BP has agreed with Iraq to slash this year's budget expenditure on development work at the giant Rumaila oilfield to $2.5 billion after Baghdad told oil majors a slump in oil prices and its fight against Islamic State had made payments difficult.

The cut in the budget was from an earlier proposed $3.5 billion for 2015, an industry source familiar with the matter said on Monday.

Oil companies have proposed millions of dollars of cuts in development spending in Iraq, a senior oil ministry official told Reuters in March.

In a series of letters sent to companies such as BP, Royal Dutch Shell, and Exxon Mobil since January, the oil ministry set out the need for change in response to "the rapid drastic decrease in crude oil prices".

In view of the fact that a significant proportion of development costs are passed on to Iraq, the oil ministry called on firms to revise their oilfield development plans by considering postponing new projects and delaying already committed projects as long as no additional costs were incurred.

Those cuts should be made against a backdrop of maintaining or even increasing current oil production levels, the ministry told the oil companies.

The cut in budget spending will have no impact on production from Rumaila southern oilfield, Iraq's largest. Output is expected to remain steady at around current levels of about 1.4 million barrels per day in 2015.  - Reuters