Government and KRG reach breakthrough agreement on Iraqi Kurdistan oil exports
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IHS Global Insight: Government and KRG reach breakthrough agreement on Iraqi Kurdistan oil exports
In what seems to herald a major breakthrough, the Iraqi government has approved Kurdistan Regional Government (KRG) oil exports through the Kirkuk-Ceyhan oil pipeline, from the Tawke and Taq-Taq fields .
IHS Global Insight Perspective
Significance Iraq's government has reportedly agreed to oil exports commencing from the autonomous Iraqi Kurdistan region, although no details have been released on whether the national Oil Ministry will now agree to reimburse the IOCs producing in the region according to their contracts with the KRG .
Implications Breakthroughs have been heralded before, only to collapse before actual exports begin, but given the Iraqi government's desperate need for money and the KRG's ability to export 250,000 b/d before the end of the year, the Oil Ministry might have finally had to give in to the pressure from the KRG, the Finance Ministry, Kurdish national parliamentarians, and other government officials to raise export volumes and revenues, since southern production increases have proved elusive .
Outlook A deal—if exports go through and the KRG is satisfied with the revenue split—will strengthen the hand of the KRG significantly regarding its right to have its own oil law and control its own resources, as the agreement will legitimise the contracts it has signed with the companies—even though the early producers entered before the KRG oil law was launched .
A Deal Finally?
Reports over the weekend indicate that claims by the Kurdistan Regional Government (KRG) on Friday (8 May) that exports from its Tawke and Taq-Taq fields were imminent have been followed up by official statements from the Iraqi Oil Ministry that exports from the autonomous region will indeed commence in just a few weeks' time, as soon as the fields' export pipeline is tied in completely with the Kirkuk-Ceyhan export pipeline to the Turkish Mediterranean coast. Reports from numerous news agencies today also confirm Norway 's DNO—the operator of Tawke—as saying that it has received official notification from the KRG on the matter.
According to the KRG's Natural Resources Minister Ashti Hawrami, initial exports will start flowing on 1 June, with DNO pumping 60,000 b/d of crude into the Kirkuk-Ceyhan pipeline, followed later that month by around 40,000 b/d of oil from the Taq-Taq field, operated by a joint venture between Swiss/Canadian Addax Petroleum and Turkey 's Genel Enerji. Before the end of the year, exports from the KRG should reach 250,000 b/d, as both companies already have significant installed production capacity that has stood idle during the political dispute about export rights, and have undertaken far-reaching preparations for second-phase facility expansions.
Too Good to Be True?
Conspicuously, there is no information from either side about the details of the deal. The Iraqi government and Oil Ministry have hitherto welcomed all additional crude being sent on by the Kurds, but in line with their refusal to accept the legality of the KRG's passing of their own oil law, they have refused to honour the payments due to those IOCs under contracts they have signed with the region. As the Iraqi government has moved away from initial plans to offer oil contracts based on a production-sharing-agreement (PSA) basis—similar to the KRG contracts—in favour of technical service contracts (TSCs), the dispute has acquired a technical and legal dimension. This has made it ostensibly impossible for Iraq's government to honour the production shares the companies are due for producing the crude under the KRG contracts, without legitimising both the contract model (which many, particularly in Iraq's parliament, find to be in breach of the nation's need for national control over its oil and gas reserves) and the KRG oil law, including the autonomy asserted by the region over its natural resources.
All Iraqi crude in the Turkish Ceyhan port has to be marketed by the State Oil Marketing Organisation (SOMO), a prerequisite confirmed again by comments about this issue to Associated Press (AP) by Oil Ministry spokesman Asim Jihad. Hence, a deal would need the Iraqi government to have agreed to split the export revenues with the autonomous region—as per a previous government revenue split agreement reached some years ago— after having paid the companies their production share. IOCs in the KRG have production shares of between 18% and 20% in general, while the KRG has agreed to a 17% share of Iraq 's government revenue, based on its population's size as a proportion of Iraq 's total population. Iraq 's Oil Ministry last year said that the KRG operators were free to pump their crude into the Kirkuk-Ceyhan pipeline, but refused to acknowledge the operators' share of the production and revenues, forcing the region to pay the up-to-20% production share out of its own 17% revenue share. This is an impossible calculation, which of course was designed by the Oil Ministry to be a non-starter.
Far-Reaching Implications
If the Oil Ministry has now agreed to split the revenue after production costs (and the profit oil) with the KRG instead of before, as is indicated by the fact that all sides are apparently moving forward full throttle, it will be hard for anyone not to interpret the new situation as legitimising the KRG's claim to full autonomy over its resources and its right to have a separate hydrocarbons legislation from the rest of Iraq.
The Iraqi Oil Ministry has always accorded DNO and the Addax/Genel Enerji JV a special position, given that the companies entered the KRG before it had passed its own oil law and with the blessing of the then-government of Iraq. Since then, however, the companies have harmonised their PSA contracts with the KRG law, and this has rendered the distinction that the Oil Ministry is accepting them, but not those following, difficult to keep up in the long run. From this perspective—if oil exports from the KRG do get under way within a few weeks—it is hard not to see the deal as a one-sided victory for the KRG, as it does not force the region to enter some wider compromise about its overall legal status or its claims on the disputed Kirkuk region.
