Iraq in talks with oil companies on postponing payments, cutting costs: official

Dubai — Iraq, OPEC's second-largest oil producer, has begun negotiations with international oil companies on postponing payments to them and cutting costs as OPEC's second largest oil producer grapples with the crude price crash, Mudher Saleh, an economic adviser to new Prime Minister Mustafa al-Kadhimi, told S&P Global Platts Wednesday.

"At this moment, there are negotiations with IOCs to reduce costs as a priority," Saleh said. "There are negotiations with the ministry of oil and IOCs at this moment to find a way to postpone payments. We have to pay IOCs around $1 billion a month."

Iraq is one of the OPEC members hardest hit by the oil-price crash, which has slashed its oil export sales to $1.4 billion in April, from a monthly average of over $6 billion last year.

The effect of the price crash on the country's energy industry has been compounded by the coronavirus pandemic.

Iraq took the biggest hit to production of any OPEC member in April of 110,000 b/d as low fuel demand and a lack of product storage space forced its refineries to slash crude runs, according to the latest Platts OPEC survey. Production was 4.54 million b/d in April.

Restoring oil market share

Kadhimi outlined his government program to help revamp the economy and the oil industry.

In his program, Kadhimi said he wanted to restore Iraq's oil market share as well as start negotiations to amend contracts with IOCs, which operate the country's biggest fields in the south.

"We have to find a way to optimize oil production at less cost," Saleh said. "This is the strategy."

Iraq needs at least $5.5 billion a month to pay salaries, pensions as well as for items such as subsidies and debt-servicing costs.

"We need to restructure expenditure or find some way to borrow. Government expenditure represents 45%-50% of Iraqi GDP," he said. "The intention of the government is to implement the budget for 2020."

The country has been operating without a budget because it was run by a caretaker government since December after the resignation of the cabinet of former prime minister Adel Abdul Mahdi in November in the face of mounting protests demanding political and economic change.

Financial reform

At a cabinet meeting held Tuesday, the government decided to establish the Emergency Cell for Financial Reform, and expedite drafting of the budget law and the completion of the draft oil and gas law.

"In my opinion, we need some restructuring of salaries," Saleh said.

"Salaries and pensions take 70% of the operational budget. The operational budget represents around 70% of total expenditure."

Saleh expects the budget to be based on an oil price not exceeding $25/b and post a fiscal deficit of around $25 billion. Iraq sold its oil in April at $13.80/b. In its 2019 budget, Iraq forecast an oil price of $56/b, but still expected to post a deficit of around $23 billion.

The budget law is needed to allow Iraq to borrow internally or externally to fund its expenditure in 2020, he said.

Iraq has more than $2 billion in loans from the World Bank still available, while officials are talking to the International Monetary Fund about financial support, Saleh said.