Iraq discusses reducing spending by foreign oil companies

20 January 2016

Oil ministry says it is doing everything possible to increase production

Iraq’s oil ministry is looking at how it can reduce spending by foreign oil companies, according to a statement made by Oil Minister Abdel Abdul Mahdi on 19 January.

“The ministry is discussing reducing financial spending by foreign companies operating within service contracts,” he told a meeting of the oil fields’ joint management committees in Baghdad.

Abdul Mahdi added that the ministry is doing everything possible to increase production to “cover the federal budget deficit resulting from the decline in oil prices”.

Brent crude fell below $28 a barrel on 18 January amid fears that the removal of western sanctions on Iran could worsen the existing global oil glut.

Iraq’s existing technical service contracts see international oil companies paid a flat fee for each barrel of oil produced.

These fees consumed around ten per cent of the country’s oil revenues when prices were above $100 a barrel in 2014, but as oil prices have dropped the fees have put an increased strain on the country’s budget.

In October 2015 Iraq’s finance minister said the country was predicting its fiscal deficit to hit 11.9 per cent of economic activity in 2016.

Since then the country’s economic outlook has worsened.

The country’s budget for 2016 is based on an oil price of $45 a barrel, meaning revenue will likely be significantly less than projected and the deficit will come in above the expected 11.9 per cent.

Due to ongoing budget problems the 2016 project budgets for major upstream schemes are yet to be approved by Baghdad.

On 17 January an industry source told MEED that BP still hasn’t received the green light for its proposed  budget for the $2.5bn Rumaila oilfield development.

The West Qurna-2 Mishrif Full Field Development, another upstream megaproject that is estimated to be worth $2.5bn, is also facing budget problems.

On 14 January Lukoil, the Russian company that operates the field, told MEED that it is yet to reach a final agreement on the 2016 budget for the project and negotiations were continuing with Baghdad

Iraq is OPEC’s second-largest producer and generates 95 percent of its public budget from oil sales.

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