Conversion Under the Gallows
Indeed, the apparent Kurdish victory might be a result of its impressively organised and executed lobbying in Iraq and a growing realisation in government circles that Iraqi oil production continues to fall, with export increases remaining elusive for some time still even in a best-case scenario. The Iraqi Oil Ministry has launched a host of projects to raise its oil production revenues significantly within a year, but depleted infrastructure, and a national oil industry suffering from brain drain, decades of reservoir mismanagement, and sanctions have made the obstacles large and production levels difficult to maintain. One year ago Iraq achieved an average export level of 2.11 million b/d—the highest since the 2003 war—but this has since dwindled to more stable levels around 1.8-1.9 million b/d. Interestingly the missing volumes could, before the year is ended, be supplied by the KRG.
In an environment of low oil prices, the fall in export volumes has hit Iraq doubly, raising pressure on the Oil Ministry to reach a deal with the KRG in order to raise export revenues by the only way possible over the short term. The national Kurdish factions in parliament have cleverly used this to their advantage, making sure to press home the fact that Iraq was sitting on shut-in volumes at a time of a severe financial crunch that forced the government to halt a host of reconstruction projects. This pressure might have finally become too much for Prime Minister Nuri al-Maliki and his Oil Minister Hussein al-Shahristani, forcing them to swallow what looks like a very bitter pill for their agenda of centralising the Iraqi state and its oil industry.
Outlook and Implications
It still remains to be seen whether oil exports from the KRG will actually commence within weeks, as details about whether the Iraqi Oil Ministry is now ready to honour the payments to the producing IOCs—as per their contracts with the KRG—have not been made public. Production from the Tawke and Taq-Taq field could, however, commence very quickly and be ramped up to 250,000 b/d before the year's end, as significant installed production capacity has been shut in and pipelines have been constructed to within metres of the Kirkuk-Ceyhan export pipeline that the government controls.
If indeed a deal has been struck in which the Iraqi Oil Ministry and government honours the production share due to the operators according to the KRG revenue-sharing law, the KRG's hand in negotiations to allow it to continue applying its own oil law and hydrocarbon autonomy has been greatly strengthened and legitimised, conferring "winner" status on many more of the IOCs that have invested in upstream acreage in the region. The Iraqis might have seen little alternative in the end, given the country's need to raise export revenues drastically and its inability to raise production in the rest of the country within the short term.
IHS Global Insight: Government and KRG reach breakthrough agreement on Iraqi Kurdistan oil exports
In what seems to herald a major breakthrough, the Iraqi government has approved Kurdistan Regional Government (KRG) oil exports through the Kirkuk-Ceyhan oil pipeline, from the Tawke and Taq-Taq fields .
IHS Global Insight Perspective
Significance Iraq's government has reportedly agreed to oil exports commencing from the autonomous Iraqi Kurdistan region, although no details have been released on whether the national Oil Ministry will now agree to reimburse the IOCs producing in the region according to their contracts with the KRG .
Implications Breakthroughs have been heralded before, only to collapse before actual exports begin, but given the Iraqi government's desperate need for money and the KRG's ability to export 250,000 b/d before the end of the year, the Oil Ministry might have finally had to give in to the pressure from the KRG, the Finance Ministry, Kurdish national parliamentarians, and other government officials to raise export volumes and revenues, since southern production increases have proved elusive .
Outlook A deal—if exports go through and the KRG is satisfied with the revenue split—will strengthen the hand of the KRG significantly regarding its right to have its own oil law and control its own resources, as the agreement will legitimise the contracts it has signed with the companies—even though the early producers entered before the KRG oil law was launched .
A Deal Finally?
Reports over the weekend indicate that claims by the Kurdistan Regional Government (KRG) on Friday (8 May) that exports from its Tawke and Taq-Taq fields were imminent have been followed up by official statements from the Iraqi Oil Ministry that exports from the autonomous region will indeed commence in just a few weeks' time, as soon as the fields' export pipeline is tied in completely with the Kirkuk-Ceyhan export pipeline to the Turkish Mediterranean coast. Reports from numerous news agencies today also confirm Norway 's DNO—the operator of Tawke—as saying that it has received official notification from the KRG on the matter.
According to the KRG's Natural Resources Minister Ashti Hawrami, initial exports will start flowing on 1 June, with DNO pumping 60,000 b/d of crude into the Kirkuk-Ceyhan pipeline, followed later that month by around 40,000 b/d of oil from the Taq-Taq field, operated by a joint venture between Swiss/Canadian Addax Petroleum and Turkey 's Genel Enerji. Before the end of the year, exports from the KRG should reach 250,000 b/d, as both companies already have significant installed production capacity that has stood idle during the political dispute about export rights, and have undertaken far-reaching preparations for second-phase facility expansions.
Too Good to Be True?
