Tumbling oil prices leave Iraq facing a perfect storm
As crude prices plunge, Iraq’s oil sector is facing a triple threat that has slashed revenues, risks denting production and may spell trouble for future exports.
So what are the challenges facing the only significant industry in Iraq, as global oil prices fall to around $25 a barrel?
The price crash means Iraq’s monthly crude revenues were slashed by nearly half from February to just $2.99 billion in March.
The second-biggest crude producer in the OPEC oil cartel, Iraq pays international oil companies (IOCs) about $3 billion quarterly to extract its crude. With oil so cheap, the government is desperately looking to cut costs and delay payments.
Last week, the
Basra
Oil
Company — the state-owned firm coordinating production in the oil-rich southern province — asked IOCs to accept a delay in six months’ worth of payments and cut work budgets by 30 percent, according to letters seen by AFP. “A delay in first quarter payments is necessary, and we asked for the second quarter just in case,” said Khaled Hamza Abbas, BOC’s assistant director and a signatory to the letter, saying that oil companies had yet to respond.
But IOCs are already taking independent action, according to internal letters seen by AFP.
Oil superpower ExxonMobil immediately asked subcontractors to “reduce overall cost” with other firms asking suppliers for discounts. “IOCs are cash-strapped,” a source at the main operator in the south said.
However, the trouble does not stop there.
IOCs expense Iraq at the end of each quarter for what it cost to extract crude, and the Iraqi government pays them in oil.
“With the lower prices, the government would have to use virtually all its crude to pay oil companies and would have barely enough to sell,” a leading Iraqi official said.
Iraq relies on oil revenues for more than 90 percent of state expenses. Its 2020 budget was based on an estimated barrel price of $56, more than twice the current rate.
The spread of the novel coronavirus has severely disrupted rotations of key foreign nationals working at Iraq’s oil fields, risking a drop in the usual 4.5 million barrel per day (bpd) production.
To stem the spread of the respiratory illness, Iraq has shut its airports and imposed a countrywide lockdown until at least April 19, although many expect an extension.
The Gharraf field in Dhi Qar province, which has produced up to 100,000 barrels per day (bpd), is offline after last month’s evacuation of dozens of Malaysian workers by operator Petronas over coronavirus fears, according to a source at the province’s stateowned oil company.
Most foreign oil workers live on the fields in Basra, and are currently stuck there beyond their normal six- to eight-week rotations due to travel bans.
“We’re seeking approvals for an exemption for foreign staff so that we can secure the rotating teams. These companies have internal rules and you can’t keep the teams here for more than two months,” said BOC’s assistant director, Abbas. A source from a major European oil firm operating in Basra said that a halt to foreign staff rotations would be a bigger threat to production than payment delays.
Britain’s BP, too, would have to trim production if 4,000 British nationals working in the south could no longer travel.
“There are no two ways about it,” a source with knowledge of BP’s operations said.
The third threat is a global drop in oil demand for the first time in a decade, with the International Energy Agency expecting 2020 demand to decrease by 90,000 bpd, a sharp downgrade from forecasts it would grow by more than 800,000 bpd.
“It has no equal in the history that we see such a strong decline in demand and a huge massive overhang of supply at the same time,” IEA director-general Fatih Birol said. Two countries facing shrinking demands are India and China, where Iraq sells “the lion’s share” of its crude, according to geopolitical analyst Noam Raydan.
China, where the virus first emerged, is struggling through a huge economic slump and India has entered a three-week lockdown.
FASTFACT 90% Iraq relies on oil revenues for more than 90 percent of state expenses.