Dubai — After years of dragging its feet on complying with OPEC oil production quotas, Iraq has taken its biggest steps towards implementing its agreed output cuts, as a campaign of financial sweeteners and diplomatic pressure from Saudi Arabia and the US appears to be paying off.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The new government in Baghdad led by Prime Minister Mustafa al-Kadhimi has in recent weeks ordered drastic reductions in crude exports and agreed to compensate for months of overproduction.
The change in sentiment coincides with the offer of financial assistance from Riyadh to help Kadhimi's impoverished government and a diplomatic push from the US, where President Donald Trump's administration has made reviving oil prices a priority.
Saudi Arabia's has offered a $500 million loan -- quietly negotiated shortly after Kadhimi took office in May -- along with revived promises of investment to help its neighbor rebuild from years of unrest, according to people familiar with the matter.
The unpublicized loan highlights the pressure building in Riyadh to boost oil prices, which at $41.83/b for Dated Brent on June 30 remain significantly below the kingdom's fiscal breakeven.
The Saudi cash comes as the US increased its diplomatic efforts to get Iraq to comply with the OPEC cuts to help lift the oil market and ultimately support hard-pressed shale producers crippled by the COVID-19 pandemic, other sources said.
"There is an unusual level of near desperation by [Saudi Arabia] to raise prices," one OPEC source told S&P Global Platts. "The role of the US cannot be excluded, either."
Officials in energy and finance ministries in both Saudi Arabia and Iraq did not respond to requests for comment.
Since the interventions, Iraq has slashed its June crude exports by nearly a fifth from April levels to 2.816 million b/d and submitted an OPEC-approved plan to make up for its excess production in May with extra cuts this summer that would take output to a five-year low.
Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, has made tightening up OPEC compliance a priority in order to protect its supply accord with Russia and other allies. However, his task has been complicated by OPEC's weak internal governance.
Output levels are considered a sovereign right and OPEC has no legal mechanism to compel compliance beyond peer pressure. In the case of Iraq, the prince's efforts had largely been ignored -- until now.
Helima Croft, an analyst with RBC Capital, said the Saudis have previously offered significant financial support to Iraq in the past few years, "but tying it to OPEC compliance seems to be something that really accelerated when [Prince Abdulaziz] became oil minister."
Making the cut
Iraq had signed on to OPEC's agreement with 10 allies to cut output to unprecedented levels -- a combined 9.7 million b/d reduction, or nearly 10% of the pre-pandemic market.
Under the deal, Iraq committed to cut just over 1 million b/d, with a quota of 3.592 million b/d. As the deal took force, Iraqi officials told their Saudi counterparts that implementing such steep production cuts would make it impossible to pay public sector salaries and benefits, according to sources knowledgeable about the talks.
The Saudi funding -- described by one source as a "bridging loan" to be repaid when oil prices recover -- is to be disbursed in July, August and September. It is intended to cover short-term government liabilities from production cuts, said sources.
Other sources have suggested the Saudi loan could be linked to investments in Iraq's oil and gas sector, which is in sore need of capital and outside expertise.
Iraq's finance minister Ali Allawi -- who was acting oil minister until Ihsan Ismaael was named to the post June 6 -- visited Riyadh in late May, where he met with Prince Abdulaziz and other top officials.
Both Iraqi officials have since declared their full-fledged support for the OPEC deal and pledged to make up the country's May and June excess production in July, August and September.
Prince Abdulaziz has continued his outreach to Iraq since then, and his half-brother Crown Prince Mohammed bin Salman -- the kingdom's de facto ruler -- has also been in active contact with Baghdad, sources said.
"Iraq has been more compliant and they got something out of it, for sure," another source said, describing the Saudi tactics as a "carrot and stick approach."
Washington has also played its part in persuading Iraq to implement oil cuts, sources said.
The US State Department in May granted Iraq a 120-day extension of a sanctions waiver to continue importing Iranian energy -- up from the typical 30 days. However, sources said it was aimed more as a goodwill gesture for the prime minister as he established his government following months of turmoil.
President Trump has made no secret of his role in brokering the latest OPEC+ agreement in April -- after weeks of gruelling negotiations -- in large part to stem a wave of bankruptcies and layoffs across the US oil industry.
The administration has worked quietly behind the scenes in the subsequent weeks to ensure it sticks, including calls with Baghdad to urge tighter compliance, sources said.
A US State Department official, who declined to be named, directed Platts to comments by Assistant Secretary of State Francis Fannon in April, made after the OPEC+ cuts were agreed.
"We will all be monitoring it closely, constantly engaging with our partners around the world to ensure that we reduce the volatility that is in the market, we create a sense of calm and a degree of resilience as we all get through this corona-induced demand destruction," said Fannon, the US' top energy diplomat.