Iraq tells oil companies to submit conservative funding requests for 2016
A letter dated September 6, 2015, from the Iraq Oil Ministry was sent out to international oil companies operating inside the country notifying them that they should plan to lower spending in 2016, reports The Wall Street Journal. Iraq is struggling to support its energy sector as it feels the pressure of low oil prices and fights a war against the Islamic State.
International oil companies operating in Iraq maintain and expand operations through government money, and are reimbursed for production through government funds. The letter warned oil companies like Eni (ticker: E), Lukoil (ticker: LKOH), Royal Dutch Shell (ticker: RDSA) and BP Plc (ticker: BP) to submit conservative funding requests for 2016, saying that it would be unable to meet expanded production.
“Because of the drop in our oil-sales revenues, the Iraq government has sharply reduced the funds available to the Ministry of Oil,” Iraqi official Abdul Mahdy al-Ameedi worte. “This will…reduce the funds available for the reimbursement of petroleum costs to our contractors.” Ameedi added that the oil ministry did not expect lower funding to “reduce production from the levels that were [already] stipulated.”
An unsustainable push
Production from Iraq has been one of the leading additions to increasing supply out of OPEC, which produced 31.51 MMBOPD in July as an organization, according to OPEC’s most recent Oil Monthly Report. Of that production, 4.07 MMBOPD came from Iraq, an increase of 0.47 MMBOPD from June, making it the second largest producer in OPEC after Saudi Arabia.
The crash in crude oil prices, along with an ongoing conflict with ISIS, and disputes with Iraq’s northern Kurdish Region, have all made further expansion in 2016 unsustainable. In August, Iraq’s oil export revenues were about $1 billion lower than in the previous month, at around $3.8 billion, down from $4.9 billion in July and $5.3 billion in June, according to the Iraqi State Organization for the Marketing of Oil (SOMO).
Last Friday, the International Energy Agency (IEA) said Iraq was producing more than its sustainable capacity of 4.1 MMBOPD. Morgan Stanley analyst also lowered their expectations for Iraq in a research note earlier this month, saying they predict oil production over the next five years to decline, rather than increase, reports Reuters.
“Our commodity team have lowered their Iraq oil supply forecast and now expect Iraq oil production to average about 4.2 million barrels per day in 2016, broadly flat compared to Iraq’s production levels in June and July. They also now forecast a slight decline in Iraqi production between 2016-2020 compared to previous forecast growth of over 500,000 bpd,” analysts wrote.
No new development expected, companies concerned about payments
The cut in spending will mean that companies operating in Iraq will have to focus on maintaining production, rather than trying to expand their operations. BP, the largest operator in Iraq’s Rumaila field, which produced 1.3 MMBOPD at the end of last year, will likely only see enough capital to maintain production. A spokesman for BP said the company has a longer-term plan to develop the field to 2.1 MMBOPD, but the timing is now uncertain.
An official at a different European company in Iraq told The Wall Street Journal that production levels could drop without investment in future development. In a worst-case-scenario, the company could declare force majeure in order to back out of projects without legal liability because of forces beyond its control.
“We are trying to clarify whether they are going to just shred the 2016 budget or are also going to defer payments for monies already owed,” said another executive working in the country.