Kurdish oil deal with Baghdad hangs by a thread

To those unversed in Iraqi politics, the oil deal between Baghdad and the Kurdish region in December might have seemed to usher in an era of amity and cooperation.

The United States, under envoy Brett McGurk, tried tirelessly to broker this agreement, and both the Americans and the Iranians have worked this year to salvage it.

The spectre of a more sinister mediator sits at the table – the threat of ISIL drove the two sides together last year. Yet even as fighters of the so-called Islamic State torched wells at the Khabbaz oilfield, near Kirkuk, on Friday, the accord was sinking deeper into trouble.

Baghdad was to pay the Kurds about $1 billion per month from the federal budget, while the Kurds would export 550,000 barrels per day of oil via the Iraqi state marketing organisation. But with trust in shorter supply than oil, the Kurds complain that Baghdad is “bankrupt”, while the federal government points to their failure to export the agreed quantities. With the deal hanging by a thread, Iraq’s future is again imperilled.

The prime minister Haider Al Abadi said in February that the agreed payments to the Kurdish region would not be made until it met the oil export targets. But so far, the industry publication Iraq Oil Report suggests that only 145,000 bpd has been transferred – nearly all from the Kirkuk-area fields.

Kurdish capacity should now be sufficient to produce something close to the required target, after allowing for domestic consumption. But, as pointed out when the deal was struck, it is not clear whether oil from Avanah (part of the Kirkuk field) and Bai Hassan – able to produce 150 000 bpd between them – is counted as Kurdish or federal crude.

This oil accord is quintuply critical. It is needed to sustain Iraq’s financial basis, to support the Kurds’ nascent state and potential independence, and to continue the fight against ISIL. For the oil companies in the Kurdish region, their growth and even survival depends on getting paid. For the outside world, it could add more production to an already oversupplied market.

On Baghdad’s side, the fiscal mismanagement and corruption under the previous administration of Nouri Al Maliki is now becoming clear, compounded by the cost of the war and the lower oil price. With a debt to GDP ratio still less than 40 per cent, Iraq is not bankrupt – but it is facing an acute liquidity crisis.

Erbil needs its own revenue stream. With the cut-off of the federal budget since February 2014, it has borrowed at least $3bn, about 12 per cent of its GDP, in less than a year. Its funds go towards the fight against ISIL (although central government payments to the Peshmerga military should alleviate that), and a bloated public sector. Whether quickly or slowly, the Kurdish region seems to be moving towards independence, but that would be disastrous without establishing a sustainable economy that goes beyond cycling oil revenues through a rentier system.

Erbil and Baghdad are locked in a life-and-death struggle with a capable and barbaric enemy. And the Kurds would not benefit from the collapse of Mr Al Abadi’s government, opening the way to a more narrowly sectarian government, perhaps a comeback by Mr Al Maliki.

Until they get the payments flowing, the Kurds cannot pay the oil companies in their region – which has already led one, Gulf Keystone, to put itself up for sale before it runs out of cash.

Without money, the companies will not invest in increasing production capacity. That may bring some short-lived relief to a glutted oil market, but it does nothing to build the foundations of the Kurdish state.

Erbil and Baghdad may not trust each other, but they should reflect on whether they trust Turkey or Iran, their other partners, any more. And oil revenues are more critical than ever to winning the war against ISIL, their common enemy.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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