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Abu Dhabi, UAEMonday 10 December 2018

Compromise is key to Kurdistan oil recovery

There is a possibility to not only save the relations between Erbil and Baghdad, but also to come to a long-term and sustainable agreement

Iraqi technicians at work on oil fields. By 2040, crude will be eclipsed by the rise of the cleaner, more-efficient natural gas as the main source of energy in the Middle East. Haidar Mohammed/AFP
Iraqi technicians at work on oil fields. By 2040, crude will be eclipsed by the rise of the cleaner, more-efficient natural gas as the main source of energy in the Middle East. Haidar Mohammed/AFP

Relations between the Kurdistan regional government (KRG) and the central government of Iraq have been at an all-time low since the KRG’s independence referendum in September 2017.

The central government imposed strict punishment measures in addition to taking control of the Kirkuk oilfields from KRG. The government of the Prime Minister Haider Al Abadi imposed a flight ban over the Kurdistan region, so no international flights can fly directly to KRG’s international airports in Erbil and Sulimaniyah. The relations between both capitals have been strained since 2014 over budget and oil issues, but the latest events turned the already bad relations even more sour.

But there is a possibility to not only save the relations between Erbil and Baghdad, but also to come to a long-term and sustainable agreement. The Iraqi election is scheduled for May later this year and the United States and the international community prefer to have Mr Al Abadi re-elected instead of the much more sectarian Nuri Al Maliki, a former Iraq prime minister who is seen as the most prominent among other runners for the top post. The US is also aware that for Iraq to not totally fall apart, any new government needs the backing of the Kurds.

Since the seizure of Kirkuk and its surrounding oilfields by the central government, crude production from Kirkuk has fallen from 450,000 barrels a day to around 150,000 barrels a day.

Despite the decline, in January the British energy major BP signed a memorandum of understanding with the Iraqi government to ramp up production to 750,000 barrels a day. The Iraqi Oil Minister Jabbar Al Luaibi even hinted that Baghdad would build a separate pipeline that will bypass the KRG pipeline.

But there are several obstacles that would be very difficult to make this feasible. First of all, if Baghdad were to build a separate pipeline it would take a minimum of two years to complete. Secondly, Kirkuk is a disputed territory and contested by both the central government and the KRG so even if the central government were to bypass the KRG, it would still be a political flashpoint for years to come without some form of revenue sharing deal. It is neither in the interest of Baghdad, the KRG or British petroleum to have the majority of Kirkuk’s production stranded. But there is an option for a revenue sharing deal that would be a win-win for both Baghdad and Erbil and which would also please the US who would prefer to see Mr Al Abadi re-elected with the support of the Kurds.

This option would require a political deal between the KRG and Mr Al Abadi prior to the Iraqi elections. That would also need concessions from both parties. With the loss of Kirkuk and half of the revenues it generated, KRG currently controls around 350,000 bpd of crude production, including the Khurmala dome concession which was awarded to the Kurdistan focused firm KAR group in 2008 by the Iraqi ministry of oil. Khurmala is part of the Kirkuk formation but lies outside Kirkuk Governorate.

KRG has been struggling to pay its public employees after Baghdad stopped paying it its share of the budget in 2014. Also, with the loss of Kirkuk fields' current 350,000 bpd output means there is not enough money to pay KRG civil servants. Furthermore KRG has stacked up billions of dollars in debts to Turkey, oil trading houses and international oil companies. So what can be done to end this stalemate?

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Read more:

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Iraq PM says Kurds face budget cuts like everyone else

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There is an option that would benefit both sides: to restart crude flow from Kirkuk and export it through the existing KRG-Ceyhan pipeline selling the oil via Iraq’s state oil marketing group SOMO. The revenue Iraq would generate from the Kirkuk export could then be used to pay KRG's civil servants.

Iraq’s North Oil Company, which operates the fields in Kirkuk, could ramp up production immediately to 450,000 bpd by using the existing pipeline to Ceyhan. Furthermore the central government and the KRG could share the crude from Khurmala; Baghdad could export half of Khurmala's current production of 105,000 bpd to Ceyhan pushing total Iraqi northern exports to 500,000 bpd. The KRG, on the other hand, could use the rest of the crude from Khurmala to feed its refineries.

Kurdistan based KAR could still operate Khurmala as per the agreement with the Iraqi oil ministry from 2008 but the crude would be divided between the central government and the KRG.

KRG would still produce and sell the oil from the fields in the Kurdistan region independently, and thus still be committed to repaying back its debts and pay international oil companies operating in Kurdistan region - thereby freeing the central government of the debts KRG has picked up over the past couple of years.

Both Baghdad and KRG would get to utilise the Kurdistan pipeline and that would drive costs of the pipeline lower. It would also give the central government and KRG leverage against Turkey, especially when it comes to water, river and dam issues. A sustainable deal with the central government would de-risk the Kurdistan oil industry and international oil companies would likely increase their investments in the industry, enabling KRG to ramp up production from fields under its control, get higher prices for its oil and better leverage with its suppliers. It would also provide cash to pay KRG salaries.

In October, Rosneft bought 60 per cent of Kurdistan’s crude pipeline and committed to upgrade the pipelines capacity to 1 million barrels a day from about 350,000 now. BP owns 20 per cent in Rosneft, so a deal between KRG and the central government would be in the interest of both oil majors as well. It would also be in the interest of the US to have both its allies cooperate in the post-ISIL era.

Any deal would require painful concessions and bold steps by both parties but it would stabilise a country that has gone through some extremely tough years.

Alan Mohtadi is head of T&S Consulting Energy and security, which specialises in in advising companies working in Kurdistan oil and gas sector