When oil prices collapsed suddenly in March, it was immediately clear that the oil-dependent economies of Iraq and the semi-autonomous region of Iraqi Kurdistan were particularly exposed (MEES, 13 March).
The results have not been pretty. MEES estimates that federal Iraqi export revenues will come in at $41.5bn this year, barely half of 2019’s $78.8bn (see chart). The picture is equally dismal for Iraqi Kurdistan where crude exports via the Turkish port of Ceyhan have fallen by around 50,000 b/d year-on-year. Coupled with low prices and outstanding debts for prior prepayment schemes, this has seen revenues fall by over 50%.
For both Erbil and Baghdad, the events of 2020 will have long-lasting financial and social implications. In a desperate bid to stave off fiscal ruin, the Central Bank of Iraq announced on 19 December that it is devaluing the currency by 23% by moving the currency peg from $1=ID 1,182 to $1=ID 1,450. The move from the ostensibly-independent CBI appears to have been pushed by the government, which is seeking to maintain government spending (largely in Iraqi Dinars) amidst much lower government revenues (90% of which come from dollar-paid oil exports).
The move comes as the cabinet struggles to gain approval for foreign borrowing from parliament and as the CBI’s foreign reserves are rapidly depleting; the World Bank projects reserves running dry by 2022 (MEES, 27 November).
The KRG faces equivalent issues made all the worse by the fact that, as a non-sovereign country, it cannot print its own money nor issue bonds. Moreover, it is obliged to hand over substantial volumes of crude to trading houses under the terms of earlier prepayment agreements, leaving it with less revenues to meet its current obligations.
OIL SECTOR WORRIES
Broader macro issues aside, 2021 could also see both the KRG’s and Baghdad’s financial woes further hit oil sector development.
For starters, Erbil is entering the new year with a massive $850mn in receivables owed to foreign operators for missed payments between November 2019 and February 2020 (MEES, 9 October). While subsequent payments have been reliable, it is far from clear how the KRG will be able to pay this down any time soon.
In April, the KRG told IOCs that these payments would be postponed for “at least nine months” or “until prices recover to $50/B” (MEES, 17 April) – both conditions have now been met. Multiple firms have now confirmed a tentative payback plan on these payments, but the details remain sketchy, as does the KRG’s ability to uphold such a deal.
Genel Energy – which operates the 9,000 b/d Taq Taq field in addition to minority stakes at DNO’s 114,000 b/d Tawke license and the recent Chevron-operated startup at Sarta – said earlier this month that “the KRG has now also submitted a reconciliation model for repayment of the receivable relating to amounts owed for invoices.” “We will work through this submission and update the market when appropriate, as further discussions with the KRG take place,” Genel adds. Operator of the 42,000 b/d Shaikan license Gulf Keystone adds that “We look forward to further engaging with the KRG on this matter and will provide an update in due course.”
But when stacked upon its own hefty ‘domestic’ expenditures tab – not to mention the $3.44bn still owed due to past prepayment deals (MEES, 22 May) – a timely payback in 2021 would be a huge task for the KRG.
For Baghdad, the 2020 revenue crunch has also been highly disruptive and has exacerbated pre-existing political instability. With monthly revenues insufficient to cover basic current spending (i.e. salaries and pensions), investment spending has been minimal throughout the year. Baghdad asked IOCs to cut investment, further reducing the prospect of Iraq achieving its ambitious production capacity targets (MEES, 1 May).
Hardest hit could be Iraq’s ambitious plans to end gas flaring through several ongoing gas processing developments. Cashflow problems have led to major delays on EPC projects in the past - notably Hyundai’s greenfield Karbala refinery (MEES, 24 December) – and the same could prove true on the EPC gas deals.
Despite Mounting A Small Recovery Since Q2, Iraq* Crude Export Revenues Are At Their Lowest In Over A Decade
DEAL IN THE WORKS?
One bright spot entering 2021 could finally be a resolution to the KRG and federal government’s long-standing oil-for-revenue dispute. Erbil and Baghdad have long tussled over the constitutional requirement that the KRG hand over 250,000 b/d of its ‘own’ production to Somo in exchange for its share of the federal budget.
Empty promises and provisional deals are nothing new, but the last few months has seen considerable movement on this front (MEES, 21 August). Finance Minister Ali Allawi said this week that the ministry has reached an agreement with the KRG for allocations under the 2021 budget, and the KRG’s deputy PM Qubad Talabani echoed these sentiments, saying 22 December that “Fortunately, as part of our visit to Baghdad, we were able to reach a deal with the federal government on the 2021 budget bill.”
The mechanisms remain tricky – particularly given the KRG’s obligations to hand pre-sold volumes to traders – but if the two sides can work out a compromise, it will see one of Iraq’s long-standing oil disputes resolved in what looks otherwise like a grim year for the sector.
