Wednesday, November 1, 2023

Iraqi Kurdistan’s Failed Independent Oil Strategy

(The Cradle)

The Kurdistan Regional Government (KRG) set upon a policy of developing and exporting its own oil in the hopes that it would help promote the region’s independence. It seemed like its plans were working as it got major energy companies to sign deals and opened its own independent pipeline to Turkey. Then things fell apart as the KRG wasn’t able to export as much petroleum as it hoped, govt into increasing arguments with Baghdad and accrued a huge debt in the process. Today, it finds itself largely dependent upon the federal government for money the exact opposite of where it saw itself twenty years ago.

 

In the 2000s Kurdistan formulated an independent oil policy. Even before the U.S. invasion the region signed its first oil deal with Turkey’s Genel Energy in 2002. Two years later it inked an agreement with Norway’s DNO. (1) KRG Prime Minister Nechirvan Barzani declared that Baghdad would never control the KRG’s resources and this was a step to ensure that. At the end of 2005 DNO started drilling and struck oil in December of that year at the Tawke field. That along with Taq Taq that Genel Energy operated would become the two major oil wells in the region.

 

Kurdistan then passed legislation and began creating institutions to regulate and develop its oil industry. First the Kurds claimed the constitution gave them the right to sign oil contracts for new developments. In May 2006 the Natural Resource Ministry was created to manage the sector. (2) In July 2006 an investment law was passed to regulate foreign oil companies working in the region and then in October 2006 a regional oil law was enacted.

 

The KRG’s moves towards creating an independent oil sector led to objections by Baghdad. In November 2007 for instance, Oil Minister Hussein al-Shahristani said any KRG oil deals were null and void and companies would be blacklisted from doing business with the federal government. This posed legal problems for any company doing business with Kurdistan especially if it wanted to export oil because it would not be authorized by the central authorities. (3) That was the reason why major energy corporations were initially reluctant to do business in the region.

 

In June 2009 the KRG began exporting its petroleum (4) but there was a problem. The main issue was that there was no payment program with the companies. That was made up of DNO, Genel Energy, and Addax petroleum. The businesses went ahead anyway believing that they would be compensated in the future. That didn’t prove true and would become one of the major difficulties with the region’s energy sector. In August 2012 for instance, the CEO of Genel Energy complained to the Natural Resource Minister that it had not been compensated for 2009 and 2011 exports. This would create a growing debt that the region is still dealing with today.

 

At the same time Kurdistan maintained a long tradition of oil smuggling to Iran to earn additional funds. In 2010 this became an international story with the New York Times reporting on it. The practice had been going on since the 1990s but was especially needed now to help pay the companies operating in the region.

 

In 2011 the KRG had a breakthrough when the first major oil company signed with it. That happened in October when Exxon agreed to work on six blocks. The next year France’s Total bought shares in two blocks as well. That was followed by Chevron. This was what the Kurds had been hoping for all along. The KRG offered better terms than Baghdad on its contracts and claimed to be more business friendly. The start of exports also meant the possibility of increased profits.

 

The Kurds ran into their second major problems in 2012 which was not apparent at first. The KRG was given an export quota for its oil under the budget and received monthly payments from Baghdad in return. In April 2012 the KRG’s Natural Resource ministry said it was stopping oil sales because the central government was not sending funds. (5) That was because the Kurds were not meeting their quota for months. In September 2011 for instance, now Deputy Prime Minister Shahristani complained that the KRG’s exports dropped from 150,000 barrels a day to 50,000. In August 2012 the two sides made a new deal for renewed exports but this would remain an issue for years afterwards up to the present day as the KRG continuously failed to meet its budget obligations.

 

Kurdistan believed it had an alternative to Baghdad with its own independent oil pipeline to Turkey. In May 2012 the KRG said it would start exporting on its own to Turkey and by December 2013 that became a reality. The Kurds were hoping that its pipeline would earn more than the money it was getting from Baghdad but that didn’t come true either.

 

The necessity for the central government became apparent as soon as the budget dispute started. It was reported in March 2012 that oil companies operating in the region cut back on their work because they had not been paid. (6) The KRG wasn’t making enough on its own to take care of its growing debts and was now getting cut off from the budget. By 2016 it was reported that Kurdistan owed $3 billion to the oil businesses.

