Iraq needs to review upstream contracts in line with oil prices: Oil minister

Iraq, September 8, 2016

As Iraq continues to pump record crude oil levels, oil minister Jabbar al-Luaibi, stressed Wednesday the need to review its upstream contracts with international oil companies to account for changes in the oil price.

Luaibi met a delegation from Italian oil company Eni led by head of exploration, Antonio Villa, in Baghdad, to discuss his plans for the sector in 2016 and 2017, which he said would focus on the small undeveloped fields in the south of the country.

He emphasized that his office is working to overcome the obstacles and difficulties faced by oil companies operating in Iraq, adding that it "will open a new page in the development of the oil sector" in a statement released Wednesday.

Luaibi reiterated that he has no plans to cancel any of the upstream contracts, but called for the deals to be modified to take into account prices.
Eni leads the development of the 4 billion barrel Zubair oil field in the south of Iraq, along with South Korea's Kogas and Iraqi state-owned Missan Oil Co. under a technical service contract with the oil ministry.

It plans to increase total production capacity to 850,000 b/d over the next few years. But planned investments in the field have been delayed as the company has sought to preserve cash to deal with lower oil prices.

Not only have these dented Iraqi oil export revenues, but they have also meant the government requires a larger portion of this revenue to pay fees and cost recovery to its international partners for their work. This in turn means less budget available for Iraq to spend on increasing its production capacity.

With oil prices at more than $100/barrel, the proportion paid in cost recovery and fees is around 16%, but this could rise as high as 48% in a much lower price environment.

In its September nominations for example, Iraq allocated a total of 1.066 million b/d of crude as payback oil out of a total export program of 3.257 million b/d, or around 32%. This crude would be worth around $1.54 billion at today's price of around $48/b, from total revenues of around $4.7 billion.

But at $100/b, revenues would be nearly $9.8 billion, and Iraq would only have to allocate around 514,000 b/d for the equivalent contractor payments.