West Asia conflict: Iraq declares force majeure on foreign-operated oilfields, says report

Amid the escalating military conflict across the West Asia region, Iraq has declared force majeure on all oilfields developed by foreign oil companies due to disrupted navigation through the Strait of Hormuz, Reuters reported, citing officials aware of the decision. 

Hormuz is a chokepoint for around 20 per cent of global oil and liquefied gas supplies. The Iraqi oil ministry said in a letter dated March 17 that navigation via Hormuz has been severely impacted due to unprecedented military activity.

It added that most Iraqi crude exports transit the strategically vital waterway and that the storage capacity has reached its limits due to the disruption. 

What does force majeure involve?

The move invokes contract clauses for uncontrollable events such as the closure of the Strait of Hormuz due to the ongoing conflict and attacks on tankers. "The international partners were unable to nominate tankers to lift crude, preventing exports despite the state oil company SOMO being ready to load shipments," according to the statement.

It further said that the Iraqi oil ministry ordered a "full shutdown of production" at affected concession areas, with no compensation arising from the measure under contract terms. Iraq is also planning to conduct periodic reviews and urgent talks to maintain minimal operations. 

What happens to essential operations?

The ministry said that it has invited companies for urgent talks to agree on issues such as essential operations, costs and staffing under the force majeure conditions. 

Iraq has drastically cut crude production at the Basra Oil Company following a halt in southern port exports. According to a ministry statement on Friday, Iraq’s Oil Minister Hayan Abdel-Ghani said crude production at Basra Oil Company has been cut to 900,000 barrels per day (bpd) from 3.3 million bpd after exports from the country’s southern ports were halted.

To keep local operations running, “the produced quantities were being pumped to operate refineries,” the ministry added. Since the state depends on crude sales for over 90% of its income and nearly all public spending, this production freeze puts an immense strain on the nation's fragile finances.

How will this impact India? 

• Iraq has been one of India's top suppliers, accounting for around 18-21 per cent of its total crude imports. This implies a sudden loss of around 1 million barrels per day from a single country. 
• Around 40-55 per cent of India's crude imports, roughly 2.5-2.7 million barrels per day, normally flow through the Hormuz route from Iraq, Saudi Arabia, UAE and Kuwait. As of March, India has diversified its oil imports as 70 per cent of its crude imports now come via alternative routes, mainly Russia, the US, Africa, and Latin America. 
• Fuel and transport are likely to rise, pushing CPI up by 0.2-0.3 percentage points per $10 oil rise. 
• LPG is essentially vulnerable as India imports 60 per cent of its needs and 90 per cent of that passes through Hormuz.