Tumbling oil prices leave Iraq facing a perfect storm

Iraq pays international oil companies (IOCs) about $3 billion quarterly to extract its crude. (AFP)
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Updated 03 April 2020

Tumbling oil prices leave Iraq facing a perfect storm

  • The price crash means Iraq’s monthly crude revenues were slashed by nearly half from February to just $2.99 billion in March

BAGHDAD: As crude prices plunge, Iraq’s oil sector is facing a triple threat that has slashed revenues, risks denting production and may spell trouble for future exports.

So what are the challenges facing the only significant industry in Iraq, as global oil prices fall to around $25 a barrel?

The price crash means Iraq’s monthly crude revenues were slashed by nearly half from February to just $2.99 billion in March.

The second-biggest crude producer in the OPEC oil cartel, Iraq pays international oil companies (IOCs) about $3 billion quarterly to extract its crude. With oil so cheap, the government is desperately looking to cut costs and delay payments.

Last week, the Basra Oil Company — the state-owned firm coordinating production in the oil-rich southern province — asked IOCs to accept a delay in six months’ worth of payments and cut work budgets by 30 percent, according to letters seen by AFP.

“A delay in first quarter payments is necessary, and we asked for the second quarter just in case,” said Khaled Hamza Abbas, BOC’s assistant director and a signatory to the letter, saying that oil companies had yet to respond.

But IOCs are already taking independent action, according to internal letters seen by AFP.

FASTFACT

90%

Iraq relies on oil revenues for more than 90 percent of state expenses.

Oil superpower ExxonMobil immediately asked subcontractors to “reduce overall cost” with other firms asking suppliers for discounts.

“IOCs are cash-strapped,” a source at the main operator in the south said.

However, the trouble does not stop there.

IOCs expense Iraq at the end of each quarter for what it cost to extract crude, and the Iraqi government pays them in oil.

“With the lower prices, the government would have to use virtually all its crude to pay oil companies and would have barely enough to sell,” a leading Iraqi official said.

Iraq relies on oil revenues for more than 90 percent of state expenses. Its 2020 budget was based on an estimated barrel price of $56, more than twice the current rate.

The spread of the novel coronavirus has severely disrupted rotations of key foreign nationals working at Iraq’s oil fields, risking a drop in the usual 4.5 million barrel per day (bpd) production.

To stem the spread of the respiratory illness, Iraq has shut its airports and imposed a countrywide lockdown until at least April 19, although many expect an extension.

The Gharraf field in Dhi Qar province, which has produced up to 100,000 barrels per day (bpd), is offline after last month’s evacuation of dozens of Malaysian workers by operator Petronas over coronavirus fears, according to a source at the province’s state-owned oil company.

Most foreign oil workers live on the fields in Basra, and are currently stuck there beyond their normal six- to eight-week rotations due to travel bans.

“We’re seeking approvals for an exemption for foreign staff so that we can secure the rotating teams. These companies have internal rules and you can’t keep the teams here for more than two months,” said BOC’s assistant director, Abbas.

A source from a major European oil firm operating in Basra said that a halt to foreign staff rotations would be a bigger threat to production than payment delays.

Britain’s BP, too, would have to trim production if 4,000 British nationals working in the south could no longer travel.

“There are no two ways about it,” a source with knowledge of BP’s operations said.

The third threat is a global drop in oil demand for the first time in a decade, with the International Energy Agency expecting 2020 demand to decrease by 90,000 bpd, a sharp downgrade from forecasts it would grow by more than 800,000 bpd.

“It has no equal in the history that we see such a strong decline in demand and a huge massive overhang of supply at the same time,” IEA director-general Fatih Birol said.

Two countries facing shrinking demands are India and China, where Iraq sells “the lion’s share” of its crude, according to geopolitical analyst Noam Raydan.

China, where the virus first emerged, is struggling through a huge economic slump and India has entered a three-week lockdown.


