Iraq's KRG delays oil payments with cash stuck in Lebanese bank: sources

Dubai — The oil ministry of Kurdish Regional Government in Iraq has been unable to pay energy companies operating in the semi-autonomous region because its cash has been stuck in a Lebanese bank facing a liquidity crunch and the oil price crash will only make matters worse, sources told S&P Global Platts.

The Kurdish government had $1 billion in the bank account, which it cannot access because of the liquidity issues caused by the financial crisis in Lebanon, a source told Platts.

"That was cash the KRG put in there for a rainy day and now [is] not able to draw," said the source.

KRG's oil and finance ministries declined to comment on the payments issue.

"The [bank account] issue has been ill-timed due to the oil crash, however, and exacerbates payment risk over and above the underlying problems from low oil prices," said Patrick Osgood, senior Iraq analyst at Control Risks.

Two oil companies operating in Kurdistan, Norway's DNO and UK's Genel Energy, have said production in the region and their ability to spend on operations will be impacted by delayed payments from the ministry.

Payments for crude production in October and November 2019, which were due in January and February 2020, have not been received, Genel said earlier this month. The London-based company said drilling activity at Tawke license has been scaled back and the Qara Dagh-2 well spud set for the second quarter is likely to be delayed.

Genel's warning followed that of its Norwegian partner DNO in the Tawke license, where the UK company has a 25% stake.

DNO said it had last gotten paid in January, covering September 2019 exports. As it faces delayed payments from the Kurdistan Regional Government, DNO said its operations in the region are also being curtailed by the coronavirus impact, which will lead to a drop in production from several fields.

Advance payments

The oil price crash and outbreak of the coronavirus, which has spread to Kurdistan and has led to limited movement of people and drilling activities for oil and gas companies, will exacerbate the regional government's finance situation, according to sources.

"Hard to know what they will do now. Maybe more of the same advance payments for oil from traders like before," said the source.

The KRG had resorted to tapping advance payments from oil traders during the last oil price crash in 2014-2015, when Brent plummeted from $115/b in mid-2014 to less than $70/b in the beginning of 2015.

"The KRG's production sharing contracts give a measure of burden-sharing between international oil companies and the KRG, and the advances it receives from oil traders prior to the [current oil] crash may be giving some temporary leeway," said Osgood.

"But at sub-$40 prices – and now at sub-$20 due to the significant net discounts the KRG sells at – the region is effectively insolvent unless it radically cuts spending."

The KRG has a few options to shore up its finances and pay oil companies. It cannot borrow or tap Iraq's foreign currency reserves, which are expected to be siphoned by the Baghdad government already struggling with low oil income.

"At $65/b oil, the KRG was just managing to pay its workforce with little or no cash for other services," said Shwan Zulal, Head of Carduchi Consulting. "At the current oil price, the region can no longer pay the oil companies nor the inflated public sector."

2020 budget

To make matters worse, Iraq does not have a 2020 budget, which includes Kurdistan, because currently there is only a caretaker government since December. Iraqi President Barham Saleh's first choice for Prime Minister-designate Mohammad Allawi failed to win parliament's vote of confidence and withdrew his candidacy.

The new Prime Minister designate Adnan al-Zurfi has said he will expedite sending the new budget to parliament for approval once he forms a government and gets parliament's vote of confidence.

The lack of leadership in Baghdad has made it difficult to implement an oil deal with the KRG reached in December last year.

The KRG agreed with the Baghdad government to deliver 250,000 b/d of oil to state-oil marketer SOMO as part of a deal that includes payments of financial dues to KRG within the 2020 budget.

"The KRG is dependent on $384 million-$426 million a month from the federal government to pay wages and welfare payments, while declining to transfer any of the region's oil to federal marketer SOMO," said Osgood.

"At current prices this transfer makes up a majority of KRG revenue. As Baghdad faces dire fiscal and political crises of its own, the risk to that transfer increases significantly."