The Kurdish regional government (KRG) is escalating its spat with Baghdad over oil payments today, issuing a statement confirming that supplies to the Iraqi export network have been cut by half to 50,000 barrels of oil per day (bpd).
A drastic cut from the figure of 90-100,000 bpd given as recently as 15 March has been justified by the KRG on the basis that around $1.5 billion is already owed to the region under an agreement struck between the central and regional government, which is needed to fund oilfield development.
“Because of the production costs and the re-investments needed by the producing companies in the Region, the MNR has reluctantly decided to reduce exports to 50,000 bpd with a view to possible cessation in one month unless payments are forthcoming,” the spokesman for Ashti Hawrami’s Natural Resources Ministry says in the statement. The region’s commitment to Baghdad under the 2012 central budget is 175,000 bpd.
The move comes as the eyes of the Arab world are on Baghdad for the Arab League summit.
The KRG’s complaint is that Baghdad’s position is contradictory, as the oil ministry appears happy to take the region’s oil and sell it, but then refuses to remit anything to the region on the basis that the contracts under which the region produces its oil are illegal.
Baghdad’s position is that it will sell Iraqi oil as it gets it, but will not recognise agreements with foreign oil companies which violates its understanding of the country’s ambiguous constitution, a document which appears to support the positions of all conflicting parties in Iraq at all times.
“We still remain hopeful that the authorities in Baghdad will realise the damage being caused to Iraq’s economy by their continued failure to comply with their commitments,” the KRG spokesman said.
Two payments totalling $514million were received by the KRG in early 2011, which when paid to current producers such as DNO and Genel Energy provided a fillip to plans to increase production from the Tawke and Taq Taq fields in the region.
Current producers aside, production activity in the region is showing signs of stalling light of insecurity over receivables. Independents had hoped to be able to start exporting (and getting paid for) more oil by now, not less, or see an end to political wrangling between Erbil and Baghdad make them attractive takeover targets. The prospects of either appear to be dimming.
Kurdistan’s production capacity is believed to be 214,000 bpd, and – largely powered by commitments from DNO and Genel Energy – is slated to rise to 450,000bpd by the end of 2012.
It is widely documented, sometimes at great risk to local Kurdish journalists, that some of Kurdistan’s oil is smuggled out of the region by truck to buyers in Iran, Turkey and Azerbaijan. Estimates of the volume vary, but Deputy Prime Minister for Energy Hussain Al-Sharistani recently put the figure at 75,000 bpd. With the Kurdish market totaling 100,000 bpd – around half of which officially goes into local refining – on the basis of figures provided by officials, there is no-where for Kurdish oil to go beyond unauthorized exports north.
The ongoing feud between the BRG and Baghdad is also holding back the development of Kurdistan’s oil industry through mergers and acquisitions, which the KRG had hoped to see gain momentum after Genel Energy’s rebirth as a London-listed company and ExxonMobil’s entry to the region.
As Iraq’s production and export capacity in the South enters a renaissance, with record post-Saddam production and exports of 2.01 million bpd generating $6.595 billion after one-off teething problems, Baghdad may feel it can afford to care less, at least while oil prices hugely exceed estimates set down in the budget.
The KRG is gambling that the Maliki government’s fragility in parliament, where the government relies on the Kurds to prevent a vote of no confidence, makes the export payment issue impossible to ignore.