Pakistan seeks Arab creditors, China to convert $7.7 bn into long term loans — Hafeez Shaikh

Updated 02 June 2020

Pakistan seeks Arab creditors, China to convert $7.7 bn into long term loans — Hafeez Shaikh

  • Pakistan received $3 billion BoP support from Saudi Arabia, $2 billion from the UAE and $2.2 from China
  • Conversion of short term deposit will provide long term financial stability to the country, say experts

KARACHI: Pakistan is in talks with Saudi Arabia, the United Arab Emirates and China to extend the tenure of their $7.7 billion short term deposits, a move that will ensure long term forex stability of the South Asian nation, Dr. Abdul Hafeez Shaikh, the prime minister’s adviser on finance and revenue, told Arab News in an exclusive interview.
“Last year, when Pakistan was going through the worst balance of payment (BoP) crisis in our history, we were provided financial support by our brotherly countries,” Shaikh said on Monday.
Pakistan’s friendly countries were approached by the government of Prime Minister Imran Khan soon after assuming the office in 2018 as the country’s current account deficit reached $20 billion.
Responding to Pakistan’s call, Saudi Arabia deposited $3 billion while the UAE and China deposited $2 billion and $2.2 billion, respectively. Qatar also contributed by depositing $0.5 billion with Pakistan’s central bank.
“The $7.7 billion secured from the bilateral arrangements provided the much needed balance of payment support to Pakistan,” he added.
“These are short term deposits placed with the central bank in Pakistan at concessional rates,” the PM’s adviser said, adding: “We are in talks with our development partners to move these deposits toward longer tenors.”
Economists say these deposits provided a lifeline to the country’s economy that had higher imports and lower exports.
“The balance of payment support oxygenated the country’s economy that was much need for its survival. The support helped Pakistan not to default on its foreign payment obligations,” Muzzamil Aslam, senior economist, who is familiar with the developments, told Arab News.
Pakistan’s current account deficit (CAD) was $20 billion in 2018 which declined to $13.43 billion during the last fiscal year. Its further decline is also projected for the current fiscal year (2019-20).
“CAD is projected to decline to $4b [or 1.7 percent of the GDP] in the current fiscal year, compared to $20b when the government took office in 2018,” Shaikh said.
The major balance of payment support came from Saudi Arabia which provided $6 billion in financial assistance to Pakistan, with $3 billion in foreign currency support and $3 billion worth of oil on deferred payments. The agreement was signed during the visit of Prime Minister Imran Khan to the Kingdom in October 2018.
Economists say when Pakistan approached the International Monetary Fund (IMF) for the bailout program, the United States had expressed concerns that the money could be used to pay off debts, especially those taken from China.
“After we started getting the IMF assistance, the fund imposed a condition during the first review of the program to roll over these loans instead of paying them back. This was because the US had misgivings that Pakistan will pay the Chinese debt with the IMF money,” Aslam said.
However, the IMF acknowledged in April that “Bilateral creditors have maintained their exposure in line with debt sustainability objectives of the EFF [Extended Fund Facility].”
China maintained their exposure by renewing $2 billion bilateral deposits in March. Saudi Arabia also refinanced $3 billion BoP support loans that matured in November-January, while the UAE rolled over $1 billion BoP support loans in March. The oil facility with Saudi Arabia – worth $3.2 billion – was activated in August 2019 and has also been providing support to the balance of payments, according to the IMF documents.
Instead of frequent rollovers now, the government wants to convert these short term deposits into long tenors. “The IMF is behind this strategy,” Aslam informed. “The conversion will impact the status of these deposits in a way that loan rates will be decided in line with the international benchmark which may be LIBOR+2-3 percent.”
Economists say the conversion of these deposits will positively impact the economy of the country since Pakistan will get some breathing space and an opportunity to improve its overall financial condition. “It will provide long term forex stability. Otherwise, we will be under pressure to pay back $7.7 billion,” Aslam said.