Tuesday, September 18, 2012

Iraq’s Central And Regional Governments Reach Third Oil Deal, But Will It Last?

In September 2012, Baghdad and Irbil announced that they had come to a new agreement over Kurdish oil exports. The Kurdistan Regional Government (KRG) halted their petroleum shipments in April over a payment dispute with the central government. It then started them again in August hoping that would lead to a new deal, which has now happened. There are two important and unresolved issues however. The first is whether the Kurds can meet their quotas, because they weren’t able to do so the last time they exported. The second is whether Baghdad can be counted on to consistently distribute funds to the energy companies working in Kurdistan, which was the issue that led the last two deals to break down. Both of those are likely to come up again, making this latest agreement, perhaps just as short term as the others.

In mid-September 2012, Baghdad and Kurdistan negotiated a new export deal. This came as a result of a meeting headed by Deputy Premier Rowsch Nouri Shaways that included Finance Minister Rafi Issawi, Trade Minister Khayrulla Hassan Babakir, Oil Minister Abdul Karim Luaibi, the head of the Board of Supreme Audit, and KRG Natural Resource Minister Ashti Hawrami. The two sides came to a five-part agreement. First, the Kurds said they would export 140,000 barrels a day for the rest of September, and then increase that amount to 200,000 barrels for the rest of the year. Second, Baghdad would pay companies operating in Kurdistan $833 million. Third, the two would work out an export quota and payments to be included in the 2013 budget. Fourth, Baghdad would provide 17% of refined oil products and 17% of fuel to the KRG for its power stations. Finally, two committees would be formed to keep track of production, remunerations, oversee the agreement, and try to resolve any problems that might arise. These were all issues that led to the breakdown of the last deal between the two. The Kurds for instance, accused Baghdad of cuttings its fuel shipments. Now the central and regional governments have supposedly worked out their differences. It also has two mechanisms to try to problem solve any issues that may come up this time around. This move was widely hailed in the press.

The new agreement was the result of the breakdown of the last one. On April 1, Kurdistan halted its exports, claiming that Baghdad owed companies there $1.5 billion. Kurdish officials told the press that firms in the region had not been paid for their exports from 2009 and 2011. The central government countered that the KRG never provided invoices for its exports to be audited, so that payments could be made. Four months later on August 7, the Kurds’ Natural Resource Ministry restarted sending oil through the northern pipeline to Turkey, hoping that it would lead to a breakthrough with Prime Minister Nouri al-Maliki. At the time, the KRG was coming under increasing pressure from oil companies there over money. Norway’s DNO for instance, reported a loss in August, and that it had to ramp down production at the Tawke field in Dohuk, because it could not export. The few companies that produce oil in Kurdistan only make small amounts of cash either from selling to the domestic market there or through smuggling to Turkey and Iran, both of which pay below international prices. Having a deal with Baghdad only covers costs, but that is still more than they are currently being paid. This was the second time that relations between Baghdad and Irbil had broken down, so businesses were pushing Kurdistan to come to a firmer and longer lasting agreement with Maliki’s government, so that they could earn a steady income from their large investments in the KRG. It was for these reasons that the Natural Resource Ministry re-started exports in August. The problem is that there is no guarantee that Baghdad will keep up their payments, because they haven’t in the past. That could bring down this new deal just like it did the last two.

Another major issue is whether the KRG can reach its quotas. The Natural Resource Ministry has made many lofty claims about the potential of the region’s energy sector. Before, they said that Kurdistan could reach 200,000 barrels a day in exports by the end of 2011, an average of 400,000 barrels by the end of 2012, and 1 million by 2014. The problem is that it has never come close to any of these figures. In January 2011, Baghdad and Irbil reached their second deal over exports. The Kurds were to export 150,000 barrels a day as set in the 2011 budget, and then 175,000 barrels for the 2012 budget. When the details of this agreement were being worked out in early 2011 however, Kurdish officials said that they could only produce 100,000 barrels a day at the time, and wanted that to be their quota. That request was turned down. It turned out the KRG was able to quickly ramp up their exports, starting at 10,500 barrels in February, then 75,000 barrels later that month, rising to 100,000 barrels in March, and 115, 000 in April. By June, it finally hit an average of 175,000 barrels a day. The Natural Resource Ministry claimed it maintained that level all the way to March 2012, but Baghdad and the press said otherwise. A November article said that Kurdistan was only exporting 79,000 barrels a day that month, and 75,000 the next. In March, the KRG started complaining about the lack of payments, and stated that it had cut exports to 50,000 barrels a day to protest the matter. When Kurdistan re-started shipments in August it was at 100,000-120,000 barrels. While it only took four months for the region to reach the 175,000 set in the 2012 budget, there are questions about whether it was able to maintain that mark. Reports had exports quickly falling off afterward. Not only that, but some officials in Baghdad have claimed that Kurdistan doesn’t have the pipelines, pumps and other infrastructure to reach its quotas. The KRG will have to disprove these doubts, because it has to double output to 200,000 in just a few weeks under the new agreement. Something the Natural Resource Ministry said it could achieve by the end of last year, but failed to do.

This is the third time that the central and regional governments have cut a deal over oil. In 2009, it only took three months for the first one to fall apart over Baghdad not paying companies in Kurdistan. The second one lasted fourteen months, but then disintegrated over the same issue. There is no reason to believe that this latest one will be any different. The Maliki government has never objected to the Kurds exporting petroleum through the northern pipelines as long as profits are deposited in the central bank. That’s because it gives them control over the dispersal of the money, and allows it to claim that all energy deals have to go through it. The problems are that the KRG has not been able to maintain its quotas, which then draws criticism from Baghdad, and the central government has not kept up its payments. Both issues could be caused by a lack of capacity or political decisions to protest the actions of the other. With oil production and exports taking off in southern Iraq, that gives an added incentive for Premier Maliki to just stick to short-term deals with the Kurds, which can be quickly ended. It gives the central government the upper hand in its long-standing disputes over oil policy since it controls the purse and the pipelines to foreign markets. Rather than a solution, this new deal is likely just one of many that will fall apart, and then have to be re-negotiated in the future.


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