Breakthrough On Oil Deal Between Baghdad and Kurdistan? Not Quite

On May 8 the Kurdistan Regional Government (KRG) announced that it had been given permission to export oil. Baghdad and Kurdistan almost agreed to the same deal in the winter of 2008 only to see it fall apart. This latest report was hailed as a breakthrough between the two sides that have bitterly argued over who has control over the country’s resources, but a closer inspection of the terms shows that selling Kurdish oil is still a long way off.

In early May the Iraqi central government seemingly authorized the KRG to export oil. This would begin on June 1 and come from the Tawke and Taq Taq fields. Those are the only two currently producing in Kurdistan, and are being developed by the Norwegian DNO and the Swiss-Canadian and Turkish joint venture Addax Petroleum-Genel Enerji. At first, the Oil Ministry denied the story, but later confirmed it. The Tawke field will be able to connect to the Kirkuk-Turkey pipeline, while Taq Taq would truck its oil to that line until an extension was built. In total, both were expected to add 70,000 barrels a day immediately. The KRG claims that they have the potential of 250,000 barrels down the road. All of the profits from these fields would be deposited in the Development Fund for Iraq, which is controlled by Baghdad. This comes just at a time when Iraq’s revenues have plummeted, and it is expecting a budget deficit that could grow to $25 billion unless it boosts oil production.

There’s one major hitch however. The Oil Ministry has said that the Kurds can export their oil, but that it will not pay the companies. That means the Kurdish government will have to. The KRG has signed production sharing agreements with the oil businesses, which generally pay between 18-20% of production. The Kurds receive all of their money from the central government, and have no independent means of garnering revenue, so they will be hard pressed to compensate DNO, Addax and Genel Enerji. The KRG is acting like this is a done deal, but those three oil companies issued a press release saying that they are not moving forward until the finances are straightened out.

Something very similar occurred in November 2008. Then the Oil Minister was trying to work out a deal over those same Taq Taq and Tawke fields to export. The negotiations began in June 2008, and seemed to be on the verge of coming to fruition that winter when things fell apart. Baghdad demanded that the Kurds void all their oil contracts that they signed after they passed their own oil law in August 2007, while the KRG wanted a share of the profits. The negotiations collapsed in December as a result.

In the on-going dispute between Baghdad and the KRG, it appears that the Kurds have been outplayed for the time being. The central government would love to add Kurdish oil production to their coffers, especially if they don’t have to pay anything. However this may be a short lived victory as the Oil Ministry is under intense pressure to either boost production immediately or give up its authority over petroleum because of the dire financial situation of the government. At a May oil and gas summit in Houston, Texas for example, oil executives, analysts, advisers, and the former Oil Minister all said that international companies would not invest in Iraq until a national oil law was passed, and the government offers better terms on its contracts. Iraq’s Oil Minister Hussein al-Shahristani was also given a petition signed by 140 members of Iraq’s parliament collected by the Oil and Gas Committee calling for him to appear and answer questions on why his policies have failed. Vice President Adel Abdul-Mahdi of the Supreme Council also publicly criticized Minister Shahristani for failing to increase output this month. Oil analysts also believe that while the Kurds might be frustrated in their effort to expand their oil industry in the short term, it is adding even more pressure on the central government to allow them to export. In April 2009 Iraq exported 1.82 million barrels a day. The Oil Minister’s goal is 2 million barrels. The KRG’s claim that they can add 250,000 barrels a day would achieve that amount.

The Kurds hope of exporting oil seems closer now than ever before. As long as oil prices remain low, there will be intense pressure on Baghdad to boost production. The Oil Ministry has proven incapable of doing that. As reported before, oil output has gone up and down since the invasion, and has never achieved the benchmarks set by the government. All sides, the Kurds, parliament, international oil companies, etc, have criticized Oil Minister Shahristani. He has the backing of Prime Minister Nouri al-Maliki however. With a massive budget deficit expected, all of this is coming to a head. Of course, this being Iraq, it’s just as likely that the issue will be deadlocked for months and months as find a resolution.

For more on Iraq’s oil industry click on the “oil” label below.

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