April 22, 2015 / 1:56 PM / 5 years ago

Iraq's 2015 oil output seen flat, next year a challenge

DUBAI, April 22 (Reuters) - Iraq’s oil output in 2015 is likely to remain flat as Baghdad struggles to cope with a slump in crude prices that has slashed government revenue and forced the OPEC producer to renegotiate its service contracts with oil majors.

A boost in crude production next year will prove to be even more challenging if oil prices remain low and Baghdad fails to repay oil companies or approve field development plans on time, oil executives and market experts say.

Industry sources say approvals by Baghdad for tenders to build new crude-processing facilities have already been delayed for up to six months in some of the main southern fields.

Baghdad has asked foreign oil companies such as BP, Royal Dutch Shell, ExxonMobil, Eni and Lukoil to revise their oilfield development plans by considering postponing new projects and delaying already committed undertakings.

That could lead to slower production than initially anticipated, oil executives say.

“The priority now is to maintain steady production. You will not be seeing any incremental increases in 2015 or even 2016,” an oil executive working in southern Iraq told Reuters.

“From where? Certainly not from the south. Who will increase?”

Baghdad’s aim is to hit 4 million barrels per day (bpd) by the end of December, including crude output from the northern Kurdish region.

But an oil-export deal between Baghdad and Arbil has already proven to be shaky as flows from the Kurdish region are below the agreed level and payments have been delayed.

That means any rise in output would come from the giant southern fields being developed by the oil majors.

“Four million (bpd) is pie in the sky. That will never happen,” another executive said.

Foreign companies, already complaining of infrastructure constraints and a cumbersome approval process for field development, say they see little chance of a rise in Iraqi production this year or next.

Some have been asked to curtail output because of export restraints and crude-quality issues.

“I do not see 2016 as being a big leap (in production). I think it will be much more gradual,” said Michael Townshend, regional president of BP Middle East.

“Iraq is going through its own turmoil about how much budget it can spend because every dollar that we spend, we claim back and it has to fit in their budget as well,” he said at the Middle East Petroleum and Gas Conference this week in Abu Dhabi.

He said he sees steady output from the Rumaila oilfield, Iraq’s largest, at the current level of about 1.4 million bpd.

Iraq’s oil production now is around 3.3 million to 3.5 million bpd.

LOW OIL, LESS REVENUE

A near-halving in world oil prices since last summer means Baghdad is paying companies much more than it would under the production-sharing model followed elsewhere, and is seeking to renegotiate the terms of its contracts.

International firms operate in Iraq’s southern oilfields under service contracts, currently based on a fixed dollar fee for additional volumes produced - a formula that has seen Baghdad’s bills balloon just as its oil revenue collapses.

Lukoil, which operates West Qurna Two, was asked to curtail output by more than 50,000-75,000 bpd due to differences in crude quality from the country’s southern oilfields, said Gati al-Jebouri, senior vice president at Lukoil Overseas.

Current production capacity at West Qurna Two is over 400,000 bpd but actual output is less than 350,000 bpd.

Iraq has notified its exploration partners that it plans to start splitting its southern Basra oil production into two grades due to quality differences, and offer a heavier type of crude from May onwards.

Because West Qurna’s crude is heavier than that of the Rumaila and Zubair oilfields, the overall blend is a little heavier, Jebouri said at the Abu Dhabi event.

“To maintain the stability of the export blend at the moment, they are curtailing production at a number of fields, not only West Qurna,” Jebouri said.

“I do not see a fall in production in Iraq at all, but I see a slowing down in the growth of production in Iraq (in 2016-17), and that would be as a result of projects being postponed if Iraq’s budget cannot finance those projects.” (Editing by Dale Hudson)

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