During a sombre visit to Germany last week, Iraqi Prime Minister Haider al-Abadi urged the international community to help boost his country’s crisis economy in the face of plummeting crude oil prices, underscoring a desperate situation in which Iraq has lost 85 percent of its oil revenues.
Iraqi oil revenues have fallen to just 15 percent of what they used to be, the embattled prime minister said, despite a boost in production ordered last year.
The surge in production has failed to compensate for the collapse of oil prices, and the situation is dire when oil revenues constitute around 43 percent of Iraq’s gross domestic product (GDP), 99 percent of its exports and 90 percent of all federal revenues.
All told for this year, the Iraqi government expects to export 3.6 million barrels of oil per day (bopd).
Only last October, Iraq’s oil revenues were holding at about $40 billion, excluding the cost of oil production.
This has prompted the Al Abadi government to announce strict austerity measures across institutions, including significant salary cuts for middle-class government employees. Protest rallies were held against delayed salaries, which later turned violent in some parts of Iraq, including the Kurdistan region.
Under these circumstances, one must question the legitimacy of the deal Baghdad has now offered to the Iraqi Kurds.
Earlier this week, Baghdad extended an offer to pay the salaries of the KRG’s public employees in return for a halting of unilateral oil exports by the Kurds. Both sides need this deal. The KRG is struggling to pay salaries, and protests are mounting—threatening the stability of what was not long ago the only peaceful and secure place in all of Iraq.
But most significantly, both Baghdad and the KRG need to ensure that the Kurdish Peshmerga fighting forces are being paid, because this is the key bulwark against further Islamic State (ISIS) advancements in the disputed territories of northern Iraq, around Mosul and oil-rich Kirkuk.
The Iraqi Kurds have accepted the deal, but they don’t really believe it will happen. Baghdad has consistently failed to make good on deals, and with its oil coffers depleted, it’s unclear how the central Iraqi government can afford this.
Al Abadi’s government inherited Iraq’s civil war-ravaged sluggish economy back in September 2014 and set out to try to consolidate the administration, which was bursting at the seams with a massive budget deficit, inherent bureaucratic corruption and the ongoing war burden with ISIS.
The current market turmoil has created a once in a generation opportunity for savvy energy investors. Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays. So with low oil prices depleting revenues, Baghdad finds itself in an uphill struggle to fund the war against ISIS, which continues to control over 10 percent of Iraq’s oil fields, including those in the Nineveh governorate. ISIS hasn’t gotten anywhere near the oil-rich area of Basra—where the serious exports are—but Basra has its own problems, which are being compounded under the multiple pressures.
All the talk of potential independence—founded on unilateral oil flows—for Iraqi Kurdistan has lent more impetus for calls for more control over oil wealth management and distribution in Basra. And Shi’ite tribal clashes are raging in Basra, far too close to the main oil installations, prompting Baghdad to divert security forces there—away from the ISIS battle.
The situation in Basra will likely intensify, too, with growing protests over the central government’s imposition of a higher customs tariff as of 18 January. Profit margins are threatened, and there will be a backlash in a province where autonomy sentiments are already running high.
The country has been losing up to 400,000 barrels of oil per day because of ISIS advances—even after recapturing a couple of oil refineries like Bajii in the Saladin Governorate, north of Baghdad, from ISIS in October last year.
All eyes are now on the giant Majnoon oil field in Basra, in the south, which is considered to be one the richest oil fields in the world, with an estimated 38 billion barrels of oil reserves. Majnoon has approximately 13 different oil and gas reservoirs, but this area, too, is now becoming a flashpoint of unrest and tribal clashes.
As such, the deal brought up earlier this week by Saudi Arabia, Russia, Venezuela and Qatar to freeze oil output to January levels will not likely see the light of day. It requires the same commitment by Iran—which is not keen—and Iraq, which is hesitant to join in.
In January, Iraqi production hit a record high, averaging 4.775 million barrels per day. January exports averaged 3.9 million bpd. But with oil prices averaging right now under or around $30 per barrel, these production figures won’t help. Iraqi oil is going for about $22 per barrel. That’s half of what it needs to be to meet budgetary requirements.
Nowhere are the stakes higher than in Iraq, and selling oil at half the price it would take to just break even could break this giant’s back. It certainly isn’t enough to stave off the unrest in Basra, not to mention the ISIS threat.
By Charles Kennedy Of Oilprice.com