BP says oil firms submit Iraq contract changes as output slows

ANTHONY DIPAOLA

ABU DHABI (Bloomberg) -- International oil companies submitted proposals to Iraq to change their production contracts in the face of constraints on growth in the country’s output next year after the oil ministry asked for spending cuts amid low crude prices, according to BP Plc.

The companies have submitted proposals to the government about how the country could change their contracts from service agreements to a model closer to production sharing agreements, Michael Townshend, the company’s regional president for the Middle East, told reporters in Abu Dhabi on Tuesday. Companies are now paid a fee, either in cash or with oil barrels, based on meeting output targets, while production sharing agreements give companies a direct stake in crude pumped.

BP operates Rumaila, Iraq’s largest deposit. Production from the southern field will average between 1.3 MMbopd and 1.35 MMbopd this year, while output next year depends on spending approved by the government, which has asked foreign companies to decrease their 2016 budgets due to the drop in crude prices, Townshend said. Total capital expenditure on the field will be about $2.5 billion this year, with BP responsible for about half of that, he said.

“It’s difficult to see a massive ramp up next year” in Iraqi crude production, Townshend said. Talks about a budget for next year at the Rumaila oil field are “a work in progress.”

The slump in global crude prices by more than 40% in the past year has cut the Iraqi government’s income as it battles Islamic extremists that have seized parts of the country. That risks sidetracking Iraq’s efforts, after decades of conflict and sanctions that choked investment, to boost production with the help of international companies.

2016 Budgets

The government sees opportunity to reach agreement with foreign oil companies on plans to decrease their 2016 budgets, Oil Minister Adel Abdul Mahdi said Oct. 28 in Amarah, Iraq.

Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 4.3 MMbopd in October, according to data compiled by Bloomberg. The country pumped about 2.4 MMbopd by the end of 2010 and plans to boost capacity to 6 MMbopd in 2018.

BP has been taking both Iraq’s Basrah Light and Basrah Heavy crude grades produced at its southern fields, Townshend said. The heavy grade is lower quality and harder to refine.

“It’s less easy to place in the market,” Townshend said. “It tends to be in the Far East but that’s fairly saturated so it does run at quite a substantial discount.”