Iraqi foreign oil payments threatened

BP has received its first payment for boosting oil output from Iraq's largest oilfield, amid labour unrest that could flare into a backlash against foreign oil companies if not handled carefully.

Rumaila oilfield in Basra where Iraqi state oil workers called a 'boycott day'. Atef Hassan / Reuters

BP has lifted its first cargo of Iraqi crude as payment in kind for boosting output at the country's biggest oilfield.

But by reaching that milestone, it may have triggered a popular backlash against foreign oil companies in Iraq.

Last Saturday, as the tanker Oceanis sailed from the Basra oil terminal carrying 2 million barrels of crude for BP worth more than US$200 million (Dh734.6m), Iraqi state oil workers threatened rotating wildcat strikes in a country-wide dispute over pay. The labour action spread on Tuesday to the Rumaila oilfield, where BP and China National Petroleum Corporation (CNPC) have been working to raise crude production under a long-term technical services contract.

Late last year the partners reached their initial target of a 10 per cent rise in crude production, becoming eligible to receive payments from Baghdad for the rise in output and recover their development costs.

But the state employees, aggrieved about receiving less pay than colleagues working for international oil companies, called a "boycott day" just as BP was to receive its first payment, and tried to stop foreign workers from entering the Rumaila site.

An internal union memo also directed members to block access to the Zubair and Majnoon oilfields, being developed by groups led respectively by Italy's Eni and Royal Dutch Shell.

The strike was averted through negotiations but a showdown may have been only postponed.

Unless they are offered higher wages, Iraqi state workers are likely to grow more resentful of the better-paid foreigners.

But Baghdad would be hard pressed to provide those pay rises.

"As vast and virtually simultaneous work programmes get under way at Iraq's main oilfields, the payments [to foreign oil companies] will now significantly start eating into Iraq's budgeted oil export revenue," said Samuel Ciszuk, the senior Middle East energy analyst at IHS Global Insight.

"Whether the oil ministry will be able to fund imminent pay increases is doubtful.

"So far, the Iraqi government response to the oil unions has been to call any action illegal and threaten severe security crackdowns and prison terms for those involved."

The "suddenly rather dense-looking oil cargo payment schedule" has materialised as Baghdad continues to struggle to meet huge reconstruction needs from an overstretched budget, Mr Ciszuk said.

Oil export income to the state would flow in at a much slower rate, "a factor that might create a political backlash if not managed carefully", he said.

Making the situation more inflammatory, Iraqi oil contracts lack the maximum limits to annual cost recovery that are found in contracts in other countries.

The easiest way for the government to handle the situation would be to cut Iraq's aggressive 2017 oil production target from 12 million barrels per day to something more realistic, Mr Ciszuk suggested.

"The country can ill afford the luxury of maintaining a swing production capacity akin to Saudi Arabia's before being properly rebuilt," he said.

The alternative - a political backlash against government payments to international oil companies - would create "unpredictable consequences", Mr Ciszuk warned.

BP and CNPC are owed about US$1 billion each for the oil they have pumped this year.

A second tanker shipment on behalf of CNPC is expected shortly.