Kurdistan launches staunch defence of oil policy

Despite significant political and economic challenges, and acts of theft and sabotage on the export pipeline inside Turkey, the Ministry of Natural Resources (MNR) has boosted crude oil export and generated sufficient funds to meet the KRG’s planned revenue goals.

The KRG policy to increase direct oil sales (jointly agreed in June by the KRG and all five political parties in the coalition government) will enable the KRG to cover ongoing government costs and state salaries and to start to pay off the backlogs of unpaid wages. In addition, the KRG will be able to begin payments to the exporting oil companies so that they can sustain and then increase their oil export levels, which is vital for the Region’s economic welfare.

In 2014, former Prime Minister Nouri Al- Maliki’s government cut the entire Kurdistan budget, creating a financial crisis for the people of the Kurdistan Region.

At that time, despite the limited capacity to export oil, the Ministry of Natural Resources (MNR), under the directive of the Kurdistan Region Oil and Gas Council, moved quickly to organize alternative financial support for the Kurdistan Region by a) increasing pipeline export capacity, b) boosting actual oil exports, and c) successfully securing from buyers pre-payments against future oil supplies.

As a direct result of those measures, the Kurdistan Regional Government (KRG) was able to survive financially during 2014, although payments of some government salaries were partially lagging behind. However, other unexpected factors came into play that severely impacted the financial situation, such as the added costs of the war against IS terrorists and the economic burden on the Region from hosting 1.8 million refugees and internally displaced people.

Then at the end of 2014, following new budgetary discussions, the KRG and the entire political leadership in Kurdistan, including the five political parties in the coalition government, decided to give the new government in Baghdad a chance, under its new Prime

Minister Haider Al-Abadi.
The cooperation and coordination reached with Baghdad was encouraged by all the Kurdistan political leaders. It consisted of a plan to supply certain volumes of oil from the Kurdistan Region to SOMO in return for the KRG’s full federal budget entitlement during 2015, which was estimated at around US$1 billion per month. This became an undertaking towards the KRG in the federal budget law of 2015.

Although MNR was pleased with the agreement with Baghdad, based on its experience of all the previous failed agreements, MNR internally registered its doubts as to whether Baghdad could or would fulfill its financial obligations to Kurdistan under the agreed oil-for-budget plan. Nevertheless, MNR fully encouraged the KRG’s decision to proceed and actively did all that was possible to make the plan work for both sides.

Regrettably, as predicted by MNR, the KRG received only one third of its budget entitlement from Baghdad in the first five months of 2015. This led to a rapid deterioration of the financial crisis in the Kurdistan Region and caused a significant backlog in the pay of government salaries, including those of the Peshmerga and the security forces.

Predicting that the crisis would deepen month by month, in spring 2015 MNR organized a series of meetings with the Regional Oil and Gas Council, the Council of Ministers, the political leadership of the five parties in Kurdistan, MPs in the Kurdistan parliament and the Kurdistan MPs from the federal parliament in Baghdad, to explain and forewarn of what would lie ahead.
The Minister of Natural Resources explained the economic realities of the situation facing the Region, and urged support for reforms to cut government costs.

The Minister of Finance, supported by the Council of Ministers, took a lead on this and produced a credible reform plan to cut government costs and increase the non-oil revenues of the Region.

Unfortunately, the Minister of Finance did not receive the required political support (particularly from some key decision makers in his own party) to implement that reform program. Thus, the budget shortfall from Baghdad, coupled with ever increasing KRG expenditure, led to more delays in government salaries and support for the Peshmerga and other vital security services.

By late spring this year, the inability or unwillingness of Baghdad to provide the KRG’s fair share of the agreed budget had become clear to the KRG and the entire political leadership of Kurdistan Region. But despite the overwhelming evidence, no action was taken by the political leadership to deal with this new deteriorating reality.

Only in mid June did the political parties of Kurdistan reluctantly agreed to MNR’s long-suggested proposal to increase direct sales of KRG oil to international exporters, in order to provide a direct and predictable economic lifeline to our Region.

That political decision took effect on 24 June 2015. The program involved the following:

• MNR to boost crude oil export to 500,000 barrels per day from KRG operated fields, assuming no interruptions to the flows in the pipeline beyond MNR’s control, and no political interference or reneging on the decisions taken.

• It was assumed and hoped that an average netback price of $55 per barrel would remain in place for the rest of the year.

• This was then expected to generate around $850 million per month, which was deemed to be sufficient to pay ongoing government costs and salaries and begin covering the backlog in the salaries.

• MNR was assigned responsibility for finding buyers for KRG crude oil and for agreeing with the previous buyers of the KRG’s oil (who had made pre-payments in 2014) to defer their outstanding pre-payments until 2016 to enable the KRG to receive the full $850 million per month during 2015.

