Iraq's Oil Contracts Make Joining OPEC Output Cut More Painful

Iraq's Oil Contracts Make Joining OPEC Output Cut More Painful
Iraq would have to compensate international oil companies for limits placed on their production, according to industry sources and documents seen by Reuters.

Reuters

LONDON/BAGHDAD, Nov 18 (Reuters) - Iraq would have to compensate international oil companies for limits placed on their production, according to industry sources and documents seen by Reuters, further reducing the prospect it will join any OPEC deal to curb the group's output.

The compensation - stipulated in contracts - would compound the financial hit of losing much-needed revenue from crude sales, if the cash-strapped country were to yield to OPEC entreaties to curtail national production.

OPEC member Iraq pays developers a fixed dollar-denominated fee for every barrel of oil produced in the south of the country - home to its biggest reserves - under technical service contracts agreed between the international firms and the state-owned South Oil Company (SOC).

"Immediately after (an) SOC notice of ... production curtailment, the parties shall agree ... a mechanism to promptly fully compensate (the) contractor as soon as possible," according to an excerpt of the contract the ministry signed with BP in 2009 for the company to develop the 20-billion-barrel Rumaila field.

The compensation, according to the excerpt seen by Reuters, "may include, amongst other things, a revised field production schedule or an extension to the term or payment of all or part lost income to contractor".

Britain's BP declined to comment.

The same clause also applies to other fields covered by the technical service contracts in the south, including fields being developed by Anglo-Dutch firm Shell, U.S. major Exxon Mobil and Italy's Eni, according to industry sources.

A Shell spokeswoman said it did not comment on contracts. Exxon and Eni did not immediately reply to requests for comment.

A senior oil official with SOC told Reuters the country would not have to worry about curtailment clauses because it had no plans to limit production.

"On the contrary, we're encouraging the foreign companies to raise production as much as they can," said the official, who declined to be named as they are not authorised to speak publicly.

'Every Dollar Needed'

The Organization of the Petroleum Exporting Countries agreed in Algiers in late September to limit its collective output to 32.5-33 million barrels per day (bpd). The group's production hit a record 33.64 million bpd in October.

Iraq has asked to be exempted from output curbs, arguing it is still trying to regain market share lost when sanctions were imposed in the 1990s during the Saddam Hussein era, and that it needs to keep up a costly battle against Islamic State.

"OPEC must submit to the fact that Iraq must stay away from any possible output cut deal because the country is in the middle of a tough war and every single dollar is needed to keep it standing on its feet," a senior government official close to Prime Minister Haider al-Abadi told Reuters.


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Paul Mcdonald | Nov. 19, 2016
This is the most stupid reasoning anyone has ever seen. What happened to the fact that when you increase production and help drive prices down you earn the same as you would if you cut production and help prices rise. Cutting production at higher prices gives the same revenue as increasing production at lower prices.


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