Iraq feeling the strain under Opec+ deal

Cash-strapped Baghdad is taking stop-gap financial measures to weather the slump in oil revenues, writes Rowena Edwards

Iraq has long been forced to juggle its heavy reliance on oil revenues with pressure from the Opec+ alliance to comply with crude production quotas, and the strain is showing again ahead of the producer group's 30 November-1 December ministerial meetings.

"We have reached the limit of our ability and willingness to accept a policy of one-size-fits-all," Iraq's finance minister and deputy prime minister, Ali Allawi, told the Chatham House Iraq conference this week. "It has to be more nuanced and it has to be related to the per-capita income of people, the presence of sovereign wealth funds, none of which we have."

Under the current Opec+ agreement, Iraq was required to cut output by more than 1mn b/d in May-July and by 849,000 b/d in August-December from an October 2018 baseline of 4.65mn b/d. It produced an average of 102,000 b/d above its quotas in May-October and now needs to produce 305,000 b/d below its November-December ceilings to compensate.

Iraq has long blamed its semi-autonomous Kurdish region for its failure to adhere to its Opec+ production limit, but Baghdad can only hide behind its dispute with the Kurdistan Regional Government (KRG) for so long. Iraq produced 3.85mn b/d in October, slightly above quota and 140,000 b/d higher than in September, Argus estimates show, but the month-on-month rise came mostly from federal fields, with KRG production stable at 450,000 b/d.

Opec+ quotas and the oil price crash have been tough on the cash-strapped federal government. The oil revenues on which it depends have almost halved on the year to an average of $3.4bn/month in 2020, insufficient to cover the cost of salaries and pensions. "In 2005, 20pc of oil revenues were spent on salaries; this year, the cost of salaries will be 120pc of oil revenues," Allawi says.

Iraq has taken some steps to boost cash flow. Its parliament passed an emergency spending bill earlier this month to borrow $10bn from local and international markets for the remainder of 2020 — albeit well below the cabinet's request for $35bn. And state-owned oil marketing firm Somo is seeking one year of pre-payment as part of a major five-year crude term deal it is offering.

Reform or collapse

But structural changes are required to put the country on a sustainably firmer financial footing. "The choice facing Iraq as a whole… is either reform or collapse," KRG deputy prime minister Qubad Talabani told the Chatham House conference. Iraq unveiled an economic reform plan last month aimed at tackling the financial crisis and diversifying away from its reliance on oil revenues. But this will take time. Under the Opec+ deal, Iraq faces the prospect of capped output until early 2022. And some Iraqi oil officials expect the agreement's compensation mechanism, which obliges quota-busters to make up for past overproduction with additional cuts, to be extended beyond this year.

An extension of existing production cuts and the compensation scheme would be a blow to Iraq's finances. But Iraq appears unlikely to back up its protest within Opec with any drastic action. While the finance ministry reiterates its concern over the financial pressures that the country is under, Allawi says it is the oil ministry that "sets the markers".

Iraq has spent the past few years trying to shake off the ‘troublemaker' image it has earned since rejoining Opec's production quota system after decades on the outside. Oil minister Ihsan Ismael continues to reiterate Iraq's commitment to the Opec+ deal, despite its shaky compliance record, and there is little sign of a change in approach.

Iraq output and compliance