Iraq's oil contracts make joining OPEC
output cut more painful
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[November 18, 2016]
By Ahmad Ghaddar and Ahmed Rasheed
LONDON/BAGHDAD (Reuters) - Iraq would have
to compensate international oil companies for limits placed on their
production, according to industry sources and documents seen by Reuters,
further reducing the prospect it will join any OPEC deal to curb the
group's output.
The compensation - stipulated in contracts - would compound the
financial hit of losing much-needed revenue from crude sales, if the
cash-strapped country were to yield to OPEC entreaties to curtail
national production.
OPEC member Iraq pays developers a fixed dollar-denominated fee for
every barrel of oil produced in the south of the country - home to its
biggest reserves - under technical service contracts agreed between the
international firms and the state-owned South Oil Company (SOC).
"Immediately after (an) SOC notice of ... production curtailment, the
parties shall agree ... a mechanism to promptly fully compensate (the)
contractor as soon as possible," according to an excerpt of the contract
the ministry signed with BP in 2009 for the company to develop the
20-billion-barrel Rumaila field.
The compensation, according to the excerpt seen by Reuters, "may
include, amongst other things, a revised field production schedule or an
extension to the term or payment of all or part lost income to
contractor".
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Britain's BP declined to comment.
The same clause also applies to other fields covered by the technical
service contracts in the south, including fields being developed by
Anglo-Dutch firm Shell, U.S. major Exxon Mobil and Italy's Eni,
according to industry sources.
A Shell spokeswoman said it did not comment on contracts. Exxon declined
to comment and Eni did not immediately reply to a request for comment.
A senior oil official with SOC told Reuters the country would not have
to worry about curtailment clauses because it had no plans to limit
production.
"On the contrary, we're encouraging the foreign companies to raise
production as much as they can," said the official, who declined to be
named as they are not authorized to speak publicly.
'EVERY DOLLAR NEEDED'
The Organization of the Petroleum Exporting Countries agreed in Algiers
in late September to limit its collective output to 32.5-33 million
barrels per day (bpd). The group's production hit a record 33.64 million
bpd in October.
Iraq has asked to be exempted from output curbs, arguing it is still
trying to regain market share lost when sanctions were imposed in the
1990s during the Saddam Hussein era, and that it needs to keep up a
costly battle against Islamic State.
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![](../images/111816pics/news_t31.jpg)
A worker checks the valves at Al-Sheiba oil refinery in the southern
Iraq city of Basra, January 26, 2016. REUTERS/Essam Al-Sudani/File
Photo
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"OPEC must submit to the fact that Iraq must stay away from any
possible output cut deal because the country is in the middle of a
tough war and every single dollar is needed to keep it standing on
its feet," a senior government official close to Prime Minister
Haider al-Abadi told Reuters.
Iraq put its output at 4.77 million bpd in October and said it would
not go back to below 4.7 million bpd.
"Not for OPEC, not for anybody else," said Falah al-Amri, Iraq's
OPEC governor and head of the country's state marketer SOMO.
There is, however, no certainty over how the discussions will play
out at an OPEC meeting on Nov. 30.
As a consequence, the Iraqi oil ministry and oil companies will not
be able to finalize their 2017 spending plans until after the
meeting, to have enough clarity on what route Iraq will take on its
near-term production ambitions, an industry source told Reuters.
Iraq has been making great efforts to ensure it pays its dues to oil
firms promptly and oil minister Jabar Ali al-Luaibi has made
boosting production in the country a priority.
"[Iraq] is one of the countries in the region that doesn't have
large foreign reserves, so will want to continue to maximize its
revenue," said Jessica Brewer, Middle East upstream oil analyst at
UK-based consultancy Wood Mackenzie.
She added that while most Middle Eastern OPEC members had all or
most of their production operated by national oil companies, Iraq
was one of the few that relied on international oil companies for
the majority of its output.
(Writing by Ahmad Ghaddar; editing by Pravin Char and Jason Neely)
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