Iraq is asking foreign oil companies to push forward on oil field development despite low oil prices, according to a letter sent Monday by oil minister Jabbar al-Luaibi to the oil companies.
The letter, dated August 22, was shared with S&P Global Platts by a senior international oil company official.
Titled "Targets of the Service Contracts," the letter acknowledged the impact that the low oil price environment over the past two years has created, including the requirement to reduce spending, but in essence conveyed a message that the more foreign oil companies produce, the more money the state will have with which to pay.
"In light of the current environment of the oil price and its forecast in the next year[s], we [the Ministry of Oil and contractors] should be prepared to live with the prevailing circumstances," the letter said. This includes to "modify and adjust, accordingly, the field enhanced redevelopment plans/final development plans."
The minister itemized three targets: increase production; utilize all associated gas; and commit to projects to support reservoir pressure.
All three require Iraqi approval of development plans and, more significantly, a budget allocation.
Iraq's technical service contracts, signed over four licensing rounds between 2009 and 2012, have a quick turnaround requirement for paying cost recovery. International oil companies have complained that delays in payments have impacted their confidence in putting up the cash needed to increase output and maintain reservoirs.
"We're not a bank," said one foreign oil company official, when asked about the letter, though the official said they are taking a wait-and-see approach to what this actually means for them.
In 2014 and 2015, the oil ministry pushed back on field development plans, eventually halving major works programs at the BP-led Rumaila and ExxonMobil's West Qurna-1 oil fields. Due to the drop in oil prices and increased cost in fighting the Islamic State militant group, the ministry also instructed the companies to continue only the work that is required to maintain production.
"That situation created less worldwide attractive investment environment for all the oil companies and much more difficult situation for the Iraqi government and the Ministry of Oil to pay, on time, the contractors' entitlements in respected of petroleum costs and remuneration fees, especially in the years 2014 and 2015," the letter said.
"Accordingly, the work programs and budgets for all the fields were cut to the minimum that could sustain the oil production at its current level, in addition to postpone certain projects which are essential in the field development."
Without any expectation that oil prices will rise, however, the oil ministry wants projects to get back on track -- the 12 million b/d combined production target at the time of contract signing has been walked back, including with some contract changes, and now a 6 million b/d target by 2020 is seen as overly ambitious.
"We will support your efforts in order that our targets will be realized," the letter said. It also committed the ministry to "assume full responsibility to solve or mitigate any problem, impediment and obstacle that may hinder the smooth implementation of the service contracts and achieving their targets to increase the level of crude oil production and utilizing the associated gas."
