Wednesday, April 11, 2012

Kurds May Be Fighting Losing Battle With Iraq’s Central Government Over Oil Exports

For the second time in three years, the Kurdistan Regional Government (KRG) has halted its oil exports. Once again, the issue is the central government not paying the companies producing petroleum in the north. The matter is attracting all of the usual hyperbole with Iraqi politicians trading accusations against each other. The problem for the Kurds is that their actions will only hurt them. Oil production is picking up in the south, and with a new terminal opened in Basra, so are exports. That means Baghdad doesn’t need the Kurdish contribution as much as it once did. A compromise will likely occur, but it might take time until the war of words between the two sides calms down.

The latest controversy between the Kurds and Baghdad over oil started in March 2012. On March 26, the Kurdish authorities said they would reduce their exports. On April 1, they stopped them completely. In June 2011, Kurdistan hit 175,000 barrels a day in foreign sales, but output had been going down since then. The reason for the halt was a demand that the central government pay the companies that were pumping oil in the north. The Kurdistan Regional Government (KRG) had been complaining about the lack of compensation since March 15. The KRG’s Natural Resource Ministry claimed that the Oil Ministry owed them for 10 months worth of revenue, roughly $1.5 billion. The Resource Ministry said that Kurdistan had not seen any money since May 2011, and only gotten two payments of $514 million in total. On March 28, Finance Minister Rafi Issawi responded that $558 million would be released to companies operating in northern Iraq, which would come from the 2012 budget. Issawi noted that the funds would have to be audited first. The Kurds were obviously not satisfied with that, and decided to end its exports in protest. This was just the latest spat between the two over petroleum. It immediately led to a barrage of attacks between them.
Deputy Premier Shahristani with Oil Minister Luaibi in the background. Shahristani has been the most vociferous opponent of the Kurds oil policy (Reuters) 
The regional and central government have a series of long-standing disputes over the country’s natural resources, some of which came out after the Kurds decided to stop their exports. The Oil Ministry complained that the KRG was not meeting its quota set in the 2012 budget, which calls for 175,000 barrels a day in exports. The harshest comments emanating from Baghdad came from Deputy Premier Hussein Shahristani who is in charge of energy policy. He accused the Kurds of smuggling oil to Iran and Turkey, producing $3.4 billion worth of petroleum that was never officially exported, and called Kurdish oil contracts illegal. Shahristani has always been opposed to the Kurds’ independent energy program, arguing that Baghdad should be in control of all of the oil and gas in the country. He has continuously made the most vitriolic comments about the KRG as a result. His charges of smuggling and illegal contracts have all been made in the past whenever problems erupt between the two.

Members of the Kurdish Coalition and the oil committee in parliament tried to step in and mediate. A lawmaker from the bloc said that the KRG should restart its exports, warning that the matter could turn public opinion against the Kurds. He said that the matter needed to be dealt with in another way instead of an escalating series of tit for tat maneuvers. At the same time, he warned Baghdad that Kurdistan’s patience was running out, and criticized Shahristani’s comments. A member of the oil committee said that one problem was that the Kurdish Natural Resource Ministry is not transparent, and does not provide a full accounting of its oil production and exports to the central government. At the same time, it was hoping that it could be a middleman in the argument between the two sides. These were helpful comments at a time when politicians in Baghdad and Kurdistan were escalating their war of words. Whether they have any influence is yet to be seen.

2012’s breakdown in relations over petroleum harkens back to a similar situation that occurred in 2009. In May of that year, the central and regional governments worked out a deal to allow the Kurds to export oil for the first time. The Oil Ministry controls the country’s pipelines, and therefore the KRG must get its permission to ship any of its products to other countries. In just a few months, exports were halted when Natural Resource Minister Ashti Hawrami was caught up in an insider trading scandal involving Norway’s DNO, one of the companies that produces oil in Kurdistan. In October, all exports were halted with the Kurds complaining that Baghdad was not paying any of the energy corporations operating there. In May 2010, another deal was struck, this time as part of the political agreement for the Kurds to support Prime Minister Nouri al-Maliki’s second term in office after parliamentary elections were conducted in March. The Kurds were to export 100,000 barrels a day, and that amount was set in the 2011 budget. The KRG would be allowed to sell its oil once again using the northern pipeline to Turkey, but Baghdad was only going to pay the oil firms for their costs, not profits. In February 2011, exports started once again for Kurdistan, which lasted fourteen months until the latest controversy erupted. The two situations closely mirror each other. The Kurds are complaining that the central government is not compensating oil companies once again.

