Progress but no solution: the KRG-Baghdad oil deal

A drilling rig in the Kurdish region of Iraq. Previous aborted export deals mean the latest compromise should be welcomed with caution.

The Iraqi government has struck a tentative deal with its regional counterpart in Erbil that - if ratified and stuck to – will see a steady increase of Kurdish oil via central government pipeline in exchange for compensation for the Kurdish region’s foreign oil companies.

Under the verbally-agreed deal, announced on the Kurdish Regional Government’s website from the office of Deputy Prime Minister Rosh Nuri al-Shawish, the Kurdish region will initially supply 140,000 barrels of oil a day to the central export pipeline hub at Kirkuk, rising to 200,000 bpd from October, and 250,000 bpd from 2013, according to Iraq Oil Report.

Iraq’s Oil Minister Abdul-Karim Luaibi, and his regional counterpart Ashti Hawrami hammered out the deal with finance and trade ministers, according to AK News.

The deal is subject to the approval of the cabinets of the governments in both Baghdad and Erbil. According to Kurdistan alliance spokesman Moa'd al-Tayyeb, the deal will help pave the way for the passage of an oil law in Iraq.

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ADVANCE

Under the deal, Baghdad will shortly pay a trillion Iraqi Dinars – a little over $850 million – as a lump sum “advance” to the regional government (the KRG) for distribution to the region’s oil companies.

$850 million covers around half of the $1.5 billion unpaid costs incurred by oil firms in the region to date, according to a KRG estimate. Baghdad previously said it would pay $560 million, after firms in the region were audited, on the basis of a lower export commitment from the region.

It is unclear whether this “advance” is final settlement of the full $1.5 billion the KRG have previously claimed on behalf of oil companies. Several important details of the agreement - not least of which how the central government will audit payments - appear to have been farmed out to small committees, where progress in Iraqi politics often goes to die.

SAVING FACE

While the Kurdish delegation was negotiating in Baghdad, top politicians on both sides issued standard lines to pre-empt potential failure.

Shortly before the deal was announced, Baghdad’s Deputy Prime Minister for Energy Hussein Al Sharistani has been vocally maintaining his long-standing position that companies which choose to work in the Kurdish region after signing contracts in the south will be expelled.

Sharistani also reportedly had a rough meeting with ExxonMobil executives a week before the deal was struck. "It was a really tense meeting. Shahristani was tough with Exxon's officials and warned them angrily they could lose the West Qurna contract if they started work in Kurdistan," an industry source told Reuters. "The atmosphere heated up when Exxon said they would consider legal action."

KRG Prime Minister Nerchervan Barzani issued a similarly trenchant statement that oil companies in the Kurdish region must be paid.

PAYMENT TERMS

Further payments to the KRG will be contingent on a satisfactory audit of Kurdish oil receipts and expenditures by Baghdad.

Companies will only be repaid for the accrued capital expenses they have incurred, and will still not receive the ‘profit oil’ they are eligible to derive from oil sales under the terms of the contracts they signed with the KRG. Receipt of these amounts is unlikely to be recovered without overdue oil and gas framework legislation in place.

Companies have been selling oil locally to cover their operating expenses, which may become unsustainable as the demands on investment increase with the production levels from the region’s fields. Recent financial results from Genel Energy confirm that the company is currently operating on a break-even basis.

Shares in the Kurdish region’s oil firms leapt on the news late Thursday, with Genel, Gulf Keystone Petroleum and DNO International closing up 4.2%, 5.2% and 11.7% respectively.

The lack of oil legislation in Iraq, part of the unfinished business left the Coalition Provisional Authority in 2005, has retarded the development of Iraq’s oil sector, and it is hoped that passage of a bill broadly in line with one proposed in 2007 will reinvigorate flagging investor enthusiasm for south Iraq’s oil sector while putting the issue of Kurdish oil contracts to rest.

Genel and DNO will be the largest contributors to the region’s new production commitments. Exports from the KRG currently come from the Taq Taq block, operated by Genel, Tawke, operated by DNO, and Khurmala, operated by local firm KAR Group.

The companies agreed to take part in a “goodwill initiative” developed by Hawrami to resume oil exports via the central government’s pipeline after a freeze in April in protest at Baghdad’s refusal to make continued payments for the dues of oil companies operating in the Kurdish region.

Under the terms of the 2012 federal budget, from which it receives 17% of the total subject to central government expenses, the KRG agreed to pump 175,000 bpd.

The goodwill initiative saw companies pump between 100,000 bpd and 120,000 bpd “to build confidence with the federal government with the purpose of squaring up all the oil and gas issues in Iraq,” according to an official statement by Hawrami.