly at the Basra terminals, through which crude from Iraq’s giant southern oilfields reaches global markets.

Riyadh is unlikely to listen to Baghdad’s complaints considering the latter’s failure to commit to the output cuts. Iraq is widely assumed to have been pumping at close to its operational capacity throughout the three-year deal. Last month’s output, including the semi-autonomous Kurdish region, averaged almost 4.6mn bl/d, according to Opec data. This was barely changed from the fourth quarter of 2019, despite pledges made under Saudi pressure in November to keep to a new ceiling of just under 4.5mn bl/d.

$56/bl – oil price assumed in Iraqi budget

The state of the market suggests prices will remain at current levels or fall in the coming months. And while the Iraqi oil ministry has made repeated assurances that the coronavirus is having no impact on output , events suggest otherwise. Malaysia’s Petronas, operator of the Gharraf field in the southern Dhi Qar province, announced in mid- March that it had halted operations and evacuated staff. This meant shutting in only c.95,000bl/d of output, but it is nonetheless a bad sign as infections in Iraq remain on a steep upward curve.

IOC cutbacks

Of greater concern are plans being drawn up by IOCs to severely reduce investment in the wake of the price slump. IOCs operate the bulk of Iraqi federal production, and the cutbacks could affect the prospects not only of raising output but also of sustaining current rates.

BP, which operates the bedrock Rumaila field, is responsible for roughly a third of Iraqi output and intends to reduce spending this year by around 20pc; Italy’s Eni, which operates Zubair, the second-most prolific field in Iraq, is also reviewing capex with a view to making steep cuts. A lack of water for injection into wells is already constraining output at some of the major southern fields, and the prospect of progress on the repeatedly delayed common seawater supply facility project—designed to provide the requisite volumes—appears distant in the near term.

Meanwhile, the inevitable government budget cuts could fall partly on payments to IOCs, as occurred in the wake of the 2014 price crash. This would further deter investment.

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