International oil firms have warned Iraq that projects to increase its crude output will be delayed if the government insists on drastic spending cuts this year, a senior Iraqi oil official said.

Oil companies helping Iraq develop its massive oil fields effectively perform a role similar to oil service firms in that they have to clear spending with the government each year. They are then repaid with crude oil produced from existing fields.

The arrangement worked smoothly when oil prices were above $100 a barrel but since crude has collapsed to $40 a barrel, Iraq has been struggling to find enough oil to repay the companies for their investment.

Iraq relies on oil for nearly all its revenues and is spending heavily to fight Islamic State in its northern and western provinces.

With its finances stretched, Iraq has asked foreign oil companies to rein in their budgets for developing the country's oil resources for a second year in a row but the two sides have failed so far to agree on spending levels.

The Iraqi government request was contained in Oil Ministry letters, seen by Reuters, to BP, Royal Dutch Shell , Exxon Mobil, Eni, Lukoil and Petronas.

"There has been no agreement so far with the foreign companies on the proposed budgets, and that is causing delays in all key oil field projects," said the Iraqi official, adding that the talks were continuing.

The government has also argued that prices for goods and services have fallen steeply during the market downturn so oil companies should be getting less.

Some companies, however, have complained that the proposed budgets may prevent them from continuing operations in Iraq, the official said, giving no details. He said BP, Shell and Lukoil have already objected to the proposed investment budgets.

Iraq's outgoing Oil Minister Adel Abdel Mahdi had said in February that the budget for foreign oil company development costs had been revised down to just over $9 billion in 2016 from $23 billion, following complex negotiations.

Among Opec members, Iraq's supply rose last year and output reached a record 4.775 million barrels per day in January 2016.

SPENDING AND PRODUCTION TARGETS

According to a summary of Iraq's proposals seen by Reuters:

* BP has been asked to cut its 2016 budget to $2.48 billion and target output of 1.4 million barrels per day (bpd) at the Rumaila field it operates. BP proposed a budget of $3.25 billion for 2015, though the amount agreed with Iraq may have differed.

* Lukoil is expected to cut spending to $1.26 billion and aim for a production of 400,000 bpd at the West Qurna 2 project. The Russian company proposed a 2015 budget of $2.1 billion.

* Eni should cut spending to $1.62 billion and aim for production of 351,000 bpd at the Zubair field. The Italian firm said in February it would cut spending by 20 percent across the board this year, without specifying the size of cuts in Iraq.

* ExxonMobil was asked to slash spending to $878 million and aim for output of 379,000 bpd at the West Qurna 1 project. Last year, the U.S. company insisted on spending $1.8 billion.

* Shell should cut spending to $855 million and aim for a 200,000 bpd from the Majnoon field. Last year, it proposed a budget of $1.5 billion.

* Petronas should reduce costs to $712 million and target production of 100,000 bpd from the Garraf field.

The oil companies in question either declined to comment or had no immediate comment. - Reuters