Conspicuously, there is no information from either side about the details of the deal. The Iraqi government and Oil Ministry have hitherto welcomed all additional crude being sent on by the Kurds, but in line with their refusal to accept the legality of the KRG's passing of their own oil law, they have refused to honour the payments due to those IOCs under contracts they have signed with the region. As the Iraqi government has moved away from initial plans to offer oil contracts based on a production-sharing-agreement (PSA) basis—similar to the KRG contracts—in favour of technical service contracts (TSCs), the dispute has acquired a technical and legal dimension. This has made it ostensibly impossible for Iraq's government to honour the production shares the companies are due for producing the crude under the KRG contracts, without legitimising both the contract model (which many, particularly in Iraq's parliament, find to be in breach of the nation's need for national control over its oil and gas reserves) and the KRG oil law, including the autonomy asserted by the region over its natural resources.
All Iraqi crude in the Turkish Ceyhan port has to be marketed by the State Oil Marketing Organisation (SOMO), a prerequisite confirmed again by comments about this issue to Associated Press (AP) by Oil Ministry spokesman Asim Jihad. Hence, a deal would need the Iraqi government to have agreed to split the export revenues with the autonomous region—as per a previous government revenue split agreement reached some years ago— after having paid the companies their production share. IOCs in the KRG have production shares of between 18% and 20% in general, while the KRG has agreed to a 17% share of Iraq 's government revenue, based on its population's size as a proportion of Iraq 's total population. Iraq 's Oil Ministry last year said that the KRG operators were free to pump their crude into the Kirkuk-Ceyhan pipeline, but refused to acknowledge the operators' share of the production and revenues, forcing the region to pay the up-to-20% production share out of its own 17% revenue share. This is an impossible calculation, which of course was designed by the Oil Ministry to be a non-starter.
Far-Reaching Implications
If the Oil Ministry has now agreed to split the revenue after production costs (and the profit oil) with the KRG instead of before, as is indicated by the fact that all sides are apparently moving forward full throttle, it will be hard for anyone not to interpret the new situation as legitimising the KRG's claim to full autonomy over its resources and its right to have a separate hydrocarbons legislation from the rest of Iraq.
The Iraqi Oil Ministry has always accorded DNO and the Addax/Genel Enerji JV a special position, given that the companies entered the KRG before it had passed its own oil law and with the blessing of the then-government of Iraq. Since then, however, the companies have harmonised their PSA contracts with the KRG law, and this has rendered the distinction that the Oil Ministry is accepting them, but not those following, difficult to keep up in the long run. From this perspective—if oil exports from the KRG do get under way within a few weeks—it is hard not to see the deal as a one-sided victory for the KRG, as it does not force the region to enter some wider compromise about its overall legal status or its claims on the disputed Kirkuk region.
Conversion Under the Gallows
Indeed, the apparent Kurdish victory might be a result of its impressively organised and executed lobbying in Iraq and a growing realisation in government circles that Iraqi oil production continues to fall, with export increases remaining elusive for some time still even in a best-case scenario. The Iraqi Oil Ministry has launched a host of projects to raise its oil production revenues significantly within a year, but depleted infrastructure, and a national oil industry suffering from brain drain, decades of reservoir mismanagement, and sanctions have made the obstacles large and production levels difficult to maintain. One year ago Iraq achieved an average export level of 2.11 million b/d—the highest since the 2003 war—but this has since dwindled to more stable levels around 1.8-1.9 million b/d. Interestingly the missing volumes could, before the year is ended, be supplied by the KRG.
In an environment of low oil prices, the fall in export volumes has hit Iraq doubly, raising pressure on the Oil Ministry to reach a deal with the KRG in order to raise export revenues by the only way possible over the short term. The national Kurdish factions in parliament have cleverly used this to their advantage, making sure to press home the fact that Iraq was sitting on shut-in volumes at a time of a severe financial crunch that forced the government to halt a host of reconstruction projects. This pressure might have finally become too much for Prime Minister Nuri al-Maliki and his Oil Minister Hussein al-Shahristani, forcing them to swallow what looks like a very bitter pill for their agenda of centralising the Iraqi state and its oil industry.
Outlook and Implications
It still remains to be seen whether oil exports from the KRG will actually commence within weeks, as details about whether the Iraqi Oil Ministry is now ready to honour the payments to the producing IOCs—as per their contracts with the KRG—have not been made public. Production from the Tawke and Taq-Taq field could, however, commence very quickly and be ramped up to 250,000 b/d before the year's end, as significant installed production capacity has been shut in and pipelines have been constructed to within metres of the Kirkuk-Ceyhan export pipeline that the government controls.
If indeed a deal has been struck in which the Iraqi Oil Ministry and government honours the production share due to the operators according to the KRG revenue-sharing law, the KRG's hand in negotiations to allow it to continue applying its own oil law and hydrocarbon autonomy has been greatly strengthened and legitimised, conferring "winner" status on many more of the IOCs that have invested in upstream acreage in the region. The Iraqis might have seen little alternative in the end, given the country's need to raise export revenues drastically and its inability to raise production in the rest of the country within the short term.
