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[sludgehound]

Iraq oil picture dims lately, low price & IS

BAGHDAD--Clobbered by falling oil prices, Iraq is headed over a fiscal cliff, unable to make critical investments needed to keep its oil flowing and still pay the skyrocketing costs of fighting Islamic State extremists, according to government officials.
Without a recovery in oil revenues, some fear the country is again sliding toward a breakup.
"We're battling on two fronts, both ISIS and oil," said Mudher Salih , a former senior central bank official who advises Prime Minister Haider al-Abadi on financial policy.
One of the few bright spots for Iraq in recent years has been an impressive expansion of oil production. The second-largest exporter in the Organization of the Petroleum Exporting Countries , Iraq has added up to a million barrels a day of new capacity, to the surprise of many doubters. That has provided a fountain of cash that has smoothed over many of Iraq's challenges.
But with global oil prices halving in recent months, Iraq's finances are eroding rapidly. Revenues are expected to fall by 40% this year, leaving a deficit of more than $20 billion , equivalent to one-fifth of spending.
Officials familiar with the government budget say even that $101 billion of planned revenue could prove to be an overly rosy projection. It is based on an average oil price of $56 for the year and exports of 3.3 million barrels a day. It assumes a wellspring of more than $10 billion in new tax revenues that the weak central government could have trouble implementing and collecting.
U.S. officials have cast worried looks over Iraq's finances. Mr. Abadi personally pressed Secretary of State John Kerry and British Foreign Minister Philip Hammond on the issue at a meeting in London in January, warning of a military reversal and wresting promises of support from the international coalition.
But Mr. Kerry at the time dismissed concerns that the military effort was in danger of faltering due to a shortage of money, indicating U.S. and allied shipments of equipment and aid would continue.
"Let me assure you that this effort is not going to be deterred or diminished or defeated" over a lack of supplies or ammunition, he said.
Prices for Iraq's oil have hovered below the $56 level for months, and without huge new investments and unprecedented cooperation between the central government and the semiautonomous Kurdish region in the north, the country will struggle even to maintain last year's exports of 2.5 million barrels a day, observers of Iraq's oil industry say.
"Neither of those figures is realistic," said Basim Antoine , a prominent business leader who has consulted regularly with the government about the budget.
Already, both the central government and the Kurdish regional government have fallen behind in payments to international oil companies. The cash flow crisis worsened last month, when stormy weather and technical issues in the south and political wrangling in the north hamstrung oil exports.
Fiscal woes couldn't come at a worse time, say Iraqi leaders and analysts. The costs of fighting Islamic State-- which controls about one-third of Iraqi territory--are soaring.
This year's budget allots a whopping one-quarter of expenditures to security and defense, some $20 billion , up from about $17 billion last year, when that amount accounted for a far smaller chunk of the overall revenue pie.
Iraq needs to re-equip and retrain its tattered army in hopes the military can take the lead fighting Islamic State. This is critical not only to fending off the extremist threat, but also to holding Iraq's fractious ethnic and sectarian communities together within one country.
With the army struggling, the Shiite-dominated government has depended upon Kurdish and Shiite sectarian militias and armed Sunni tribal groups to take on Sunni Islamic State fighters. But those groups often use the opportunity to expand their own influence, undermining the central government and raising tensions between Sunni, Shiite and Kurdish regions even as their communities fight Islamic State.
Dependence on these militias has sharpened sectarian divides. The central government has agreed to pay more than $1 billion in salaries for Shiite militias, a decision that kicked up a storm of protest from Sunni communities whose tribal fighters won't be paid by the government. Meanwhile, the Kurdish government is paying its own militias, collectively known as Peshmerga.
"It's already happening," said Mehdi Hafedh , a lawmaker and former planning minister. "I don't expect Iraq to unite again."
Those strains are particularly evident in the north, where Kurdish militias have taken advantage of the Islamic State offensive to seize new swaths of oil-rich territory the central government also claims authority over. Late last year, the government and Kurds, facing a common threat in Islamic State, cut what appeared to be a tentative agreement that promised to boost exports of Iraqi crude through Kurdish controlled territory in the north--where about a quarter of Iraq's reserves are located.
The deal requires the Kurds to funnel 550,000 barrels a day of oil--partly their own, partly from disputed areas-- through the central government's state oil company. In return, the government agreed to resume paying the Kurds a 17 % share of federal revenues based on a previous agreement.
That helped Iraqi oil production surge to a 35-year-high of 3.7 million barrels a day on average in December.
But the agreement has frayed badly in recent weeks, as neither side appears capable of delivering on its side of the deal. Production from the Kurdish controlled areas has fallen well short of the agreed levels, while the Iraqi government says it doesn't have the cash to keep up with payments owed to the Kurds. The dispute erupted in public again in recent weeks. Both sides threatened to back out. If they do, it will further hobble oil production from the north and dent government revenue projections beyond the shortfalls already foreseen.
Meanwhile, clouds have also gathered quickly over the heartland of Iraq's oil patch in the south. Taking in some of the world's biggest and most productive fields, the region has seen production capacity increase by more than a million barrels a day up to roughly three million, according to the International Energy Agency , as international oil companies have gone to work over the past five years.
But infrastructure bottlenecks constantly dog output. They will hold back further gains without big investments, according to industry and Iraqi officials. The lack of a protected port and adequate storage facilities on the Persian Gulf, for example, means that production had to be curtailed for nearly half the days last month because of stormy weather that prevented tankers from loading. That problem alone trims exports by up to 10% annually, industry officials said.
But far more worrying to some is that production might begin falling after a year or so if large new investments aren't made to reverse the natural slowing of production older fields undergo as oil is pumped from them. Production at one of Iraq's longest-tapped oil fields, West Qurna-1, lost some 250,000 barrels a day of production over the past few years, according to the IEA.
With the budget crunch, industry and government officials are doubtful that one of the biggest planned solutions--a massive project to pump seawater to the southern fields--will be able to move forward on its 2019 completion schedule. The water is needed to inject into fields, which keeps up enough pressure to continue pumping oil at current rates.
The government is now turning to the major oil companies to finance many critical investments in the oil sector, while allowing them to delay work on projects deemed less critical.
But the companies--including Royal Dutch Shell and BP--haven't been paid for the work they've already done. The government is discussing issuing bonds to raise $10 billion to $12 billion of the money needed to pay them for past work, while dealing with their demands to negotiate new agreements going forward with oil prices this low. It is unclear how much of the investment burden they will be willing to assume.
"It's a critical time," said Adnan Noshee, director general of the Missan Oil Co. , an arm of Iraq's national oil company in the south. "But we can reach fair agreements."
The companies say they are working with the Iraqi oil ministry, but they declined to discuss it further.
Sarah Kent contributed to this article.
Write to Bill Spindle at [e-mail]
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(END) Dow Jones Newswires
03-10-15 2029ET
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