The projects to increase oil output in Iraq could face delays if the government insists on the spending cuts this year, international oil companies have warned the government.

With its finances stretched, Iraq has asked foreign oil companies to cut their budgets for developing the country’s oil resources for a second year in a row but the two sides have failed so far to agree on spending levels.

“There has been no agreement so far with the foreign companies on the proposed budgets, and that is causing delays in all key oil field projects,” the news agency Reuters cited an unnamed government official as saying, adding that the talks on the subject were continuing.

Oil companies helping Iraq in developing its oil fields perform a role similar to oil service firms and they have to get clearance from the government on spending each year. The companies are then repaid with crude oil produced from existing fields.

The arrangement worked smoothly when oil prices were above $100 a barrel but since crude prices have come down to $40 a barrel level, Iraq has been struggling to find enough oil and cash to repay the companies for their investment.

The Iraqi government has sent the spending cut request to BP, Royal Dutch Shell, Exxon Mobil, Eni, Lukoil and Petronas, according to Oil Ministry letters seen by the news service.

Iraq relies on oil for nearly all its revenues and the country is descending ever deeper into a financial crisis, driven by extra spending on its ongoing war with the jihadist group Islamic State in Iraq and Syria (Isis) and lower revenues due to lower oil prices. As the budget problems have worsened, the future of thousands of schemes across the country, worth billions of dollars, has become increasingly uncertain.

According to regional projects tracker MEED Projects, Iraq is the third-largest project market in the region after Saudi Arabia and the UAE, with $351bn-worth of schemes planned and under way. Of these schemes, $90bn-worth are in the oil, gas and power sectors, as the government works intends to modernise its energy sector and increase output.

However, Iraq’s projects market has shrunk by nearly a third due to the rise of Isis. Before the jihadist group’s lightning advance in June 2014, when it seized control of almost a third of the country, the value of projects planned and under way stood at $519bn.

Government augument

Now the government of Iraq has argued that the prices for goods and services have fallen steeply during the market downturn so oil companies should be getting less.

Some companies, however, have complained that the proposed budgets may prevent them from continuing operations in Iraq, the official said, adding that BP, Shell and Lukoil have already objected to the proposed investment budgets.

Iraq’s outgoing Oil Minister Adel Abdel Mahdi had said in February that the budget for foreign oil company development costs had been revised down to just over $9bn in 2016 from $23bn, following complex negotiations.

Iraq is part of the oil cartel Opec. Its crude supply rose last year and output reached a record 4.775 million barrels per day (bpd) in January this year.

According to the government proposal, BP was asked to cut its 2016 budget to $2.48bn and target output of 1.4 million bpd at the Rumaila field it operates. BP proposed a budget of $3.25bn for 2015.

Lukoil is expected to cut spending to $1.26bn and aim for a production of 400,000 bpd at the West Qurna-2 project. The Russian company proposed a 2015 budget of $2.1bn. Italy’s Eni should cut spending to $1.62bn and target production of 351,000 bpd at the Zubair field. The firm said in February it would cut spending by 20 per cent across the board this year, without specifying the size of cuts in Iraq.

US-based ExxonMobil has been asked to slash spending to $878m and aim for output of 379,000 bpd at the West Qurna-1 project. Last year, the company insisted on spending $1.8bn. Shell should cut spending to $855m and aim for a 200,000 bpd from the Majnoon field. Last year, it proposed a budget of $1.5bn while Petronas has been asked reduce costs to $712m and target production of 100,000 bpd from the Garraf field.

The foreign oil companies either declined to comment or couldn’t immediately comment to Reuters