Iraq agrees with oil majors to cut output, but short of OPEC+ target

BASRA, Iraq/ BAGHDAD (Reuters) – Iraq is cutting its oil output by around 700,000 barrels per day (bpd), a third less than required under an OPEC+ supply pact, after it failed to persuade international oil majors operating its giant fields to agree to deeper reductions.

Iraq has agreed with oil majors operating its five giant southern oilfields to cut 300,000 bpd, Iraqi oil officials told Reuters on Wednesday. It will also lower production from other fields which it operates alone, bringing the total reductions to slightly below 700,000 bpd, they said.

The country’s oil output cut target under the OPEC+ supply reduction pact is 1.06 million bpd for May and June.

OPEC and its allies, a group known as OPEC+, agreed last month to slash output by 9.7 million bpd for May and June, a record production cut.

The agreement with the oil majors came after what Iraqi officials described as “a defensive position” by the international oil companies developing Iraq’s southern fields.

The refusal by the oil majors to cut more oil indicates the difficulties which are facing Iraq to fully comply with the OPEC+ crude supply reduction pact.

Two senior Iraqi officials who are part of the talks with foreign companies said they had to agree this deal to avoid paying the companies for the curtailed production.

“CRITICAL SITUATION”

Foreign oil companies, such as BP, Exxon Mobil Corp, Italy’s Eni and Russia’s Lukoil, who are developing Iraq’s giant southern oilfields operate under service contracts which pay them a fixed dollar fee for their output and are also compensated in crude cargoes.

This type of contract shields oil companies against sharp falls in oil prices. But it also means that with the OPEC cuts, Iraq ends up with less crude to sell bringing lower revenue to its state budget.

“Companies accepted to cut around 300,000 bpd which is considered nominal,” said a senior official at Iraq’s Basra Oil Company (BOC) who has direct knowledge of the discussions with the oil majors.

“We are in a critical situation where we cannot exert more pressure on the foreign firms and at the same time, we have to respect the OPEC agreement which is very difficult to fully implement” said another senior BOC official, who also asked not to be named.

Iraq has often lagged other OPEC+ producers in their previous deal to cut production and had not complied fully with its agreed output targets.

“We are optimistic that OPEC and other producers will understand Iraq’s situation when we meet next month,” the second BOC official said.

At least one European and two Asian customers will receive reduced oil supplies from Iraq in June, industry sources familiar with the matter said, as OPEC’s No.2 producer cuts some of its output.

European oil major Total’s allocation of Basra crude will be cut by over 25% in June and India’s Bharat Petroleum Corp will get about 25% less oil from Iraq.

South Korea’s GS Caltex was also told that it would receive less in June.