Iraq has told foreign companies developing the country's southern oilfields that they may need to slash development spending next year because it has less money to pay them due to a slump in crude prices.

In a letter dated Sept. 6 sent to international oil companies and seen by Reuters, the oil ministry said "because of the drop in our oil sales revenues, the Iraqi government has sharply reduced the funds available to the Ministry of Oil."

"This will result in corresponding reductions of spending within the Ministry of Oil but will also reduce the funds available for the reimbursement of petroleum costs to our contractors," the letter said.

The slump in crude oil prices to around $46 a barrel from $115 in June last year has hit the government revenues of Opec's second biggest exporter, just as it faces an economic crisis triggered by surging expenditure to fund a military offensive against Islamic State militants.

International firms such as BP, Royal Dutch Shell , ExxonMobil, Eni and Lukoil operate in Iraq's southern oilfields under service contracts, whereby they are paid a fixed dollar fee for production.

The arrangement has put Baghdad's coffers under immense strain, as a dramatic drop in crude prices since last year has hammered the revenue it receives from selling oil.

The oil ministry asked the companies to submit 2016 work programmes and budgets by end of this month "which should reflect the much lower costs for steel, services and equipment that are prevailing in the current market."

"We do not expect this constraint to reduce production from the levels that were stipulated in 2015 work programmes and budgets," the letter added.

The oil ministry could not be immediately reached for comment.

Oil companies have already proposed millions of dollars of budget cuts for this year, a senior Iraqi oil ministry official told Reuters in March.

BP, for example, has agreed with Baghdad to reduce its 2015 spending on Rumaila, the country's largest oilfield, to $2.5 billion, from the initially planned $3.5 billion, an industry source told Reuters in May.

Foreign oil companies, already complaining of infrastructure constraints, say they see little chance of a rise in Iraqi production this year or even next after Baghdad's requests to cut spending.

"Nobody can invest if they are not paying. At the moment the way things are looking, production in the second half of 2016 is going to start falling," said one oil executive.

Morgan Stanley analysts said in a research note earlier this month they had cut sharply their forecasts for Iraqi oil production over the next five years and now expect Iraq to produce less oil, not more, to 2020.

"Our commodity team have lowered their Iraq oil supply forecasts and now expect Iraq oil production to average about 4.2 million barrels per day in 2016, broadly flat compared to Iraq's production levels in June and July. They also now forecast a slight decline in Iraqi production between 2016-2020 compared to previous forecast growth of over 500,000 bpd," the analysts wrote.

Iraq's inability to increase output as fast as it has previously announced could help ease the global oil glut more quickly than anticipated and thus support prices.

The Opec producer has reduced its ambitious oil output growth targets, saying it would raise production to 5.5-6.0 million bpd by 2020. – Reuters