Interim oil deal won't fully resolve Baghdad-Erbil dispute

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Although the Kurdistan Regional Government and the Iraqi federal government recently reached an interim oil agreement, many contentious topics remain unresolved.

Baghdad and Erbil reached an oil agreement Dec. 2 based on the adoption of parallel interim steps. As part of this agreement, each side offered what it could to gain the confidence of the other and to reach solutions to the contentious oil issue and the debate over the Iraqi Kurdistan Region's budget. This came in lieu of a comprehensive and final agreement that would serve as a solution to all outstanding problems, meaning that no solution was reached, as has been the case in the past.

The recent governmental change following the latest parliamentary elections helped in reaching an agreement, as did the appointment of economist Adel Abdul-Mahdi as oil minister. The agreement was also motivated by the decline in oil prices, and the two sides' need for additional and stabilized production to offset financial losses. Furthermore, the US government, through its talks with the two parties, helped Baghdad and Erbil reach a formula to begin solving this problem. As of the writing of this article, the full text of the agreement has yet to be published, sparking a heated debate about its contents. It would be best if the full text were released soon to avoid any confusion surrounding it.

The agreement, which will go into effect early next year, attempts to reduce and limit differences between the two sides. The Kurdistan Regional Government (KRG) previously complained that the government of [former Prime Minister] Nouri al-Maliki withheld oil revenues owed to it for more than a year. According to the Iraqi constitution, the region is entitled to about 17% of net oil revenue. The cessation of payments came as a punitive measure from Maliki in response to the KRG exporting oil without the Baghdad government's consent. They have now come to an agreement on the export of oil from the region, in addition to the issue of Kirkuk's oil.

The agreement adopted two key principles: The country's oil is the property of all the Iraqi people, and oil exports are a sovereign issue under the jurisdiction of the federal government. In light of this, the KRG pledged to provide the government-run State Organization for Marketing of Oil with 250,000 barrels of oil daily to be exported through the Turkish port of Ceyhan, beginning Jan. 1, 2015. The KRG also agreed to "facilitate" the export of 300,000 barrels per day of Kirkuk's oil via the State Organization for Marketing of Oil. It is expected that the Iraqi government will receive about $1 billion per month in exchange for the export of this amount (550,000 barrels per day), based on oil prices ranging from $65-75 per barrel. The KRG agreed to provide Baghdad with about 150,000 barrels per day of the Iraqi Kurdistan Region's oil during December 2014, i.e., a month before the implementation of the agreement.

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The Iraqi export pipeline system (Kirkuk-Ceyhan) consists of two pipelines inside Iraq and Turkey with a design capacity of 1.6 million barrels per day. However, the system's capacity has declined in recent years to 1.1 million barrels per day due to multiple bombings and a lack of maintenance. One of the two lines completely stopped working within Iraq about two years ago. Meanwhile, the second line remained operational with a capacity of 550,000 barrels per day, yet had only been pumping 300,000 barrels per day. This line, too, stopped working in the first quarter of 2014. The challenge now facing the Iraqi government is that the pipeline system stretching along the Tigris river from Beiji to the Turkish border is now in an area under the control of the Islamic State (IS). This means that it cannot be used to export Kirkuk's oil, so it is now necessary to "resort to" pumping 300,000 barrels per day through the region's new pipeline.

Baghdad has pledged to transfer $500 million to the KRG this month to support the region's budget, and has agreed to make monthly payments to the regional government next year amounting to 17% of the country's net oil income. It has also vowed to fund some of the peshmerga's expenses. Moreover, it is expected that the KRG will transfer to Baghdad any production that goes beyond the rate of 250,000 barrels per day. This means it will transfer 150,000 additional barrels per day during the first half of 2015, increasing to about 250,000 barrels per day in the second half of next year. The KRG will distill nearly 120,000 barrels per day in its local refineries. After meeting local demand in the region, Erbil will export its surplus petrol supplies and use the revenue from these exports to pay dues to foreign companies operating in its oil fields.

Since the agreement is only interim, and because the Iraqi oil industry has suffered greatly in the past few years due to the adoption of policies that led to the continuation of conflicts without attempts to solve them, there are many challenges remaining for the new Oil Ministry. These challenges include the issue of [Baghdad] boycotting international companies that work in the Iraqi Kurdistan Region and banning them from operating in the rest of Iraq, especially after it became evident that expected production figures are less than previously announced. It was expected that Iraq's production would reach 12.5 million barrels per day by 2017, yet current production stands at only around 3 million barrels per day. New forecasts indicate that production will be about 6 million barrels per day in 2020. This means that huge investments are needed from international companies — something that is not easy to obtain in light of the declining prices.

There is also the problem of pumping water into the fields to maintain their productivity, as well as the fight against corruption, the Kirkuk issue and the revival of the national oil company. This is in addition to the formation of an oil council of top officials, experts and representatives from oil-producing regions to formulate and coordinate oil policy. Such a council is needed to avoid the monopolization of oil-related decisions, as happened in the past, which brought the country heavy losses.

These are all serious challenges for the oil sector, but there are even greater security challenges facing the country. There is the increasing risk from the role of militias in the country, as well as open Iranian military interference met with a return of US military influence. The emergence of these two phenomena are justified by the fight against IS. But the question remains: What happens post-IS, especially in light of the flow of arms and the proliferation of these armed forces on the ground, amid the continued absence of a strong Iraqi army? These are elements for a future internal war that would have a devastating impact on the country's economy, including the oil sector.

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Found in: oil, kurdistan regional government, kurdistan region, islamic state, iraq, economy, baghdad
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