Iraq feeling the strain under Opec+ deal

Iraq has long been forced to juggle a heavy reliance on oil revenues to meet domestic funding requirements alongside pressure from the Opec+ alliance to comply with crude production quotas. But the strain has started to show ahead of next week's Opec and Opec+ 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 said at a 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 over 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. Iraq produced an average 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 the semi-autonomous Kurdish region in the north of the country for its failure to adhere to its Opec+ production ceiling, 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 largely stable at around 450,000 b/d.

Opec+ quotas and the oil price crash have been tough on Iraq's cash-strapped federal government. The oil revenues it depends on have fallen by almost 50pc on the year to an average of $3.4bn/month in 2020, insufficient to cover the cost of salaries and pensions. "While in 2005, 20pc of oil revenues were spent on salaries, this year the cost of salaries will be 120pc of oil revenues," Allawi said earlier this month.

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 earlier this week, Iraq's state-owned marketing firm Somo offered a major five-year crude term deal, with one year available under a prepayment option. But these measures fall short of the structural changes required to put the country on a 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 its reliance on oil revenues. But diversification will take time. And under the Opec+ deal, Iraq still faces the prospect of capped output until early 2022. Opec+ members will decide next week whether to proceed with a scheduled 2mn b/d output increase in January or roll over existing quotas into next year. Sources tell Argus that Opec+ is leaning towards delaying the increase in output, most likely by three months. Furthermore, some Iraqi oil officials expect the compensation mechanism, which obliges quota-busters to make up for past overproduction with additional cuts, to be extended beyond this year.

Towing the line

An extension of existing cuts and the compensation scheme would be a blow to Iraq's finances. But protest is unlikely. Although the ministry of finance is starting to articulate its position, Allawi made it clear that the oil ministry "sets the markers". He voiced similar concerns earlier this year with no action taken.

State news agency reports in September that Iraq was seeking an exemption from production cuts in January-March 2021 were later met with a denial from the oil ministry, alongside a similar statement from Opec kingpin Saudi Arabia, which has shown investment interest in Iraq, which the country sorely needs.

Iraq has spent the last few years trying to shake off the troublemaker image it earned in 2016 when it pushed for an exemption from production restraints on the basis of decades of war. 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.

By Rowena Edwards