Page 8 - DMEA Week 14 2020

DMEA COMMENTARY DMEA
Iraq faces tough times ahead
Iraq’s hopes to rebuild the country though a massive 2020 budget has been derailed by greatly reduced oil income following the oil price crash
IRAQ
WHAT:
Iraq’s budget has been severely hit by the fall in oil prices.
WHY:
With 95 per cent of its revenues coming from oil sales, Iraq is particularly exposed.
WHAT NEXT:
Iraq desperately hopes that a meeting of OPEC+ will be called.
THREE weeks ago MEOG highlighted that “the sudden fall in oil prices will inevitably put a mas- sive strain on Iraq’s economy, including a severe budget shortfall that could further undermine the government’s ability to respond to myriad crises.” It went on to say that should Brent crude remain near $30 per barrel, Iraq would be likely to earn less than $3bn per month – leaving a monthly deficit of more than $2bn just to pay current expenditures.
With Brent crude falling through the afore- said $30 per barrel figure – it slid to $22 before making a partial recovery to $34 last weekend – Iraq is proposing that all foreign oil firms operat- ing in OPEC’s second-largest producer cut their budgets by 30% on the condition that crude pro- duction levels do not suffer.
Iraq is struggling with oil at these low levels, and its oil ministry is having trouble repaying international oil companies (IOCs) that are developing major oilfields in the southern part of the country. Foreign firms who develop Iraqi oilfields do so under service contracts and are being paid a fixed fee in US dollars for their oil production.
Iraq saw its oil revenues cut nearly in half in March when oil prices collapsed, even though OPEC’s second-largest producer exported more barrels of crude last month than it did in February.
According to data from Iraq’s oil ministry, cited by AFP - Agence France Presse, Iraq’s crude oil sales amounted to 105mn barrels in
March. From these sales, Iraq earned revenue of $2.99bn. To compare, Iraq’s February sales of 98.3mn barrels of crude oil earned OPEC’s pro- ducer almost twice that, $5.5bn.
With Saudi Arabia and others unleashing a wave of extra oil supply to the market and the coronavirus (COVID-19) pandemic battering global oil demand, oil prices have plunged to the $20s and are utterly unsustainable for Iraq’s oil revenues and total budget income, much of which depends on income from oil exports.
Iraq’s oil typically trades at around a $4 per barrel discount to Brent, so over the past cou- ple of weeks, Iraq’s crude oil was selling for $21 a barrel, Oil Minister Thamer Ghadban told local media, AFP reported.
Iraq is selling around 70% of its crude exports to Asia, Thamer al-Ghadhban added. The minis- try is also in talks with IOCs over the best way to move forward given the low oil prices and their impact on Iraq’s economy and finances.
There is a need to reach an agreement, whereby the IOCs’ payments are not a burden on the government’s limited finances while at the same time making sure the IOCs continue to operate in the country, he said.
Iraq is struggling to shore up its finances despite its ability to pump at will as of April 1 following the breakdown of OPEC’s talks earlier this month.
The foreign oil firms have received the letter from Iraq asking for a 30% cut in budgets, but they have not made a decision yet, a source with
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w w w . N E W S B A S E . c o m Week 14 09•April•2020