Iraqi oil and gas projects worth tens of billions of dollars are facing an uncertain future in the face of Baghdad’s ongoing budget crisis.

The main drivers behind the crisis are Iraq’s expensive war with Islamist group Islamic State in Iraq and Syria (Isis) and the decline in global oil prices, which make up more than 90 per cent of government revenues.

Brent crude dropped from $112 a barrel in June 2014 to less than $50 a barrel in October 2015 reducing government oil revenues by more than a third.

Due to persistently low oil prices Iraq’s government is expecting oil revenues of $51.6bn in 2015, 36 per cent less than the $81.2bn recorded in 2014.

The budget crisis in Baghdad has sent a shockwave through Iraq’s key oil provinces of Kurdistan and Basra, causing thousands of projects to stall.

Iraqi Kurdistan

Lack of funds in Baghdad was a contributing factor to the collapse of the revenue-sharing deal agreed with the Kurdistan Regional Government (KRG) in December.

The deal’s collapse has meant an end to transfers of government funds from Baghdad, something that has exacerbated an ongoing financial crisis in the region, where as many as 5,000 projects have been put on hold.

The KRG owes international oil companies about $3bn on top of large debts to local contractors, according to analysts.

This large debt and uncertainty over future payments has discouraged investment in oil and gas assets in the region.

Basra projects

The state-owned South Oil Company (SOC), which produces almost 80 per cent of Iraq’s oil and focuses its operations in Basra, is also experiencing problems connected to the budget crisis in Baghdad.

Speaking at a conference in Istanbul on 3 November, Salah Mahdi Abdullah, head of engineering, procurement and projects at SOC said the drop in oil revenues is “hindering production and exportation development” in the oil sector.

On 6 September, a letter from the Oil Ministry warned foreign companies developing the country’s southern oil fields that Baghdad had “sharply reduced the funds available to the ministry” due to the drop in government revenues from crude sales.

Southern slowdown

Since the letter was sent, many of the companies running the country’s biggest oil and gas projects have been asked to submit budgets for spending in 2016 for approval by the central government.

On 3 November, MEED revealed the ongoing budget problems in Baghdad are delaying the $2.5bn Rumaila oilfield development project, which is being operated by BP in partnership with state-owned China National Petroleum Corporation and SOC.

At the same time, the $4bn West Qurna-2 field development project, which is being operated by Russia’s Lukoil, is experiencing schedule setbacks as it waits for Baghdad to approve its 2016 budget.

Shell’s South Gas Utilisation Project, a $17.2bn scheme to capture and utilise flared gas from fields across the south of Iraq, is also seeing delays.

The contract award for a $500m package due to be awarded in the third quarter of 2015 has been postponed until 2016.

Similarly there are concerns that Iraq’s $13bn Common Seawater Supply Project (CSSP), a scheme critical to sustaining output from ageing fields in the country’s south, could see extensive delays.

Project uncertainty

These latest delays connected to budget issues are especially unsettling for contractors and developers as Baghdad is yet to signal when budgets will be approved – or whether significant cuts will be required.

Speaking to MEED on 27 October, a spokesperson from Lukoil said the development schedule for West Qurna-2 would remain uncertain until Baghdad gave approval for the project’s budget.

“The time frames of further development of the West Qurna-2 project are being discussed with the Iraqi side,” said the spokesperson. “Lukoil has submitted its proposals on the project budget for 2016 to the Iraqi government… the company is expecting that they will be reviewed in the nearest time.”

On 3 November, Zaid Elyaseri, the Iraq country manager for the UK-based energy company BP, made similar comments regarding its $2.5bn Rumaila field development scheme.

“The time frame for the project is uncertain,” he said. “We are waiting to hear from Baghdad.”

Baghdad’s failure to make a swift decision on these projects is affecting sentiment in Iraq’s oil and gas sector, according to industry sources.

“The companies don’t know when they will get a response from Baghdad and they don’t know whether they’ll be asked to make cuts or slow spending,” said one source. “The uncertainty is having a very negative impact on the sector.”

More delays

More cuts and delays may well be announced in coming months.

Thamir Ghadhban, an adviser to Iraq’s Prime Minister, says holding back on investment is a key part of the Iraqi government’s strategy for coping with the budget crisis – along with finding new resources and cutting spending.

Delaying investments on key projects could have a long-term impact on the Iraqi economy according to industry sources.

“Budget cuts at the Oil Ministry are a major threat to big oil projects in Iraq’s south,” said one industry source.

“If upstream projects don’t go ahead as planned, then volumes won’t increase in-line with predictions, and future government revenues will suffer – exacerbating the country’s budget problems.”

Other challenges

Aside from the budget problems, oil and gas projects in southern Iraq are also challenged by an acute water shortage, inadequate export infrastructure and concerns about security.

The success of projects aiming to increase the output from ageing fields in the region rely on injecting large volumes of water to maintain well pressure.

At the BP-operated Rumaila field alone, water injection was increased 282 per cent in 2014 compared with 2013.

Using river water has created a shortage of supply that is not only affecting injection operations, but has frustrated local communities that are finding it harder to secure clean water for household use.

Security concerns

Adding to the increasing anger among communities that live near oil and gas operations is the high level of pollution due to gas flaring, according to local members of parliament.

Both these factors, as well as high unemployment, drive regular protests in the area, some of which have disrupted oil operations.

In addition to local unrest, analysts say there is also a risk of Isis targeting the region, despite Basra being located 400 kilometres away from territory under its control.

“[Isis’] ability to launch terror attacks in places like Basra should not be discounted,” says James Jeffrey, a visiting fellow at the Washington Institute for Near East Policy and a former senior US diplomat.

Project sequencing

If key strategic projects are delayed it could have a knock-on effect for other developments in the region.

The failure to implement gas production projects on time over recent years has already seen a planned $500m liquefied natural gas (LNG) export project, due to be constructed in Basra, delayed by at least five years.

The $13bn Common Seawater Supply Project (CSSP), which aims to replace existing use of fresh river water at Iraq’s southern oil fields with seawater, is another project that has seen delays that affect oil projects in the region.

Under the original timeline, the project was due to be completed in 2017. This is now out of the question and commissioning is expected in 2019 at the earliest.

Any further setbacks to the CSSP will add to south Iraq’s water crisis and slow plans to ramp up water injection at fields like Rumaila.

Some optimism

Even as the budget crisis in Baghdad remains unresolved and the headwinds from the water shortage and security situation persist, some investors remain optimistic about the long-term prospects for oil and gas projects in Iraq.

On 2 November, Abu Dhabi Investment Bank (ADIB) opened up a new branch in Basra – looking to capitalise on high demand for financial services driven by turnover from oil and gas projects in the region.

“We are very optimistic about Basra in the long term,” says Ali Atef Moussa, a senior relationship manager at ADIB. “When you look at the projected turnover for the next decade – it’s enormous. Basra is a region that is full of opportunities if you offer the right kind of services.”

Anthony Randerson, a technical manager for the fuel logistics company Ska Energy, which is in the second phase of developing the first privately owned tank terminal in Iraq, agrees with Moussa.

“It’s not an easy environment to operate in,” he says. “But, we have proved if you are persistent and committed, you can push projects through and reap the rewards.”