Kurdistan Region challenges Baghdad with oil exports

The author sheds light on the status of KRG oil contracts, reserves, potential future developments and the difficulties in marketing its oil.

al-monitor The SCF Altai tanker (background) docks near Israel's Ashkelon port, as men sit in a fishing boat in the Mediterranean sea June 20, 2014. Iraqi Kurdistan looked set to unload in Israel a first cargo of disputed crude oil from its new pipeline after weeks of seeking an outlet as Iraq's central government has threatened legal action against any buyer. Photo by REUTERS/Amir Cohen.

Topics covered

turkey, pipeline, oil, kurdistan regional government, kirkuk, iraqi kurdistan, erbil, constitution

Jul 20, 2014

Iraqi Kurdistan continues to export oil to the Turkish port of Ceyhan, in another move played in its game of chess with Baghdad. Just like in any real game of chess, the moves undertaken by nations in their virtual games can be successful or miscalculated to the point of being deadly. Here, we find ourselves in Iraq, where important oil export revenues titillate the autonomous province’s desire to completely break away from Baghdad and play in the game of nations, to the point of pushing toward the partitioning of Iraq — an outcome that can still be avoided. In that context, is it possible for the political powers, which have ruled the country since 2003 and brought Iraq to this dire situation, to find a solution not predicated on civil war or partitioning?

Oil plays an important role in determining the politics of the region. It is also widely known that Iraqi Kurdistan has succeeded in establishing an important oil industry over the past 10 years. Furthermore, international oil companies continue to flock in droves to the region as the Kurdish oil sector develops in scope, at a time when indications suggest that future reserves might be greatly expanded if development continues.

As proof thereof, the province’s government has signed around 50 production-sharing agreements with various oil companies. It started with smaller companies, then with international behemoths such as Exxon, Total, Chevron and Gazprom. The relatively small Turkish company Genel Energy tops the list of companies operating in the province, insofar as the quantity of proven reserves is concerned (approximately 1.6 billion barrels), thanks to its strong ties with Turkish officials and the fact that it is run by former British Petroleum CEO Tony Hayward.

Overall, Iraqi Kurdistan’s proven reserves are estimated to total 12 billion barrels of oil and 25 trillion cubic feet of gas. In addition, unproven reserves are expected to top 45 billion barrels of oil and approximately 100-200 trillion cubic feet of gas. Iraq’s oil reserves as a whole are estimated to total 150 billion barrels (including the Kirkuk oil field’s 25 billion barrel reserve).

Iraq today produces around 3 million barrels of oil per day (ranking after Saudi Arabia in OPEC). Production is expected to be between 6 and 9 million barrels per day by 2020. By comparison, Iraqi Kurdistan produces around 200,000 barrels per day, a quantity that officials claim can be increased to approximately 1 million barrels per day in 2015 and around 2 million barrels per day by 2020.

The importance of the province’s oil lies in the additional supply that it provides to world markets and the investment opportunities that it offers to international companies. It should be noted here that a large number of oil companies with operations in Iraqi Kurdistan have on their boards of directors retired US ambassadors and military officers who had served in Iraq since 2003.

Iraq has faced many problems and disagreements since its occupation in 2003. Among these was assigning responsibility for the development of the oil sector, with all attempts to adopt a law organizing the sector failing to pass since 2007. Constitutional articles, specifically those pertaining to the oil sector, were vaguely worded and open for interpretation, making agreement on them impossible to achieve. In that context, Baghdad considered that ownership of oil reserves belonged to the people as a whole, and not to any one oil-producing province. It was also of the opinion that the only institution representing the people was parliament, and that the development of production, negotiations and agreements with international companies were the purview of federal institutions alone.

Iraqi Kurdistan’s government objected to this interpretation of Article 112 of the Iraqi Constitution. Erbil insisted (as per the first part of Article 112) that the constitution only gave federal authorities control over oil fields discovered prior to 2006 (before the oil law was drafted). The fields that have been discovered recently (after 2006), and which constitute the majority of fields discovered in the province, are to be developed by the provinces themselves.

The provincial government did not content itself with this legal disagreement. Erbil quickly and unprecedentedly began entering into contracts with approximately 50 international oil companies, without the knowledge or approval of the federal government. It then asked Baghdad to pay those companies hundreds of millions of dollars for expenses stipulated to in the contracts. Baghdad objected to paying for contracts of which it had no prior knowledge. The disagreement formed the nucleus of a major crisis for the operating companies themselves, the majority of which were small independent enterprises. As a result, these companies began putting pressure on the provincial government to push Baghdad into paying the contractual obligations because they needed liquidity to maintain their operations.

Disagreements gradually escalated as the provincial government refused to export pledged oil through Iraqi state institutions. As a result, Baghdad suspended disbursement of its share of the country’s overall oil subsidies, amounting to 17% thereof. This left the provincial government unable to pay its employees’ salaries and retirement pensions. It also forced it to postpone payments to dozens of engineering firms operating in the province. The disagreement intensified when the provincial government insisted on building a pipeline that directly connects the province’s fields with the Turkish-Iraqi pipeline system in Turkey. This means that the pipeline only passed through Iraqi Kurdistan and ran directly to Turkey, thus avoiding any supervision by the federal government.

The daily Platts Energy Bulletin indicated that, according to available information up to June 24, the Kurdish provincial government was earning about $100 million for every million barrels of crude oil exported through Turkey. This meant that it was selling the oil at a 9% discount compared to oil of similar quality. Specifically, it was selling barrels at a cost of $101 per barrel, while the cost of oils similar in characteristics (Russian Urals crude oil) sold for $110 per barrel. In addition, the provincial government was paying a $1-per-barrel transit fee to use the Turkish pipeline.

Refineries in countries of the Mediterranean basin — such as Malta, Morocco and Italy — declined to buy oil from Iraqi Kurdistan because Baghdad began taking legal action against the exportation of oil. Furthermore, a quantity of oil was offloaded at the Israeli port of Ashkelon. However, in light of the secrecy policy regarding the destination of exports, it remains unclear whether the deal with Israel was an on-the-spot, one-off deal, a long-term deal, or one where the Israeli company that received the oil intended to resell it in other markets or refine it locally.

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More from  Walid Khoudouri