• It was assumed that this $850 million per month would allow the KRG to set aside some funds to pay the exporting international oil companies, so that they would maintain and then increase export levels, and thereby increase revenues even further.

• It was also agreed that the Ministry of Finance would be in charge of receiving all oil revenues at the Kurdistan International Bank (KIB) and HalkBank.

• In early July, a further government directive, signed by the KRG Prime Minister, authorized the Minister of Finance with controlling the movement of money from the KRG’s account in HalkBank in Turkey.

• It was also agreed that all other revenue, if not directed to HalkBank for any practical reason, should be directed to the Ministry of Finance account at the KIB.

As a result MNR duly performed the following:

• MNR immediately signed contracts with experienced international oil traders and buyers for its available export volumes, a process approved by the Regional Oil & Gas Council around the third week of June 2015.

• MNR obliged the buyers to guarantee $850 million monthly, assuming that the average export levels were achieved.

• MNR persuaded all the traders involved to agree to defer receiving oil against their outstanding pre-payments until 2016.

• However, in practice, MNR faced significant interruptions to oil flow through the pipeline in Turkey due to sabotage and theft, leading to reduced export levels and the loss of revenue to the KRG of $501 million (details of which were published recently). Unfortunately, some domestic politicians appeared slow to condemn the sabotage to discourage similar acts in the future.

• Failure to meet contractual export delivery targets at the agreed average levels released the buyers from their full payment obligations of $850 million per month. However, even then the traders were once again persuaded not to cut back on the payments on those occasions.

Adding to all these challenges, the price of crude oil has dropped since mid June 2015 by approximately 20%.

Despite all of those difficulties, the following payments have been made or are expected to be received in the two months, from 24 June to 24 August 2015:

a) As of 20 August, the KRG received $1,241.6 million ($1.24 billion) into the KIB account in favour of the Ministry of Finance. The Ministry of Finance is tasked with following up with KIB on the management and movement of the funds received.

b) A further deposit of $187.5 million will be made into the same KIB account today, 21 August.

c) A further $125 million is also expected on or before 24 August.

d) Thus a total of $1,554.1 million ($1.55 billion) has been achieved for the past two months. This is more than promised under the agreements with the traders, despite the reduced oil exports caused by interruptions and factoring in the cost of the purchased products mentioned below.

e) In addition, the KRG purchased refined products amounting to $134 million, using export oil swaps for diesel for the KRG’s power stations.

MNR is therefore well ahead of the payments received schedule compared to the agreed program, despite the difficulties and the flow interruptions.

The money flow management and transfers through KIB and HalkBank are solely assigned to the Ministry of Finance. But the Ministry of Finance has been unable to bring all the oil revenues into Kurdistan for these reasons:

• The Minister of Finance has not been able to take the necessary procedural and administrative steps to take financial responsibility for the Ministry of Finance with the HalkBank, in order to improve the flow of the funds into Kurdistan. It is understood that this is because of direct political interference by some people in his own party, in order that they can shift the blame to MNR for the delayed payments to the Peshmerga forces and government employees.

• Also, there are some recognized difficulties in bringing dollars into Kurdistan via the KIB in a timely manner and converting them into Iraqi dinars to pay salaries. The Ministry of Finance is working on a solution to these difficulties, and MNR has always been ready to assist if needed.

In Summary

• MNR has stuck to the task at hand and continues to deliver for the people of Kurdistan.

• MNR operates on a professional and technical basis throughout all its organisations. Contrary to the myths circulated by certain politicians and their media outlets, MNR does not allow party politics to interfere with its work.

• MNR defends the interests of the people of Kurdistan against political interference and is taking the lead in helping to secure the economic stability of Kurdistan and its future.

• MNR also believes that the Minister of Finance is doing an excellent job at his ministry, but to be more effective and more successful, he should not be hindered by political influence that damages the interests of the people.

• The Minister of Finance should be supported and authorised as soon as possible in his program of economic reform and MNR is ready to assist in this process.

• MNR is confident that providing there are no major interruptions, whether through sabotage, theft, or indeed political interference or deviating from agreed export policies, the immediate needs of the people of the Kurdistan Region can be met through continued direct oil sales.

• The KRG should always remain open to dialogue and discussion with our colleagues in Baghdad on ways to resolve all outstanding issues on oil and gas and develop long-term cooperation that leads to a win-win situation for all concerned.

• If some politicians had supported more rapid action by the KRG following Bagdad’s non-compliance on the budget payments, we would been able to minimize the impact of the financial crisis on our Region. However, at this very challenging time, MNR encourages all of Kurdistan’s political parties to put aside their narrow and often damaging self-serving agendas, and to stop using oil as a political football which undermines our ability to maintain the trust of the buyers and the willingness of the oil company investors in our Region.

• We also hope that the political parties rally round MNR in support of its work in the face of the crisis, and that they act in the interests of the people of Kurdistan whom they aspire to serve.