Page 5 - MEOG Week 48

MEOG COMMENTARY MEOG

lifters will receive a discount of $0.6 per barrel salaries and pensions for public sector workers.
for every degree the consignment falls below 24 Last month, Iraqi Finance Minister and Dep-
API. uty Prime Minister Ali Allawi told the Chatham
This announcement appears to update a House Iraq conference: “In 2005, 20% of oil rev-
previous SOMO document, which reportedly enues were spent on salaries; this year, the cost of
pegged the lighter grades at 31.4 degrees and salaries will be 120% of oil revenues.”
27.9 degrees respectively. Meanwhile, at the same conference, Dep-
One industry source told MEOG that the uty Prime Minister of the Kurdistan Regional
move to introduce Basrah Medium is an effort Government (KRG) Qubad Talabani said: “The
to reduce the amount of compensation paid by choice facing Iraq as a whole … is either reform
Baghdad for failing to meet the required crude or collapse.”
density. “We’ve seen significant fluctuations in However, despite having announced plans
Iraqi crude density and these are costing the for reform through diversification away from
authorities hundreds of millions of dollars in reliance on oil production and exports, the short
compensation. It seems that SOMO is of the term is likely to continue to be dominated by the
thinking: ‘if we get them to pay for a lower crude strained relationship Baghdad has with OPEC.
grade, we avoid the compensation payments’.” Its historic non-compliance with the cartel’s pro-
The source added: “Heavy crude has been hit duction caps has been an issue of contention, and
hard by the OPEC+ cuts with Iraq, Saudi and while Oil Minister Ihsan Abdul Jabbar has reiter-
Russia reducing flows, but the market for lighter ated Iraq’s commitment to cuts, over-reliance on
grades is oversupplied with producers maintain- oil revenues makes every barrel count.
ing more valuable streams and Libyan produc- Indeed, instead of making the promised com-
tion resuming.” pensatory cuts, October output increased by
In November, Platts quoted a senior SOMO 242,000 bpd compared to the previous month.
official as saying that the crude specifications Illustrating the strain of the continuing status
were changed to “support the stability of the quo, Allawi said last week: “I think … we have
quality of each grade and shrink the range of reached the limit of our ability and willingness to
variation in the API for each grade.” accept [an OPEC] policy of ‘one size fits all’. We
The Light grade crude accounted for around are beginning to articulate that position.”
2.18mn bpd of Iraq’s exports during the first nine Compounding the situation, the KRG sent
months of 2020, according to Argus tracking an official letter to Baghdad demanding that the
data, while the Heavy grade averaged just shy of federal government disburse Erbil’s share of the
800,000 bpd. Basrah Medium is likely to take a Iraqi budget for May, June, July and October,
significant chunk of the current Light volume, which months have not been paid. Following
with Baghdad understood to be keen on a more agreement between the two governments, Erbil
balanced crude mix. is due $268mn per month, meaning that Bagh-
dad is a further $1.07bn in arrears.
Crude reliance While the moves by SOMO to generate short-
The motive behind these moves becomes clear term revenues may prove successful, they may
when looking at the impact of the coronavirus turn out to be kicking the can down the road. In
(COVID-19) pandemic on Iraqi finances. Lower any case, with oil revenues accounting for more
prices and restricted production have seen Iraqi than 90% of Baghdad’s budgeted spending, the
oil revenues fall by nearly 50% to around $3.4bn current situation appears likely to persist, with
per month during 2020, not even covering the Sword of Damocles dangling above.™

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