International oil companies have proposed millions of dollars of cuts in oilfield development spending in Iraq, after being told that Baghdad could struggle with payments due to falling oil prices and political instability, Reuters has reported.Â
In a series of letters sent to companies such as Royal Dutch Shell, BP and ExxonMobil since January, seen by Reuters, the oil ministry called for changes in projects and development plans in response to “the rapid drastic decrease in crude oil prices”.
Following the slump in crude prices the Iraqi government has lost a significant amount of oil revenue, which has further curbed its ability to cover its part of oilfield development costs.
In the letters, oil officials called on companies to consider postponing new projects and delay already committed projects as long as no additional costs were incurred.
The ministry asked companies to cut development budgets “by a certain percentage” and request subcontractors to reduce costs in order to match “the new oil prices world”.
In its February letter, it further suggested that producers make those cuts by maintaining or even increasing current oil production levels. A response was requested by the end of that month.
Shell proposed the biggest cut in spending – by more than a third to $1.5 billion from $2.4 billion, while BP offered to reduce spending to $3.25bn from $3.5bn.
Meanwhile, Lukoil said it was willing to slash investment by $200mn with ExxonMobil the only IOC not committing to making any cuts to projects in the region.
“No direct meetings have been held with any of the foreign companies. We are now only testing waters with them via correspondence,” said the official, who declined to be named because of the confidential nature of the correspondence.
A BP spokesman told Reuters the company held regular, confidential discussions with Baghdad about the development of the Rumaila field, which was operating normally.
A spokesman for Lukoil said the firm had received a letter from Iraq asking to postpone all new developments or reduce works in 2015, adding: “We are studying it.” The West Qurna project was developing on schedule and unchanged so far.
ExxonMobil CEO, Rex Tillerson said last week the company was in talks with Baghdad to restructure oil agreements “to help the government meet its near term cash needs,” according to Reuters.
“The oil ministry has irreversibly taken the decision to amend its service contracts with foreign firms, due to the cash crisis brought by oil prices drop,” the ministry official said.
“We have to acknowledge that current contracts were hastily drafted and short-sighted in failing to take into consideration the impact of a potential oil price crash.”
A letter sent to oil firms last month asked them to propose amendments to their contracts “based on the linkage between oil prices and cost recovery and due remuneration as a sliding scale”, so that both sides “take the risk and enjoy the reward”.
Oil Minister Adel Abdel Mehdi said less than two weeks ago that Iraq was renegotiating production sharing contracts in an attempt to restore its share to around 20 to 25%, after it was reduced in recent amendments to around 5 percent.
Under current contract terms, Iraq’s payments due to international companies in 2015 would reach $18bn, he added.
