Oil Deal Between Kurdistan And Iraq’s Central Government Breaks Down Again

In September 2012, the Kurdistan Regional Government (KRG) came to its third agreement with Iraq’s central government over oil exports. The deal was hailed as a breakthrough between the two after the KRG halted its shipments in April. That overlooked the fact that the root of the problem between the two, the Kurds’ independent oil contracts, was never resolved. There was also a technical issue in that Kurdistan could not reach the production levels it agreed to as quickly as scheduled. That opened the door for Prime Minister Nouri al-Maliki’s government to claim that the KRG had not fulfilled its obligations, which has led to the current impasse. The agreement between the regional and central governments has not officially come apart, but in effect it has.

Kurdistan and Baghdad have never followed through with either of the two main elements of the September deal. First, the central government agreed to pay the companies operating in the KRG $833 million in 2012. (1) Kurdistan claims that Baghdad owed the corporations $1.5 billion for exports since 2009. That amount only covers costs of operation, as Maliki’s government has refused to pay them profits over the disputes with their contracts. In October, the Finance Ministry made the first installment of $650 million. The second tranche was to come the following month, but was never made. Not only that, but the draft of the 2013 budget only allots a small amount of money to pay the companies in Kurdistan. Deputy Premier Hussein Shahristani who is in charge of energy policy said the reason why was because the Kurds were not meeting their export quota. That brings the second problem. Under the September agreement, the KRG was to export 140,000 barrels a day in September, and then 200,000 barrels a day for the remaining three months of the year. The Kurds were never able to reach those levels. In September, it sent113,000 barrels through the northern Kirkuk pipeline to Turkey, 146,000 in October, and 180,000 in November. At the end of that last month however, the North Oil Company claimed that the KRG had cut its output to only 70,000-80,000. That was partly due to technical problems at the Khurmala field in Tamim. The Kurds finally halted all exports on December 22, to protest Baghdad’s non-payment. The KRG is therefore stuck in a Catch-22. It can’t meet its quotas as quickly as called for by the September agreement, because it currently lacks that capacity. That gives the central government an excuse not to fulfill their side of the bargain. Kurdistan’s only means of protest is to cut production, but that ensures that the energy businesses there will not be compensated. Until it ups its production it can’t really hold Baghdad accountable.

Currently, Prime Minister Maliki holds the upper hand in this standoff. Baghdad welcomes Kurdish exports, because it boosts Iraq’s overall numbers, and helps bring in extra cash. It also allows the central government to make its point that energy policy has to go through it. At the same time, the Kurds’ contribution is only a small portion of overall sales, especially now that production in southern Iraq is ramping up. That leaves the KRG with little leverage in the matter. Cutting its exports only hurts the companies it has deals with. That means that the September deal is near dead, and will likely officially come apart in the coming months. Kurdistan will halt exports, blame Baghdad, and then wait to negotiate another agreement in the future. Maliki on the other hand, will hold this over the head of the Kurds to punish them for their independent energy policy. Until the conflict over the Kurds’ oil contracts is resolved Iraq will see a series of these short term deals come and go. Given the red lines the two sides have set on the matter, the demand for independence versus centralized control, a resolution to this dilemma will not come soon.

FOOTNOTES

1. Agence France Presse, “Iraqi Kurdistan confirms oil deal with Baghdad,” 9/14/12

SOURCES

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Ajrash, Kadhim and Razzouk, Nayla, “Iraq Kurds Halt Crude Exports, Central Government Official Says,” Bloomberg, 12/24/12

Kami, Aseel, “UPDATE 1-Oil exports from Iraq’s Kurdish region rise to 170,000 bpd,” Reuters, 10/4/12

Al-Khayat, Faleh, “Iraq’s oil output slumps by 200,000 b/d in October,” Platts, 11/28/12

Kurdistan Tribune, “KRG halts oil exports,” 12/21/12

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Al Rafidayn, “Iraq says it obscures payments for Kurdish oil exports,” 12/22/12

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Reuters, “Iraq says Vitol apologises for Kurdish oil purchase,” 12/10/12

- “UPDATE 1-Iraq begins initial $650 mln oil payments to Kurds,” 10/2/12

- “UPDATE 1-Iraqi Kurdish crude flow cut by 75,000 bpd due technical problem,” 12/11/12

- “UPDATE 1-Iraqi Kurdish oil exports down ‘significantly’-sources,” 11/27/12