This Key OPEC Member Could Soon See Production Cuts

Evan Kelly,

The business climate is only getting worse in Iraq for the handful of international oil companies operating in the war-torn country. The Iraqi oil ministry sent a letter to private oil companies operating in its energy sector that spending will likely be reduced in 2016.

In Iraq, companies maintain and produce from oil fields and are reimbursed by the government. However, the collapse of oil prices has sapped the government of resources, and Baghdad has struggled to pay the money owed to companies.

The Wall Street Journal reported the Iraqi government sent a letter, dated Sept. 6, that warned oil companies to expect low reimbursement levels, and that they needed to submit only modest funding requests.

“Because of the drop in our oil-sales revenues, the Iraqi government has sharply reduced the funds available to the Ministry of Oil,” the letter read. “This will…reduce the funds available for the reimbursement of petroleum costs to our contractors.”

The deteriorating fiscal position for the Iraqi government will negatively effect companies like Eni, Royal Dutch Shell, BP, and Russia’s Lukoil. The situation is similar in Iraq’s northern territory of Kurdistan, a semi-autonomous region that has its own deals with oil companies. Kurdistan has also had trouble paying oil companies like Genel Energy. The Kurdistan Regional Government has promised that it will begin paying companies this month, after moving to export oil on its own without the permission of the Iraqi government.

So far this year, Iraq has succeeded in achieving impressive production gains, surpassing 4 MMbpd. However, the inability of private companies to securely operate in Iraq and count on consistent payments from the government could cut into the country’s long-term ability to increase oil output. Iraq once had very ambitious goals to double its oil output to 6 MMbpd by 2020, a goal that is now in jeopardy.

Meanwhile, OPEC stays the course. In August, the latest month for which data is available, the oil cartel continued to produce well in excess of its stated target of 30 MMbpd. Collectively, the group produced 31.5 MMbpd, a level that has been mostly unchanged for more than three months. The high levels of output continue to keep pressure on oil prices, with crude trading in the mid-$40s per barrel. Nevertheless, OPEC predicts that shrinking U.S. output, coupled with rising global demand, will eventually erase the supply overhang.

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