Iraq-Kurdish oil deal will give country big boost but is only the first step

Workers in Tawke oil field in Iraqi Kurdistan. Reuters

After several false dawns, the sun of Iraqi Kurdistan is now set to rise over its mountains. After more than two years during which the pipeline through Turkey from the semi-autonomous Kurdish region of Iraq was closed, oil is now finally flowing again. However, this is just the first step for both Kurdistan and all of Iraq.

The Iraq-Turkey Pipeline (ITP) started operations in 1977, carrying oil from the area around the super-giant Kirkuk field in northern Iraq to the Mediterranean port of Ceyhan. It was a crucial route for Iraq to avoid dependence on its political rivals, Iran to the east and Syria to the west. Indeed, after Saddam Hussain invaded Iran in 1980, Iraq’s oil exports through the Gulf were cut off, leaving Turkey as its sole outlet. A second, larger line on the same route entered service in 1987, late in the war.

In 2013, the Iraqi Kurdistan Region completed a pipeline linking its own fields to the ITP, and began marketing its oil independently of the Iraqi federal authorities, who claimed this was their responsibility. Baghdad complained that the treaty with Ankara governing use of the pipeline, renewed and updated in 2010, gave them exclusive use. After nearly nine years of arbitral hearings, the judgment in March 2023 found in Iraq’s favour on two counts, and awarded it almost $2 billion in damages, partly offset by $527 million of Turkish counterclaims.

Turkey closed the pipeline. Although it was then promptly ready to re-open it, the dispute over oil rights between the Iraqi federal authorities and the Kurdistan Region blocked progress.

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Iraqi Prime Minister Mohammed Shia Al Sudani wanted to resolve the pipeline impasse, but came under pressure from anti-Kurdish political elements in Baghdad. He was keen to reach an agreement to strengthen his position ahead of November’s parliamentary elections. The US also exerted its influence, wanting to assist its companies active in Kurdistan, to bring more oil on to the market, and to weaken Iranian-aligned interests in Baghdad whom the Americans saw as blockers.

Iraqi Kurdistan and the federal government eventually reached an agreement that the federal Ministry of Oil, through its unit Somo, would market the crude, in turn unlocking central budget payments to Erbil.

However, the international oil companies operating in Kurdistan balked at restarting exports until their financial interests were assured and the validity of their contracts accepted by the federal side, at least implicitly. Then, a deal was almost derailed by drone strikes that lightly damaged some fields in July and temporarily cut about 100,000 barrels per day from output.

Finally, after exhaustive negotiations, a deal has been struck. All the major oil companies operating in the Kurdistan Region have signed up, with the exception of Russia’s Rosneft and Gazprom Neft, and DNO of Norway. DNO has remaining concerns about the security of payments, and in particular, its large share of the more than $1 billion of past invoices owed to the companies.

Somo will market the oil, and companies will provisionally receive $16 per barrel to cover their costs. This will be adjusted later following a consultant’s review.

The Kurdistan region is meant to deliver at least 230,000 bpd to Somo for export, with 50,000 bpd reserved for local use.

The region’s production was about 450,000 bpd immediately before the pipeline closure, and has averaged about 280,000 bpd since the start of last year. That is comparable to a single field in southern Iraq and is not even the largest.

The restart of the pipeline therefore does not make much difference to the market in the short term. About 100,000-150,000 bpd of production may be added as the operators in Kurdistan ramp up to full operations. Iraq was anyway constrained in output by Opec+ policy. With the group’s latest decision to raise allowable output, it has more room to accommodate a return of full Kurdish volumes, which was an unstated sticking point until now.

More important are the longer-term implications. Baghdad has finally, after two decades of acrimony, legal disputes and budget interruptions, accepted the legitimacy of the independent Kurdish oil sector. Conversely, Erbil has conceded the federal authority over exports and petroleum payments.

A more stable flow from the central budget should stabilise the Kurdish economy. Oil companies such as DNO, America’s HKN and Hunt, UK-listed Genel and Gulf Keystone, Canada’s Shamaran and others should now be able to invest consistently in new developments, boosting the region’s output. Sharjah-based Crescent and Dana Gas don’t produce oil in Kurdistan, but they do have important gas operations, which now have a clearer path to expand.

The next milestone is the expiry of the Iraq-Turkey pipeline treaty in July next year. Turkey has indicated that it will not renew the accord, but wants a new treaty.

The pipeline is a key strategic asset for both countries, but it could be much better used. It could be rehabilitated to its original capacity of 1.5 million bpd, and Turkey wants to expand it to 2.2 million bpd.

In March, BP agreed to redevelop the Kirkuk field and its neighbours. Increased output here would need export outlets. Ankara would also like the right to use the line for its own new fields in the south-east. A more comprehensive energy arrangement would additionally cover gas and electricity. Turkey will probably also seek to negotiate down the arbitral payment it owes.

Iraq has for years kicked around the idea of building a pipeline to Aqaba in Jordan, giving it an outlet independent of the Gulf, which could be interrupted by bad weather or by military action. The latest Israel-Iran war heightened this concern, but the Aqaba route is long and expensive. The new regime in Syria is also open to the idea of reviving the Kirkuk-Baniyas pipeline. This option strengthens Baghdad’s position in talks with Ankara.

Previous short-term deals over oil and the budget between Baghdad and Erbil have broken down within a few months. There are still plenty of details that could derail co-operation this time. But fixing one major headache and distraction should see all of Iraq’s energy industry flow more smoothly.