The Kurdistan Regional Government finds itself between a rock and a hard place on the matter. At this time, oil production and exports are increasing in the south, having hit a post-Saddam high in March 2012. New terminals are coming on line in Basra province, which can only lead to the numbers to continue to go up. That means the Oil Ministry can make up for any lost production from Kurdistan, which was never a large amount of the total to begin with. For all of 2012 to the present, Iraq has been average over 2 million barrels a day in exports. That meant the Kurds were only contributing less than 10% of that amount. If the KRG isn’t sending its oil through the northern pipeline, it can only rely upon smuggling to neighboring countries. That provides unregulated revenue that doesn’t have to go through Baghdad, but it isn’t as much money. That means that Kurdistan has little leverage in this matter. It has to eventually compromise with the Oil Ministry if it wants to not only export once again, but also expand its oil industry, because no foreign firm is going to enter the market in northern Iraq simply to explore, produce for the local market or smuggle. The problem is that the current political climate in Iraq is charged, with the Kurds criticizing not only the government for its stance on energy, but the actions of the prime minister as well. That will only delay the inevitable when the Kurds are forced to the negotiating table once again to work out some kind of compromise to clear up the payments to firms working there, so that it can once again start exporting. The last time this happened it took six months to resolve the matter. It may take at least that much time this go around.


AK News, “Kurdistan to produce 400,000 bpd by end of the year,” 3/11/12

Brosk, Raman, “Oil companies operating in Kurdistan reduced production due to non-payment by federal government,” AK News, 3/15/12
- “Shahrestani should focus on paying dues not making threats,” AK News, 4/3/12

Chaudhry, Serena, “UPDATE 2-Iraq’s Kurdish region threatens oil export halt,” Reuters, 3/26/12

Chaudhry, Serena and Karouny, Mariam, “Iraq approves $560 mln for Kurdish oil payments,” Reuters, 3/27/12

Dow Jones, “Iraq Kurdish Oil Exports Sliding To 75,000 B/D On Payment Delay – Officials,” 3/12/12

Hafidh, Hassan, “Iraqi Kurdistan Rejects Charges Of Oil Smuggling,” Dow Jones, 4/3/12

Al-Jawari, Fulaih, “”Influential parties” in federal government smuggle oil to Israel, says Kurdish Blocs Coalition,” AK News, 4/3/12

National Iraqi News Agency, “Kurdish Alliance asks the KRG to resume oil exportation,” 4/4/12

Al-Shamari, Yazin, Ali, Haba and Ibrahim, Haidar, “Kurdistan Blocs Coalition wants Kurdistan to resume oil exports to end provocation against Kurds,” AK News, 4/5/12

Smith, Grant, “Kurdistan Says Iraq Must Investigate Missing Crude Exports,” Bloomberg, 3/15/12

Al-Wannan, Jaafar, “Deputy PM: Kurdistan didn’t fulfill its oil export obligations,” AK News, 4/2/12
- “Kurdistan to increase oil production as federal government agrees to pay Iraq’s dues,” AK News, 3/31/12

Al-Yasseri, Ali, “Kurds resume shipping oil for export following payment of foreign company dues by Baghdad,” Azzaman, 3/31/12

Yeranian, Edward, “Iraq’s Kurdistan Region Halts Oil Exports to Baghdad,” Voice of America, 4/2/12

Zalla, Mihemed Eli, “Kurdish and Sunni Leaders Accuse Maliki of Authoritarian Rule,” Rudaw, 3/30/12

Zebari, Abdel Hamid, “Kurds claim Iraq owes $1 bn for oil pumped in 2011,” Agence France Presse, 3/15/12


Anonymous said...

Was this crap writen by Shahristani?

Joel Wing said...

What specifically do you object to?

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