Iraq and Kurdish region face final hurdles to energy co-operation

Baghdad and the semi-autonomous Kurdish region of Iraq have disputed oil rights since 2007

Iraqi Prime Minister Mohammed Shia Al Sudani, back left, and Kurdish counterpart Masrour Barzani, back right, at the signing of a deal to restart northern oil exports. Reuters

A deal between Iraq's federal government and the Kurdistan Regional Government will allow oil from northern fields to start flowing again to Turkey's Ceyhan port, but many hurdles need to be overcome before the two sides can finally settle their long-running dispute, analysts tell The National.

The flow of about 450,000 barrels of oil per day from the semi-autonomous region and from fields in Kirkuk operated by the federal government were halted last month after an international arbitration ruling said Turkey breached a 1973 treaty with Iraq by allowing the Kurds to export oil without Baghdad’s permission through the northern pipeline.

Despite the deal signed on Tuesday, complications could arise due to a combination of unresolved issues, including the uncertain status of existing contracts that the KRG signed with international oil companies, which Baghdad has long considered unconstitutional.

Meanwhile, KRG debt to oil companies and traders, thought to be between $4 billion and $6 billion, and the task of turning a “temporary” deal into permanent legislation, could be other stumbling blocks.

Iraqi Prime Minister Mohammed Shia Al Sudani said last week that a federal oil and gas law would be revisited to settle how Baghdad and the Kurdish region co-operate on energy issues, outlined in a number of brief articles in the 2005 Iraqi constitution.

The 2005 document calls for the issue to be clarified in a law, but several draft bills presented since 2007 have not been passed by a fractious parliament.

The Kurds began exporting oil independently in 2012, first by lorry and then by pipeline from 2014, worsening a bitter row over energy. Baghdad reacted by withholding the Kurdish region’s share of the budget that it is entitled to under the constitution.

Baghdad argued that the Kurds had violated the constitution by exporting oil independently, as well as by signing oil contracts known as Production Sharing Agreements that gave oil companies a percentage of the oil to be marketed.

Baghdad said this breached Article 111 of the constitution, which states that “oil and gas are owned by all the people of Iraq in all the regions and governorates”.

Noam Raydan, a regional energy analyst who works in Baghdad and Beirut, explained the possible stumbling blocks ahead.

“The oil and gas law is very controversial. There are people in Baghdad who don’t even believe that the KRG should be in control of any natural resources. My view is that talks will drag on. Another issue to bear in mind is Turkey, which is waiting for compensation fees from Baghdad — so we need to know if Turkey is willing to resume exports through the pipeline to Ceyhan before Baghdad pays the fees. Iraq Oil Report was the only one that highlighted this issue, and it’s important.”

Ms Raydan was referring to part of the arbitration court ruling that said Iraq had not paid what the industry calls throughput fees for use of the pipeline by the federal government, allegedly dating back decades. Iraq has been ordered to pay a sum of $1.5 billion as part of the settlement, according to Reuters.

She said the April 4 agreement was "just the beginning of a long process of negotiations over sticking points that could not be settled since 2005".

However, "the difference now is that the KRG is in a difficult financial situation and needs Baghdad for money”, she said.

The agreement says oil revenue from exports from Kurdish oilfields will be put into a jointly managed account monitored by Baghdad, while the oil will be marketed by the federal State Oil Marketing Organisation, Somo.

It is expected, but not confirmed, that Somo will have a senior board member from the Kurdish side, possibly from the region’s Ministry of Natural Resources.

This still leaves a question mark over Kurdish oil contracts.

Ali Shadad, a member of the Parliament’s Oil and Gas Committee, confirmed that all Kurdistan contracts will be reviewed and studied by a joint committee based on a Supreme Federal Court ruling in February last year.

The court decided a law regulating the oil industry that was passed in 2007 by the Iraqi Kurdistan parliament in Erbil, the regional capital, was unconstitutional. It demanded that Kurdish authorities hand over their crude supplies to Baghdad.

Acting on that ruling, the Ministry of Oil started to ask oil and gas firms operating in the region to sign new contracts with Somo rather than with the KRG.

“Some companies have expressed readiness to co-operate and offered concessions, while others may withdraw and those who refuse will be blacklisted,” Mr Shadad told The National without elaborating on the names of these companies.

“There is a possibility to change these contracts from production-sharing to service ones or reconsider their investment periods,” Mr Shadad added, referring to Baghdad’s preferred oil contract type, the Technical Service Contract.

In regard to the region’s commitments to the four companies contracted to market oil from the Kurdistan region and it lenders, Baghdad and Erbil agreed that the Oil Ministry reach “a legal settlement to solve these issues”, Mr Shadad said.

“But the payment will not be open,” he added, saying all claims will be reviewed by the Oil Ministry and the Federal Board of Supreme Audit of Iraq.

“One of the options on the table is to pay them oil in lieu of cash from the oil produced and exported from Kurdistan,” he said.

“The meetings will continue with the developers and companies and the discussions will take time,” he added. “Iraq is keen to continue co-operation with these companies.”

According to an Oil Ministry official in Baghdad, the issue of developer’s rights according to production-sharing contracts and the marketers of Kurdistan oil are not included in the deal.

"This deal is temporary just to resume the oil exports," the official told The National.

“Joint committees will be formed later to study the contracts and reach a deal," he said.

Building Baghdad-Erbil ties

"The current government of PM Sudani appears keen to improve relations with the Kurdistan Regional Government. The new PM wants to stabilise his government and Kurdish support within parliament and the political environment are key,” said Yesar Al Maliki, Gulf analyst at the Middle East Economic Survey.

"The deal builds up on months of negotiations between both governments and is a second breakthrough after reaching a budget deal. Actually, it even solidifies the budget deal."

Some Kurdish politicians have been pushing for the federal government to restore monthly budget payments to the region of 17 per cent, an agreement loosely based on a 2005 estimate of the Kurdish region’s share of the population.

Iraq abolished this level of payment in 2017 when the KRG attempted to annex the oil-rich Kirkuk governorate, reducing it to 12.67 per cent of the budget, which the federal government claimed was closer to a UN estimate of the Kurdish region’s population.

With the current budget draft, the KRG would receive record monthly sums, even at this level — providing current oil prices hold.

"While temporary, the deal allows exports to Ceyhan to continue and for the first time gives Baghdad an active role in the Kurdish oil and gas sector. For Erbil, it ensures higher revenues and a budget share,” Mr Al Maliki said.

He said that despite the complexity of the issues, agreement on an oil and gas law would be a stride forward for Iraq’s stability.

“For the future, it is a milestone in a trust-building exercise that could see both parties agreeing to an oil and gas law which is key to normalise petroleum sector management countrywide. Also, to end all historic disputes between the region and the central government,” he said.