As was promised last week, it is important to continue the story on the woes of Iraq oil. While the haemorrhage in the market continues and prices are at their lowest in 11 years, with Brent at $37.19 (Dh136) a barrel, the Iraq Parliament has just approved the 2016 budget based on $45 a barrel and without consideration to the state of the market.

It should be clear that forecasts point to further declines as the surplus in supplies persist. This compounds the risk of widening the budget deficit, which is already estimated to be $20 billion.

The Iraq Oil Report (IOR) recently stated, “Even if Iraq meets its lofty oil revenue projections of about $59 billion, the government still anticipates needing to raise another $10 billion from other sources like taxation, leaving a $20 billion deficit in need of financing.”

My estimate of current average Iraqi crude price is that it is not more than $30 a barrel and if this price is maintained over 2016, the deficit is likely to be close to $40 billion on the basis of exports of 3.6 million barrels a day (mbd), including 3.05mbd from the south and 0.55mbd “to be facilitated by the autonomous Kurdistan Regional Government under a cooperative framework that has been defunct since June”, according to IOR.

It is not clear how much in the Ministry of Oil budget is allocated to international oil companies (IOC) as compensation for costs and remuneration, but the ministry is relying on bonds of $12 billion to be issued by the central bank to finance some of the dues of the companies. A similar amount was paid in 2015 to cover 2014 dues.

In a recent statement, Oil Minister Adel Abdul Mahdi said Iraq made $340 billion as revenues from the licensing rounds fields awarded to IOCs and paid the companies only $34 billion of the proceeds. He was citing these numbers in praise of the licensing rounds and in answer to increased criticism.

But let us take the minister at his numbers, where as a result of the licensing rounds Iraq’s oil production increased to 1.5mbd, and see if this is worth $35 billion.

Over two rounds of the Arab Energy Conference in 1998 and 2001, the Iraqi presentation contained an estimate of $2.5 billion to revitalise its fields and invest an additional $15 billion to reach the capacity of 6mbd in the south over 10 years once the then imposed UN sanctions were lifted. Those numbers were given by top specialists in the ministry at the time. A lot of water has passed under the bridge since then and worldwide upstream development costs have probably doubled driven by economic development and the increase in oil prices.

Nevertheless, the current cost of developing Iraqi fields is by far beyond expectation and no one knows how much Iraq will pay over and above the $35 billion by the time capacity reaches 6-mbd. It may have to allocate a large portion of its production to finance the lavish expenditure of the IOCs.

It is not difficult to see that if oil prices drop further Iraq may not benefit from any increase in production as that may not be sufficient to pay the IOCs. Something has to give and a substantial review of the policy is in order, especially in discarding the views that still call for a production target of 9mbd by 2020. No wonder the Economist said that “the inflated costs that producing a barrel of Iraqi oil costs twice as much as in Saudi Arabia” and probably more.

The utilisation of gas in the first bid round is left to the ministry, which failed to make the progress needed to salvage the important resource. In the second bid round, the development of gas is part of the contract with IOCs, but nothing has been done so far and no limits are set as to how long the companies can go on flaring gas.

In October, and according to the ministry website, the flared gas was 1,499 million cubic feet a day (42.44 million cubic meters a day). At this rate the annual flaring is likely to reach 15.5 billion cubic meters — or the equivalent of approximately 250,000 barrels a day of oil.

In a November article, the Economist referred to Basra as “the blighted city” where the militias are “probably the province’s largest employer”. And a citizen was quoted as saying: “We provide the oil that powers the world, but live in darkness” and “local politicians argue that the south poses no less a threat” with respect to Daesh.

Something has to give.