Iraq at a turning point as north challenges south in oil showdown

In theory, the embargo on oil exports to Turkey from the semi-autonomous Kurdish region of Iraq (KRI) in northern Iraq imposed on March 25, 2023 by the Federal Government of Iraq (FGI) in Baghdad in the south remains firmly in place. In practice, the Kurdish region now produces around 250,000 barrels per day (bpd), up from around 2,000 barrels per day in the quarter immediately following the ban alone. “It is a direct challenge (by the KRI) to the authority of the Iraqi government, which has repeatedly shown (Iraqi) Kurdistan that all major oil flows in the region must go through the State Oil Marketing Organization (SOMO, controlled). by the Ministry of Petroleum),” a source working closely with the Ministry of Petroleum exclusively stated OilPrice.com last week. “Such sales are subject to ongoing legal action and also jeopardize Iraq’s position in the ongoing OPEC+ cuts because they disrupt the quota (for Iraq as a whole),” he said. “This matter is not resolved,” he added.

That said, according to a European Union (EU) energy security source, this latest move by Iraqi Kurdistan oil companies could be considered the only viable option left open to them and any notion of independence for the Kurdish region. “Since the embargo was put in place, there have been frequent calls from various companies, business groups and politicians for a proper dialogue to begin on how best to end the current impasse, but nothing has been done and an end is in sight. ,” he exclusively told OilPrice.com last week. “As such, the Kurdish region (of Iraq) continued to lose its mainstay of funding, and that threatens the viability of any real form of independence there from the federal government (in Baghdad), so what choice did they have?” Indeed, the current breach of the spirit of the embargo followed an apparently last-minute appeal letter in January this year from Kurdistan Petroleum Industry Association (APIKUR) – the group that largely includes the oil interests of several foreign firms directly or indirectly – to the US Congress asking for its help in ending the impasse. The letter stressed that the export freeze affecting 400,000-500,000 bpd of Iraqi Kurdistan oil must be lifted because it jeopardized more than $10 billion of US and international investment in Kurdistan and because it had a serious impact on the region’s economy and stability . at a time when regional tensions are already heightened.

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Interestingly, while the recent huge increase in KRI oil production is contrary to the spirit of the FGI embargo, it is a moot point whether it violates the letter of the law under which the embargo was imposed. Bizarrely, in many cases, this huge addition to the region’s oil production is sold through a variety of methods that do not include direct use of the main Iraq-Turkey pipeline that runs from Kirkuk in the KRI to Ceyhan in Turkey , which the export ban focuses on decreases. Instead, according to industry sources, the oil is often sold to local traders for a huge discount to the reference price, who then usually sell it to local refineries, which then convert the crude into diesel and diesel. Otherwise, it is trucked to more distant destinations, including Syria. Other reports state that Iran is also a buyer of some of these flows from the KRI. However, given the longstanding close relationship between Tehran and Baghdad involving the disguising of Iranian oil as Iraqi oil and its subsequent sale on international markets, as discussed in depth in my latest book on the new order of global oil market, any oil sold from the KRI to Iran is unlikely to have the approval of the Iranian authorities and is likely to be lower and AD HOC in kind.

That said, the question of the legal status of the FGI embargo on KRI oil exports or KRI oil flows outside the country is one open to interpretation, given the lack of clarity in the 2005 Iraqi Constitution on the matter. According to the KRG, it has the authority under Articles 112 and 115 of the Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 – the year the Constitution was adopted by referendum. The KRG also claims that Article 115 states: “All powers not stipulated in the exclusive powers of the federal government belong to the authorities of regions and governorates not organized into a region.” As such, the KRG claims that, since the relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenues from its oil and gas exports. However, the Baghdad FGI and SOMO claim that according to Article 111 of the Constitution, oil and gas are the property of all the people of Iraq in all regions and governorates. Accordingly, they believe that all oil and gas developed throughout Iraq should be sold through the official channels of the central FGI in Baghdad.

Efforts by both the FGI and the KRI to find a practical solution to this constitutional conundrum in previous years have also failed miserably. The original deal agreed between the two sides in 2014 was for 17% of the FGI budget after sovereign spending (about $500 million at the time) to be made from Baghdad in exchange for exporting up to 550,000 bpd of oil from the region Iraqi Kurdistan. from their own fields and Kirkuk through FGI’s SOMO. However, from very early on, the deal never quite worked out, with both sides claiming the other didn’t live up to its end of the bargain. Since late 2017, Russia has established itself as a key negotiator between the two sides, having effectively taken over the KRI’s oil sector up to that point, as discussed in depth in my latest book. It soon became clear that Moscow was acting in bad faith when it came to the KRI, simply using its position to take advantage of the greater oil and gas fields in the country’s south.

Currently, FGI has specified that KRI must immediately reduce production to 46,000 bpd, with any additional production above this to require KRI to pay compensation to FGI. According to the Iraqi oil industry source OilPrice.com spoke to, any failure to comply with any of these strictures will result in FGI withholding further budget payments to KRI. Since the embargo began, the FGI has not disbursed around $7 billion in funds, likely because of the KRI, according to official comments from Baghdad. All these developments align perfectly with the priority of the FGI “A Plan for Iraq”which ultimately aims to remove any remaining semblance of independence from the KRI before simply inserting it into the rest of a fully unified Iraq. This was more than hinted at on August 3 last year, when Iraqi Prime Minister Mohammed Al-Sudani made it clear that the new unified oil law – being rolled out, for all intents and purposes, from Baghdad – would govern all oil and gas production. and investment in both Iraq and its autonomous Kurdistan region and will constitute “a strong factor for the unity of Iraq”.

By Simon Watkins for Oilprice.com

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