The Kurdistan Regional Government (KRG) is built upon an oil
dependent economy just like the rest of Iraq. For years that appeared to pay
off, but disputes with the central government, and the collapse in petroleum
prices has put that all in jeopardy. The region has become dependent upon a
pipeline to Turkey that is constantly being bombed by Kurdish insurgents and
broken into by oil smugglers. It is also failing to meet its marks in pre-set
deals with oil traders. All together that is putting the regional government
deeper and deeper into debt, and several of its major producers are running
into financial difficulties as well.
Kurdish oil exports have been declining in 2016. In December
2015 the region had an average of 584,056 barrels per day. It then peaked at
601,811 barrels a day in January,
before going down to 350,000 bar/day in February,
and 327,371 in March.
The major cause of the large drop in February and March was that the Turkish
pipeline was bombed and then shut down by Ankara for a security operation in
the area where the line runs through against the Kurdistan Workers’ Party
(PKK). Kurdish oil could not flow to Turkey onto the international market until
March
12, after being down for three weeks.
When the pipeline came back on line the Kurds ran into
another issue, this time with the central government. The Oil Ministry ordered
the North Oil Company (NOC) to stop providing oil for Kurdistan. The NOC runs
several oil fields in Kirkuk, which had been supplying the Turkish pipeline
since the summer
of 2015. Oil Minister Adel Abdul Mahdi said Baghdad was withholding oil to
pressure the KRG into budget talks after an agreement broke down last year.
This was a major hit to the Kurds, because their fields cannot make up for this
loss, and that will put them into more debt with the contracts they signed.
The KRG’s Natural Resource Ministry (MNR) has signed pre-set
export deals with oil traders. The Kurds have to export a set amount of
petroleum each month to be paid by the companies. They can only meet that quota
with oil from the NOC. Not only that, but if they do not meet their mark they
owe money to the traders. For example, in January the KRG was supposed to
export an average of 650,000 barrels a day, and received $650 million. Because
it did not meet its requirements it owed
around $250 million to the companies. Kurdistan will not be able to get out of
these debts now that Baghdad has cut off roughly 25% of its exports.
The decline in exports and growing debt is putting the
regional government into a financial tailspin. In January it earned $650
million, then $303 million in February,
and then $289.5 million in March.
The KRG needs roughly $730
million a month to cover its bills. $424 million is necessary just to pay
public workers and the Peshmerga. The KRG is now roughly four months behind
in paying its employees, and have cut their wages 15-75% on top of that. This
has led to constant protests by civil servants for months now.
The final casualty of this collapse is the international oil
companies (IOCs) operating in Kurdistan. The KRG owes
those businesses around $3 billion in payments. Starting in September
2015 it started making monthly appropriations for the corporations. That has
led the IOCs to reduce their investments in the KRG and to a reduction in
output. The Tawkw field for example run by DNO has seen a drop in output from
180,000 barrels a day in 2015 to 120,000 barrels a day in February 2016. That’s
only half of the companies’ problems however. McDaniels and Associates cut the estimated
reserves of Kurdistan from 683 million barrels to 356 million. Oil
companies claim those reserves so that has been another hit to the IOCs. They
like the KRG are now in a financial mess. Genel Energy
only has about one third of the reserves it initially estimated for the Taq Taq
field, owes about $250 million to its creditors, and has seen a drop in its stock
prices as a result. Gulf
Keystone reported a $135 million loss in 2015, after a $248 million loss
the year before. Many of these companies were originally planning on making an
initial investment in Kurdistan, start producing oil and then sell their
holdings to larger companies. They were also hoping to profit from the
Turkey-Kurdistan oil pipeline when it finally opened. All together they are in
much of the same state as Kurdistan with declining revenues and growing debt.
Kurdistan used to promote itself as the “other Iraq.” It was
safe, it had a business friendly environment, and had no qualms about foreign
private investment. It pushed for greater economic independence through
petroleum exports topped off by the building of the pipeline to Turkey. That
brought the wrath of the government of Prime Minister Nouri al-Maliki who cut
off budget payments to the region. His successor Premier Haidar Abadi worked
out a temporary reprieve, but that broke down when neither side met their
obligations. That led to the deals with the oil traders. There were two major
flaws. The over supply of oil has completely undercut prices. Just as important
the Kurds are completely dependent upon the Turkish oil pipeline to deliver the
amount of petroleum necessary to meet its obligations, and that line is
constantly being bombed and tapped into by oil smugglers causing it to
constantly shut down. All together that has put the region down an uncertain
path.
SOURCES
Coles, Isabel,
“UPDATE 3-Iraq’s KRG to pay oil companies according to contracts in 2016,”
Reuters, 2/1/16
eKurd, “Genel Energy
reveals new downgrade on Iraqi Kurdistan oil reserves,” 3/19/16
- “Gulf Keystone says
still owed $178 mln by Iraqi Kurdistan for oil exports,” 3/17/16
- “Iraqi Kurdistan
News in brief – January 11, 2016,” 1/11/16
- “Oil exports from
Iraqi Kurdistan to Turkey slip in March: KRG,” 4/4/16
- “Sun sets on the
great Iraqi Kurdistan oil dream,” 3/20/16
Kurdistan Regional
Government, “KRG Publishes Monthly Export Report for January 2016,” 2/5/16
Lando, ben, Osgood,
Patrick, Van Heuvelen, Ben, “March exports strong despite disruptions,” Iraqi
Oil Report, 4/1/16
Osgood, Patrick,
“Kurdistan oil revenue collapses,” Iraq Oil Report, 3/8/16
Osgood, Patrick,
al-Najar, Kamaran, and Lando, Ben, “Kirkuk crude shut in despite export
pipeline restart,” Iraq Oil Report, 3/14/16
Osgood, Patrick, Van
Heuvelen, Ben and al-Najar, Kamaran, “Baghdad pressures KRG with Kirkuk crude
export cut,” Iraq Oil Report, 3/17/16
Rudaw, “KRG exported
10 million barrels of oil in March, earning $557 million,” 4/4/16
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