Iraq criticises Kurds over oil ‘grey area’

BAGHDAD — Iraq’s top minister responsible for energy affairs on Saturday criticised the autonomous Kurdish region’s push towards exporting oil independently of Baghdad, calling it a grey area lacking in transparency.

Deputy Prime Minister Hussein Al Shahristani’s remarks are the latest salvo in a long-running row between the central government and the northern Kurdish region over energy sales and, by extension, the extent of federalism in Iraq.

“The most prominent challenge is that we have not reached a national agreement to extract and market oil from all of Iraq’s territory,” Shahristani said in a speech in Baghdad at an event looking at the past decade for Iraq’s energy industry.

“The situation with the Kurdistan region is still stuck. This file is not resolved, in spite of some progress having been made. We hope it will end soon,” he added.

Shahristani continued: “We have a grey area — we do not know how much oil the region is extracting, what price they are selling at, and where the revenue goes.”

Baghdad argues that all oil sales must be overseen by the central government, and regards any independent exports as tantamount to smuggling.

US Vice President Joe Biden spoke with Kurdish President Massud Barzani by telephone Friday to discuss reaching an agreement with the central government on oil sales.

“The vice president and President Barzani both confirmed the need for close cooperation between the Kurdistan regional government and the Iraqi government to reach agreement on a way forward on the matter of energy exports and revenue sharing,” the White House said.

Iraq has threatened to boycott Turkish companies and cancel contracts after the Kurdish region last month announced its first shipment of crude sent directly to Turkey, without passing through pipelines controlled by Baghdad, had gone on sale, with more expected to follow.

Kurdistan, which enjoys a high level of autonomy from Baghdad and has its own security forces, government and flag, has also drawn Baghdad’s ire for signing contracts with foreign energy firms without its approval.

Last week, a Baghdad official said the Iraqi government has hired a law firm to target any buyer of what it considers illegally exported Kurdish crude oil, toughening its tactics in a struggle to halt the northern region’s drive for economic independence.

For the past year, the Kurdish Regional Government (KRG) has trucked about 60,000 barrels per day (bpd) of crude to Turkish ports, avoiding the Baghdad-run Iraqi pipeline system as it tries to gain more control over oil revenues.

The central government threatened to sue over the shipments in a long-running dispute that talks between Baghdad and Erbil have so far failed to settle, but it took no legal action.

However, Baghdad is now preparing to act because it says the Kurds have raised the stakes by building a new pipeline linking their semi-autonomous landlocked region to Turkey.

Iraq’s oil ministry instructed legal firm Vinson and Elkins about two months ago to pursue anyone who buys oil pumped down the pipeline to the Turkish city of Ceyhan, near the Mediterranean, a senior Iraqi oil official said.

“This is not a game. Anyone who buys this oil is doing something illegal,” added the official, who asked not to be named. “We will target the companies because they are the ones who will monetise and pay for the Kurdish oil. How else can it get onto the market?”

Vinson and Elkins, which has represented the Iraqi government in the past, declined to comment. 

Baghdad turned a blind eye to small trading companies that have bought barrels via regular tenders and trucked them across the border. Those tenders are still taking place. 

But while the trucked amounts are relatively modest, Baghdad realised the Kurds were serious about independent exports when they sent test shipments down the pipeline in early December. 

“You can’t compare general trucking of 60,000 barrels or less to significant exports through a pipeline system,” the senior Iraqi official said. “We have a bilateral, international agreement with Turkey — ratified by parliament — that does not allow the Iraq-Turkey pipeline to be used by a third party without the consent of the Iraqi government.”

The central government insists it has the sole right to export Iraqi resources, including those from the northern Kurdish region which gained de facto autonomy after US-led invasion in 1991.

The KRG says its right to exploit and export reserves under its soil is enshrined in Iraq’s federal constitution, which was drawn up following the Gulf War of 2003, and has passed its own hydrocarbons legislation.

So far, the talks between Baghdad and the Kurdish authorities in Erbil have borne little fruit, and once the storage tanks are full, Turkey must decide whether to turn off the taps or export the oil in defiance of Baghdad.

Turkish Energy Minister Taner Yildiz said on Thursday that around 220,000 barrels of Kurdish oil has been stored so far in tanks in Ceyhan. It remains unsold, and Iraq’s threat of legal  action appears intended to deter would-be buyers. 

Yildiz told Reuters in an interview that Turkey would stand by a consensus reached in December between Ankara, Baghdad and Erbil to seek the central government’s permission, but not its blessing, in exporting KRG oil. 

Oil companies baulk 

The central government has raised the pressure on the Kurds to reach a deal, threatening to cut their share of the annual budget if they independently export oil. 

On the legal front, lawyers said Baghdad would struggle to make a case stick and any litigation would be complicated by questions of jurisdiction, but the threat could deter companies reluctant to deal with the negative headlines.

“Instead of going after the KRG, they are going after people who will lift oil from them. They are trying to say to existing companies: ‘Your deal is in jeopardy’,” said one lawyer who advises oil firms.

“It is a good strategy because no lifter wants to be in this situation. It is bad for the annual report as you have to disclose any litigation. You could get small lifters who will take the risk of incurring Baghdad’s wrath, but if you are lifting 400,000 bpd you are by definition not small,” he added.

Executives from oil majors have said they won’t touch KRG crude before the Kurds and Baghdad reach an agreement for fear of losing larger contracts with the central government. 

“If Baghdad says ‘no’, I don’t think anyone like us will go. No one big will go,” an executive from one oil major said.  “Even for larger trading companies... who buy a lot of oil from Baghdad, the choice is easy. Why would they take the risk of losing that business?”

Even so, some regular buyers of Kurdish oil are likely to be interested if the Kurdistan Oil Marketing Organisation (KOMO) starts tenders for the Ceyhan oil.

“You don’t need to be such a heavyweight to lift oil from Ceyhan. Someone will be interested,” said an executive from an oil company active in Kurdistan. “They are pushing for a deal on two tracks but you can’t store oil forever. I hope they reach a deal before storage capacity is reached.”

Room for understanding

The storage is far from exhausted, potentially allowing time for talks to progress. Sources said Turkey has allocated three tanks with a capacity of 2.5 million barrels each for the Kurdish oil, just a fraction of which has so far been filled.  

Many industry executives active in Iraq believe both sides are engaged in a game of brinkmanship ahead of Iraqi elections due this year and that a deal will eventually be clinched.

Shahristani said last month Baghdad had proposed that the KRG pay the oil companies operating in the region out of its 17 per cent share of the national budget, accept that national oil company SOMO would market the crude and deposit all revenue into the Development Fund of Iraq, based in New York.

The Kurds, however, are still insisting on marketing their own oil and say the proposal does not give them enough money to pay the operators. Shahristani said the KRG would respond soon.

“There has to be a reconciliation between Baghdad and Erbil. A lot of this is grandstanding ahead of this year’s elections,” said one oil industry source active in the north. “Behind the scenes there is a lot more cordiality, and dialogue is still going on. They both want the money.”

Shahristani said the Kurds had promised not to start exporting while negotiations were still continuing. 

One industry source in Arbil doubted the Kurds would go ahead with a tender for the Ceyhan oil soon, having promised one in January. 

“Negotiations with Baghdad continue and they will play it quiet for now,” he said.