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With a battered economy, Iraq debates its contribution to OPEC+ oil cuts

DUBAI/BAGHDAD/LONDON (Reuters) - A debate within Iraq over whether it should ask to be exempt from OPEC+ oil supply cuts has resurfaced as low prices squeeze its finances, challenging a government struggling to tackle the destruction of years of war and rampant corruption.

FILE PHOTO: Flames are seen at a station in al-Zubair oilfield, near Basra, Iraq April 21, 2020. REUTERS/Essam Al-Sudan/File Photo

OPEC’s second-biggest producer, Iraq has failed in the past to fully comply with OPEC+ oil output reductions, pumping above its production targets since the pact was first signed in 2016 between OPEC and its allies led by Russia.

“Iraq always believed they were not properly treated in December 2016 when they were not exempted. As the economy continues to reel from low prices this issue keeps resurfacing,” said an OPEC source.

Iraq’s economy and oil sector were battered by years of wars, sanctions and a stubborn Islamist insurgency triggered by the U.S. invasion. Baghdad complained it had struggled to revive its stagnating oil industry, at a time where other OPEC members benefited and boosted their market share.

Iraq relies on oil to fund 97% of its state budget. Iraqi Finance Minister Ali Allawi told parliament on Wednesday that reforming Iraq’s economy would take five years of work and that state debt amounted to 80-90% of national product, while foreign debt was at $133 billion.

From May 1, the Organization of the Petroleum Exporting Countries and allies, a grouping known as OPEC+, made a record cut of 9.7 million bpd, or 10% of global output, after the coronaries destroyed a third of world demand. From Aug. 1, the cut tapered to 7.7 million bpd until December.

Iraqi politicians have criticised the pact which was signed by the previous caretaker government under which Baghdad had committed to a big cut in its output.

With oil prices currently trading at around $40 a barrel, opposition to the oil cuts is rising behind closed doors and talks of reviving old calls to review the size of the reductions have resurfaced, Iraq and OPEC sources told Reuters.

A senior Iraqi official with knowledge of the talks said there were differing views between the oil ministry and the prime minister’s office over whether to fully comply with the cuts or ask for an exemption for next year.

The oil ministry wants to ask for an exemption, the official, who declined to be identified, said, while officials in the prime minister’s office insist on compliance.

The disagreement revolves around Iraq’s current financial issues, the official added.

In May and June, Iraq had agreed to reduce its crude output by just over 1 million barrel per day, which would then ease to 849,000 bpd from July until end of the year.

Iraq has continued as a member of the deal but has overproduced above its quota.

But now Iraq needs to fully comply with the agreed output targets and even compensate for its previous overproduction in May-July by cutting deeper for the following months.

“There is strong opposition ... for their (Iraq’s) continued participation in the supply cuts,” the OPEC source said, adding that there has been unofficial talk about Baghdad’s need to seek an exemption from the oil cuts in 2021 but it was not clear whether Iraq would actually take that step or not.

In August, Iraq has reached its highest compliance in recent years but it has said it may need to extend the compensation period by two months.

Current Prime Minister Mustafa al-Kadhimi took office in May, becoming the third Iraqi head of government in a chaotic 10-week period that followed months of deadly protests in the country, which has been exhausted by decades of sanctions, war, corruption and economic challenges.

Iraq’s oil ministry spokesman said last week that Baghdad remained fully committed to the OPEC+ oil supply cut agreement, denying a media report that it was seeking an exemption from the reduction pact during the first quarter of 2021.

In June, Iraq has said it asked OPEC to take into consideration the members’ economic situation in sharing the burden of future oil cuts.

The World Bank estimates Iraq’s economy will shrink 9.7% in 2020 on back of lower oil prices and coronavirus, compared to 4.4% growth in 2019.

Writing by Rania El Gamal; editing by David Evans

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