Recovery undercut by falling oil

20 July 2015

Low oil prices and the battle against Isis have rendered Iraq incapable of paying its debts to international oil companies, despite record export figures

2015 breakeven oil price $71

2014 breakeven oil price $107

The Iraqi economy has suffered over the past year from the twin impact of lower oil prices and the gruelling conflict with the jihadist group Islamic State in Iraq and Syria (Isis). These factors have left Baghdad with even less potential to continue its already faltering efforts to reconstruct the economy more than a decade after the US-led invasion.

The Washington-based IMF, after meetings with government officials in mid-March, advised that Iraq should cut spending and change its banking policies to tackle a soaring budget deficit.

Proactive steps

“Iraq is taking proactive steps to address the double shock of the [Isis] insurgency and the collapse in oil prices,” said an IMF statement issued on 18 March. The fund forecast that a budget deficit of 12 per cent of GDP or more could be incurred, and suggested it could help finance the amount.

The first anniversary since the fall of Mosul, when Isis took control of the largest city in northern Iraq, was on 10 June. Baghdad had been planning a military operation later in 2015 to take back the Sunni-majority city, but gains made by the jihadist group in the Al-Anbar province – notably seizing the city of Ramadi earlier in May – have shifted the focus of the conflict closer to the capital.

Iraq’s parliament approved the 2015 budget at the end of January. It was based on the assumption that oil would average $56 a barrel and exports would be 3.3 million barrels a day (b/d). The IMF said this would lead to a deficit equivalent to 12 per cent of GDP.

Luay al-Khateeb, non-resident fellow at the Brookings Doha Centre, estimated early this year that the cost of financing all security forces, including the Kurdish Peshmerga, could rise to $27bn in 2015.

GDP growth

Iraq’s GDP is estimated to have contracted by more than 2 per cent in 2014, according to the IMF, but is forecast to grow by more than 1 per cent in 2015.

Oil exports in the country have been gradually increasing, and in April the Oil Ministry announced exports had hit their highest monthly level since the 1980s. Crude shipments increased by 3 per cent that month, according to State Organisation for Marketing of Oil (Somo).

The country exported an average of 3.077 million b/d of crude during April, compared with 2.98 million b/d in March. Total exports for the month reached 92.8 million barrels and generated $4.8bn in revenues.

Crude prices have recovered to an extent from the sub-$50-a-barrel prices seen in January, and have remained above $60 a barrel since the middle of April. However, Iraq had enjoyed export prices of more than $100 a barrel for most of the four years leading up to the crash, which had allowed the government to increase spending.

The IMF estimates the country’s budget breakeven oil price at $70.9 a barrel for 2015, leaving the government a long way short of balancing its books.

Depleted reserves

In February, Ali al-Alaq, governor of the Central Bank of Iraq, announced a plan for the government to borrow indirectly from the state’s reserves, estimated to be $18bn. But this option was dismissed by Finance Minister Hoshyar Zebari in an interview with the UK’s Financial Times the same month.

Zebari was reported as saying of the reserves, “We no longer have that cushion. All of that was misspent because of poor governance and financial management. This was fuelled by dropping oil prices and the rise of Isis.”

The Oil Ministry, meanwhile, is trying to negotiate with international oil companies (IOCs) to reduce its immediate payment obligations. The Paris-based International Energy Agency (IEA) says the federal government already owes $9bn to contractors from 2014 and is due to pay about $18bn to investors this year. However, only $12bn has been allocated in the 2015 national budget to pay cost recovery and remuneration fees.

In mid-May, UK oil major BP reportedly agreed with Baghdad to cut by $1bn its budget to develop the Rumaila oil field in southern Iraq. The company agreed with the Oil Ministry to reduce its planned 2015 spending from $3.5bn to $2.5bn.

Erbil crisis

The Kurdistan Regional Government is in a similar position to Baghdad, receiving lower oil revenues per barrel, funding the fight against Isis and struggling to pay off oil companies operating in the Kurdish region of northern Iraq.

Erbil has not received its expected share of the federal oil budget despite meeting its crude export targets, although it received a payment of ID543bn ($445m) from the central government for April, according to media.

The Kurdish Finance Ministry plans to use the funds to pay overdue March salaries to government employees. Significant payments are still due to IOCs.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications