Page 7 - DMEA Week 48 2020

DMEA COMMENTARY DMEA

API gravity, which are set at 33 degrees and 29 per month during 2020, not even covering sala-
degrees respectively. Meanwhile, Basrah Heavy ries and pensions for public sector workers.
lifters will receive a discount of $0.6 per barrel Last month, Iraqi Finance Minister and Dep-
for every degree the consignment falls below 24 uty Prime Minister Ali Allawi told the Chatham
API. House Iraq conference: “In 2005, 20% of oil rev-
This announcement appears to update a enues were spent on salaries; this year, the cost of
previous SOMO document, which reportedly salaries will be 120% of oil revenues.”
pegged the lighter grades at 31.4 degrees and Meanwhile, at the same conference, Dep-
27.9 degrees respectively. uty Prime Minister of the Kurdistan Regional
One industry source told MEOG that the Government (KRG) Qubad Talabani said: “The
move to introduce Basrah Medium is an effort choice facing Iraq as a whole … is either reform
to reduce the amount of compensation paid by or collapse.”
Baghdad for failing to meet the required crude However, despite having announced plans
density. “We’ve seen significant fluctuations in for reform through diversification away from
Iraqi crude density and these are costing the reliance on oil production and exports, the short
authorities hundreds of millions of dollars in term is likely to continue to be dominated by the
compensation. It seems that SOMO is of the strained relationship Baghdad has with OPEC.
thinking: ‘if we get them to pay for a lower crude Its historic non-compliance with the cartel’s pro-
grade, we avoid the compensation payments’.” duction caps has been an issue of contention, and
The source added: “Heavy crude has been hit while Oil Minister Ihsan Abdul Jabbar has reiter-
hard by the OPEC+ cuts with Iraq, Saudi and ated Iraq’s commitment to cuts, over-reliance on
Russia reducing flows, but the market for lighter oil revenues makes every barrel count.
grades is oversupplied with producers maintain- Indeed, instead of making the promised com-
ing more valuable streams and Libyan produc- pensatory cuts, October output increased by
tion resuming.” 242,000 bpd compared to the previous month.
In November, Platts quoted a senior SOMO Illustrating the strain of the continuing status
official as saying that the crude specifications quo, Allawi said last week: “I think … we have
were changed to “support the stability of the reached the limit of our ability and willingness to
quality of each grade and shrink the range of accept [an OPEC] policy of ‘one size fits all’. We
variation in the API for each grade.” are beginning to articulate that position.”
The Light grade crude accounted for around Compounding the situation, the KRG sent
2.18mn bpd of Iraq’s exports during the first nine an official letter to Baghdad demanding that the
months of 2020, according to Argus tracking federal government disburse Erbil’s share of the
data, while the Heavy grade averaged just shy of Iraqi budget for May, June, July and October,
800,000 bpd. Basrah Medium is likely to take a which months have not been paid. Following
significant chunk of the current Light volume, agreement between the two governments, Erbil
with Baghdad understood to be keen on a more is due $268mn per month, meaning that Bagh-
balanced crude mix. dad is a further $1.07bn in arrears.
While the moves by SOMO to generate short-
Crude reliance term revenues may prove successful, they may
The motive behind these moves becomes clear turn out to be kicking the can down the road. In
when looking at the impact of the coronavirus any case, with oil revenues accounting for more
(COVID-19) pandemic on Iraqi finances. Lower than 90% of Baghdad’s budgeted spending, the
prices and restricted production have seen Iraqi current situation appears likely to persist, with
oil revenues fall by nearly 50% to around $3.4bn the Sword of Damocles dangling above.™

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