Time for a deal, and for Turkey to stop meddling: Iraq and Kurdistan headed towards a deadlock over oil revenues
Baghdad and Erbil are locked in a battle of nerves. At stake are the control of the energy riches of the landlocked Kurdistan - striving hard to wriggle out of Baghdad’s grip. The region is oil rich. With a federal structure, the issue of who keeps the reins of these riches is of paramount importance. The issue under the hammer is who controls the taps and the proceeds from Kurd oil - the Kurdistan Regional Government (KRG) or the central government in Baghdad?
KOMO or SOMO?
Erbil has been insisting, all these months on a central, somewhat independent role, for its Kurdistan Oil Marketing Company (KOMO) in marketing its crude, whereas, Baghdad wanted the selling process to be under the firm control of the central government’s State Oil Marketing Corporation (SOMO).
The issue needed an urgent resolution, both sides know and realize. In a bid to reach a negotiated settlement to the long-running dispute over exports of oil from Kurdistan via a new independent pipeline to Turkey, the autonomous region’s prime minister and top energy official has been traveling frequently to Baghdad and also Ankara - in recent weeks.
And after the latest round, it has now been announced that Iraqi Kurdistan has finally relented - agreeing upon to export crude using the central government’s oil marketing body, SOMO - while representatives of the region would now be on its board too.
“After hours of meetings, we have agreed that our brothers in the region will be represented in SOMO and agreed that this is the sole national outlet responsible for exporting oil,” Deputy Iraqi Prime Minister for Energy Hussain Al-Shahristani announced.
The earlier rounds of discussions between Erbil and Baghdad had failed in achieving any breakthrough over the issue of allowing the autonomous Kurdistan Region to export its oil through a pipeline to Turkey. Hence the development seems a major step toward resolving the issue. Yet there is still a long way to go.
“The second issue that is still unresolved is that they want the revenue from oil exports to be deposited in a private account for the region in the DFI (Development Fund for Iraq),” Shahristani said. Revenue from the sale of Iraq’s oil is currently paid into the DFI in New York for Baghdad to disburse.
Kurdistan is entitled to a 17 percent share, but says it in fact receives far less than that, and in recent weeks has accused Baghdad of withholding funds, leaving civil servants in the region unpaid.
Crude from Kurdistan used to reach world markets through a Baghdad-controlled pipeline, but exports via that channel dried up due to the row over payments for oil companies operating in the northern enclave. Since then, the Kurds have been exporting smaller quantities by truck across the border whilst building the pipeline to Turkey and negotiating a multi-billion dollar energy deal with Ankara.
While the talks have continued between Erbil and Baghdad, Kurds began shipping oil independently via the new KRG pipeline into Turkey’s Mediterranean port of Ceyhan, which links with the Kirkuk-Ceyhan pipeline at the border. However, exports from the Mediterranean port have been on hold on the issue of who is to control the sales and its proceeds.
Baghdad has been sensitive to any news of direct sales as compromising its authority. It has been warning foreign companies interested in Kurdish oil in Turkey that they may face legal action. Baghdad reportedly also hired a law firm to target any buyer of “the illegally exported Kurdish crude oil.”
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 told Reuters late last month. “This is not a game. Anyone who buys this oil is doing something illegal,” said the official, who asked not to be named. “We will target the companies because they are the ones who will monetize and pay for the Kurdish oil. How else can it get onto the market?”
Iraq also threatened to boycott Turkish companies and cancel contracts after the KRG announced last month that 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.
Baghdad argued that all oil sales must be overseen by the central government and regarded any independent exports tantamount to smuggling. Temperatures in Baghdad rose dramatically, generating a diplomatic row with Ankara, when Turkey’s Daily Milliyet newspaper quoted anonymous Kurdish sources as saying that the first batch of Kurdish oil had been sold through the Trans Petroleum Company in Singapore, worth $90 million.
Baghdad was irked, forcing Turkish Energy Minister Taner Y?ld?z to move in quickly to allay the fears, rejecting reports that oil from the Ceyhan stockpiles has been exported without the consent of the central government.
“Even if a barrel of oil had passed through Ceyhan, Baghdad would have been informed of this and a daily receipt would have been given to the central government noting how much of a sale was made,” Y?ld?z said mid February.
“This is Iraq’s oil, not Turkey’s. Thus Baghdad will be informed, because it is an issue related to Iraq’s income. So far, there has not been any oil that has gone through Ceyhan, but this does not mean it won’t be transferred in future. We’ll share all information with Baghdad,” Y?ld?z emphasized.
And although the issue is still to be fully resolved, and some sticking points remain - hints that a deal between Baghdad and Erbil was imminent has been pouring in for the last few weeks. “We have never been this close to a deal,” Mehmet Sepil, the president of Anglo-Turkish firm Genel Energy who has knowledge of the progress made in talks, was quoted as saying early this month. “The issues that caused impasse have been identified. There’s been quite a bit of progress made.”
“The trickier issue is the bank account. Baghdad wants the revenues to be deposited in the Development Fund of Iraq (DFI) instead of a Turkish state bank,” Sepil said. DFI was created in 2003 under a resolution from the United Nations Security Council to receives revenues from Iraqi oil and gas sales, which are used in part for the its reconstruction efforts.
Last but not least, the outstanding oil payments to companies operating in Iraqi Kurdistan are a major issue that also needed to be ironed out, Sepil emphasized then.
A will to resolve the issue seems present. And that is helping the cause. For both Erbil and Baghdad know, and rather well, that for their own compelling reasons, they need to sort the issue out - before it is too late.
- The pendulum is swinging? Falling oil prices shifts energy balance in favor of the West
- Saudi Arabia has picked the worst time possible to be building massive oil refineries
- Aiming to reduce dependency: an inside look into Jordan's attempts to increase domestic energy production
- Stuck up on oil: the GCC's lackluster diversification record
- Renewable energy: the way out of deep Egypt's economic troubles?
- Iraq's 2014 budget hanging on a cliff- and Kurdistan is the only one that can save it
- The fine line between confidence and audacity: Kurdistan 'ready to quadruple" its oil exports
- With Iraq in disarray, Kurdistan takes advantage of the situation and links Kirkuk to its independent pipeline
- Iraq heading for record oil exports
- Iraqi oil production is headed for a comeback