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Iraq's oil-rig count tumbles after IOCs ordered to cut spending on oil plunge

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Iraq's oil-rig count tumbles after IOCs ordered to cut spending on oil plunge

Highlights

Federal Iraq rigs down to 31 from 76 in December

Iraq ordered IOCs to cut budgets by 30%

KRG sending delegation to Baghdad for budget talks

Amman, Jordan — Iraq's oil-rig count has tumbled by almost two-thirds this year after international oil companies were ordered to cut spending because of the oil crash and OPEC's second-largest producer agreed to stringent new OPEC+ cuts.

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The total now averages 32 rigs operated by IOCs this month, down from 88 rigs in December 2019, Iraqi sources told S&P Global Platts. Federal Iraq is averaging 31 rigs this month, compared with 76 in December, while the semiautonomous Kurdish region in the northern part of the country is averaging only one rig in May compared with 12 in December.

Iraq's state-run Basrah Oil Co. in March asked IOCs to cut budgets by 30% and postpone payments to subcontractors due to the oil price crash. Oil prices received by federal Iraq were down to about $14/b in April, from $60/b in January, slashing oil revenue to $1.4 billion from $6.16 billion. Oil revenue accounts for more than 90% of Iraq's federal budget.

Oil drilling is now the biggest investment expenditure of IOCs, the sources said. The drop in the drilling programs will allow Iraq to cut costs by 30%, sources said.

Iraq is currently in the midst of cutting its output in line with the new OPEC+ agreement that will trim a record 9.7 million b/d in May and June. At 4.54 million b/d in April -- according to the latest Platts OPEC survey -- Iraq's production will have to fall by almost 1 million b/d for the country to abide by its quota under the OPEC+ deal.

Fully committed

The politically splintered nation has been a consistent laggard in compliance, drawing the ire of other members, and the government faces challenging negotiations with IOCs and the Kurdish region to fulfill its cut commitment.

The country is fully committed to the new OPEC+ cuts, acting oil minister Ali Allawi said earlier this month. The existing rig count should be sufficient to keep Iraq's production at least within the OPEC+ target, the sources said.

Unlike other producers in OPEC, led by top producer Saudi Arabia which pumped at record levels in April, Iraq was not able to open the taps last month despite the expiry of the old OPEC+ cuts agreement in March. The outbreak of the coronavirus and lockdowns also forced Malaysia's Petronas to evacuate staff in March and stop production from the southern oil field of al-Gharraf, which pumped some 90,000 b/d.

The KRG has its own burdens. According to a report by Deloitte, the KRG last year had to pay $2.20/b to transport crude by pipeline to the Turkish border, $3/b to the Turkish energy ministry and $14.80/b to IOCs. The KRG also received $1.573 billion from traders as an advance payment, and at the end of the year owed $3.4 billion.

More recently, federal Iraq told the KRG in a May 22 letter that it must develop an oil and budget deal within 30 days before it will approve future salary payments. The KRG is now sending a delegation to Baghdad for talks, the sources said.