There are four key reasons why Iraq is increasing the pace of development on a number of its major oil fields right now. First, it needs the money; second, hitting its own output targets will allow it to challenge Saudi Arabia in Eastern markets; third, it will allow Iran to increase its own oil exports; and, fourth, it is what China wants. Last week’s announcement from Iraq’s Oil Ministry that its Gharraf oilfield has started preparatory works for restarting output – so quickly after the announcement that a major drilling progamme will soon begin on the Nasiriyah site – fits into all of these categories. Just like those of its neighbour, Iran – which continues to wield decisive power over it through its military and political proxies – Iraq’s finances are in a very poor state indeed. Only a month or so ago, Iraq’s economic parliamentary committee suggested that international oil companies be paid with crude oil rather than cash or cash-equivalents as a means to reduce near-term state expenditure. It also proposed delaying payments of foreign debt, introducing salary cuts of 60 per cent for various state sector employees, and reducing all non-essential spending. The negative effects on oil pricing that resulted from Saudi Arabia’s latest oil price war and outbreak of the COVID-19 pandemic have been compounded by the never-ending squabbling over the ‘oil-for-budget payments’ arrangement with the semi-autonomous region of Kurdistan in northern Iraq.
The previous OPEC+ production deal has made the situation worse for the country, which still has around 90 per cent of its government revenues come from oil sales. Overall in June, Iraq’s oil production (including output from the Kurdish region) fell by 9 per cent, averaging 3.698 million bpd against 4.068 million bpd in May. Although this is more than Iraq’s quota under the OPEC+ deal (3.592 million bpd), it is still the lowest level for five years. Worse still, Iraq has pledged to make up this production overshoot by cutting back output even more this month, and in August and September, which will translate into even less oil revenues.
The timing for this could not be worse as, in the next few weeks, Iraq’s new Prime Minister, Mustafa al-Kadhimi, will need to come up with at least IQD12 trillion (US$10 billion) just to pay the next two months salaries of more than four million employees, retirees, state beneficiaries, and the food relief for low-income families, which together constitute the majority of households in Iraq. It is believed in Iraqi government circles that any failure to pay any of these obligations could result in the sort of widespread protests that occurred at the end of last year.
Related: Could Rising US-China Tensions Change Global Energy Markets?
The intention, then, is to restart production at Gharraf as soon as the preparatory works have been completed. This is currently being worked on by the principal field developer, Malaysia’s Petronas (45 per cent stake), following a suspension in production on 16 March due to the…