Iraq is building up debts to the oil companies developing its giant fields, industry sources said, a further sign of how the oil-price drop is putting a squeeze on revenues in Opec's second-largest producer.

Western oil companies including Royal Dutch Shell, BP and Exxon Mobil are working at Iraq's southern oilfields under service contracts, which are currently based on a fixed dollar fee for additional volumes produced.

As a result of the halving of oil prices to around $56 a barrel from $115 in June, the amount of crude needed to pay the companies has roughly doubled - reducing revenue to a government fighting an Islamic State insurgency.

"The Iraqis have a problem. The number of barrels they have to give to the companies as service fees has risen two-fold because the oil price has fallen two-fold. So Iraq simply has less barrels for themselves," said a source with an oil major with exploration projects in Iraq.

As a result, sources say, Iraq is not providing the service companies with the repayment volumes they are due and is instead sometimes assigning more cargoes to companies who purchase its crude for cash under term contracts in monthly export schedules.

The current situation contrasts sharply with previous years when Iraqi service contracts were seen as a thin reward for the huge work the companies were doing in Iraq. But their appeal increased with the drop in oil prices.

"They try and strike a balance," said a source with a company that deals in Iraqi crude. "Some months we see a lot of term holders, in other months it is mostly producers. In April, it's swung the way of term holders and some of the producers are complaining."

The source with the oil major said the barrels it had received in February covered only half the dollar amount it was due under its service contract and, unless things changed, it would have to revise timeframes and targets of its exploration program due to the slower payback.

"The situation is very tense with the upstream companies," said a second source with another company which deals in Iraqi crude. "Their allocation is lower and lower when it should be higher and higher. It's a quagmire for the budget."

Government officials in Iraq could not immediately be reached on Wednesday for comment.

But the government expressed concern earlier this month, when Oil Minister Adel Abdel Mehdi said it was reviewing its deals with the companies because the financial cost of the service contracts was too high to bear.

Under current contract terms, Abdel Mehdi said, Iraq's payments due to international companies in 2015 would reach $18 billion. He gave no figure for 2014, and the contract terms are not made public.

Exporting more crude would help, but Basra Oil Terminal and other outlets in southern Iraq that receive the crude produced by the companies are currently not able to handle much more than 2.7 million barrels per day (bpd), sources say, leaving little prospect of ramping up exports in the short term.

So Iraq is also offering companies cargoes of Kirkuk crude produced in its northern oilfields and exported via Ceyhan in Turkey, instead of the Basra Light crude they are producing in the south, as payment, two industry sources said.

Kirkuk exports, offline for much of 2014, resumed in December following a deal between Baghdad and the Kurdistan Regional Government. The Kirkuk-for-Basra swap is not universally welcomed by buyers as Kirkuk is a less popular crude grade than Basra - but at least it is oil.

"Instead of getting just Basra, I've seen the upstream companies now getting Kirkuk as well," said the first source with a firm that trades Iraqi crude. "They are being kind of forced, as there's not enough Basra to go around, to take Kirkuk instead." – Reuters