 

Just as important the companies did not invest in the KRG and at times reduced their production over non-payments. In February 2015 DNO announced it was not going to put any new money into Kurdistan until it started getting paid. In June 2015 DNO said it couldn’t sustain its production levels. That same month it was reported that the businesses had cut their staff as well. The next month Genel Energy stated that it would halt exploration work. In October there was an article that the company was cutting its capital expenditures as well. These were two of the companies responsible for most of the region’s exports so this had an immediate impact.

 

The KRG’s debts were growing on other fronts as well. The on and off again budget payments from Baghdad meant that Kurdistan wasn’t able to pay salaries to its large government work force. Like the central government the state is the largest employer in the region. Starting in 2014 the KRG couldn’t pay its workers which is still happening today. This led to protests almost every year.

 

To make up for its deficit Kurdistan began making deals with oil traders, Turkey, businessmen and oil companies which also turned out to be a bad move. In 2012, it signed deals with three major oil traders for advances on future oil exports which eventually collapsed when the KRG couldn’t meet its marks and oil prices dropped. The region was receiving $850 million a month from the traders. It said it would exports 525,000 barrels a day in return but it wasn’t even producing that much. The contracts also stipulated that Kurdish oil would sell for $55 per barrel of oil but in mid 2015 prices dropped to below $50. In turn the oil traders cut back how much they were willing to advance Kurdistan cutting monthly payments to just $35 million by July 2016 before stopping doing any businesses with the region a few months later. The Kurds ended up owing the traders $3.5 billion by January 2023. Once again, the KRG hoped that it could make more money from the traders than from Baghdad but that didn’t happen. Instead it incurred another massive debt.

 

The KRG also procured loans from other sources. A Kurdish businessman gave a loan in 2014. The oil companies who were already owed a large amount even allowed the KRG to borrow money. In 2016 Turkey lent Kurdistan $1 billion. This would only add to the Kurds’ troubles.

 

By 2016 Kurdistan was facing financial insolvency and was saved by Russia’s Rosneft. That year Rosneft signed a $2.1 billion energy deal that included cash so that the KRG could pay off the oil companies. In April 2017 Rosneft agreed to an additional $1 billion advance to the KRG in return for future oil sales from 2017-19. The company gained de facto control of the region’s oil and gas infrastructure as a result. The Kurds originally believed their oil strategy would lead to independence but these moves just made them dependent upon foreign businesses.

 

The war with the Islamic State appeared to offer another savior for the KRG. It seized the Kirkuk oilfields nearly doubling its capacity. By July 2014 those fields were connected to the Kurds’ pipeline allowing for exports and a large increase in revenue. Some reports had Kurdistan believing that it would holds these areas in perpetuity which had been a long time goal of the Kurds going back decades. It turned out to be a false dream.

 

This all led to another countermove by Baghdad. It filed legal papers against the KRG. This worked in a few cases as tankers full of Kurdish oil were turned back from docking at certain ports. The central government would also take Turkey to court for allowing the Kurds to use its pipeline to export oil in violation of an agreement between the two countries. The courts would prove to be a good ally of the Iraqi authorities.

 

2017 was when the Kurds’ oil dreams finally began coming apart. After the KRG held an independence referendum the Prime Minister Haidar Abadi responded by seizing all of the territory the KRG took during the war versus the Islamic State including almost all the Kurdish oil fields. As a result Kurdistan lost 45% of its oil production. The KRG was using the Kurdish fields for most of its exports for Baghdad under the budget. This resulted in a dramatic drop in the region’s revenues.

 

Not only that but the KRG suffered from short term planning. When it seized the Kirkuk petroleum in 2014 it stopped developing its own fields. That resulted in a 75% decline in production at the Taq Taq field. That was one of the two major oil holdings within the region and accounted for a sizeable amount of its exports.

 

These setbacks couldn’t have come at a worst moment as the KRG’s debt was skyrocketing. Rosneft had advanced Kurdistan $4 billion. The oil traders had given over $2 billion and Turkey was owed $3.4 billion. This was on top of the cash the oil companies were due. By 2021 it had a $31 billion debt. This was solely the result of the Kurds’ attempt to build an independent oil policy.

 

In 2022, Baghdad’s lawsuits came to fruition. First, in February 2022 the Federal Court ruled that the KRG’s oil law was unconstitutional. Iraq’s courts are politicized so the decision was to be expected. In May 2022 the oil companies in the Kurdish region were told they had to sign new contracts with the Oil Ministry. Baghdad then filed new lawsuits against those corporations and in July and October DNO, Genel Energy, Western Zagros, HKN, Addax Petroleum, ShaMaran and Gulf Keystone’s contracts were all annulled by the Commercial Court in Baghdad. The KRG ignored these decisions but they added to the region’s legal problems. It also showed that the momentum was moving in the central government’s direction and away from the Kurds.

