Baghdad and Erbil’s threadbare agreement

Baghdad’s oil export agreement with the Kurdistan Regional Government (KRG) is hanging by a thread — just. Neither Baghdad nor Erbil is able to stick to its side of the bargain, and the agreement looks increasingly as though it could collapse under its own weight.

The deal was never meant to be a permanent agreement in the first place. It was concluded in December as a pragmatic, stop-gap measure that would allow Iraq’s federal government to make use of the KRG’s pipeline export capacity to restart its own crude marketing operation at Turkey’s Mediterranean port of Ceyhan, after insurgent attacks on the northern federal pipeline system forced a halt to exports in early March 2014.

The deal is simple — the federal government pays the KRG the latter’s 17pc share of all of Iraq’s oil revenues, in return for which the KRG gives federal state-owned marketer Somo 250,000 b/d of crude produced at KRG-controlled fields and exported through the KRG’s export pipeline to the Turkish border and on through the Iraqi federal export pipeline to Ceyhan. In addition, the KRG also exports up to 300,000 b/d of crude produced by federally-controlled North Oil (NOC) to Ceyhan and hands it over to Somo.

But the halving of oil prices since mid-2014 has hit both sides so badly that the deal is coming apart at the seams. Baghdad’s finances are in such a dire state that it has informed foreign oil companies producing the bulk of its crude exports at its large southern oil fields that it is unable to meet their full cost recovery and remuneration payments — which are made in crude volumes equivalent in value to the cash amounts owed — and has invited the companies to discuss ways of handling the crisis. There is even talk in Baghdad of delaying salary payments to government employees and public servants — who make up a large percentage of Iraq’s workforce, and whose wages comprise a big part of the government’s public spending bill. In Iraqi Kurdistan, some employees are still collecting their December salaries.

The upshot is that Baghdad has been unable to transfer to Erbil the latter’s share of Iraqi budgetary revenues, even though both sides profess their commitment to the December agreement. And the KRG has also been unable to deliver to Somo the full amount of crude that it promised under the agreement. Although no official reason for that has been given, it is likely to be an outcome of the fact that the cash-starved KRG has been delaying making payments to the foreign companies operating fields in Iraqi Kurdistan. The companies have hence resorted to increasing their sales within KRG-controlled territory — albeit at below-market prices — to earn some cash to fund their operating costs. This would reduce the amount of crude flowing through the KRG export pipeline to Turkey. It is not inconceivable that some of those companies — such as Genel Energy and DNO — could return to independently trucking their crude for export to Turkey to market their cargoes themselves and earn some cash.

KRG prime minister Nechirvan Barzani says he has convinced the Iraqi government to audit the amount of crude handed over by the KRG to Somo in Ceyhan on the basis of a three-month average, rather than on a daily basis. He also says Erbil is willing to give Baghdad some time to get its financial house in order. But the KRG clearly cannot await its budgetary allocations indefinitely, and if Baghdad does not start transferring the funds on a regular and reliable basis, Erbil will consider itself no longer bound by the December agreement. Barzani has not specified an ultimatum, but it is unlikely that he will wait beyond April.

With both Baghdad and Erbil fighting Isis and Baghdad planning a spring offensive to retake Mosul from Isis, a parting of the ways between Iraq’s Kurds and the federal government is the last thing either of them needs.

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