 

In 2023 the Iraqi government’s case against Turkey was decided. The international arbitration court in London ruled against Turkey for allowing the KRG to independently export through its pipeline in violation of an agreement with Baghdad. Ankara was angered because it had to pay damages and shut down its pipeline out of spite. As of the start of November 2023 it has not been re-opened. The KRG has lost an estimated $6 billion. The Kurds now don’t have a way to independently pay its large and growing debts. It has also lost its main source of revenue. Its hopes for an independent oil industry have been destroyed as well and it finds itself almost completely dependent upon budget payments for Baghdad which it thought it could avoid back in 2012.

 

With all those bad decisions it’s also important to note that Kurdistan is not a better business environment than the rest of Iraq like it promotes itself to be. It has all of the same issues. The bureaucracy and regulations for example delay the shipment of equipment to the region and the issuance of visas to the international companies’ workers and staff. Twenty years into its oil program and the KRG is not creating its own skilled oil work force either. It has a shortage of contractors and suppliers. The Natural Resource Ministry lacks the capacity to deal with all of the needs of the foreign companies operating there.

 

Corruption is an issue in the KRG as it is in Baghdad. In August 2015 the regional parliament’s finance committee announced that over $800 million in oil revenue had been missing for a month. That was likely because the Natural Resource Ministry was not depositing the region’s oil money into the Turkish bank account that it was supposed to. Instead it was deposited in a German bank that then sent the funds to the Kurdistan International Bank likely to skim money and give the ruling parties control over the cash.

 

In January 2018 the KRG published an audit of its oil exports that found $700 million to $2 billion had been paid to third parties with no explanation.

 

In August 2019 Dynasty Petroleum filed a lawsuit claiming Natural Resource Minister Hawrami demanded money up front to get an oil deal which the company refused. Then Qubad Talabani a member of the KRG’s oil council demanded that the Dynasty pay Hawrami the bribe. An intelligence agency belonging to one of the Kurdish ruling parties also got involved attempting to force the company to pay.

 

A July 2020 story revealed that Rosneft sent an $800 million advance to the KRG when it first made an oil deal but the money ended up with a company in Belize controlled by a Pakistani businessman who was acting as a middleman for the Natural Resource Ministry.

 

In 2021 it was revealed that Gulf Keystone paid kickbacks to a Kurdish politician to win its 2007 contract to develop oil in Kurdistan. The company also exaggerated the reserves of the field it worked on by 20 times.

 

The Kurds have been talking about independence for decades. The overthrow of Saddam Hussein in 2003 seemed to finally open the door to that. Kurdistan embarked on its own oil strategy which initially seemed to work. It attracted foreign companies and it offered lucrative terms. Major oil corporations like Exxon, Chevron and Total eventually signed with the region. It built its own pipeline and ignored complaints by the central government. 2012 can be seen as the turning point. That’s when the KRG refused to follow the national budget and began losing monthly payments from Baghdad. That sent the region down a path of debilitating debt. Its pipeline turned out to make Kurdistan almost completely dependent upon Turkey which turned off the spigot in 2023. It also squandered much of its money in corruption schemes so that the ruling parties could enrich themselves. Today, the KRG’s finances are in shambles. It can’t pay its bills. It is facing yearly protests by its state workers. If it didn’t get money from the federal government it would go bankrupt. The region’s attempt to break free of Iraq has made it almost completely reliant upon it.

 

FOOTNOTES

 

1. Daragahi, Bouzou, “Kurds allow Norway firm to begin drilling for oil,” San Francisco Chronicle, 12/1/05

 

2. Fang, Bay, “An Oil Rush in (Yes) Iraq,” U.S. News & World Report, 11/13/06

 

3. Times Of London, “Warzone where oil prospects outweighs risks,” 10/27/08

 

4. Reuters, “DNO says no pay schedule in place for Kurdish oil,” 7/17/09

 

5. Al-Wannan, Jaafar, “Deputy PM: Kurdistan didn’t fulfill its oil export obligations,” AK News, 4/2/12

 

6. Brosk, Raman, “Oil companies operating in Kurdistan reduced production due to non-payment by federal government,” AK News, 3/15/12

 

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