The unresolved dispute over oil and gas export revenue distribution between the Kurdish Regional Government (KRG) and Baghdad hampers both the Kurdish and the overall Iraqi economy.
On top of the global oil price slump, the regional crisis in Iraq has affected confidence, led some companies to withdraw staff, and further worsened the region’s fiscal crisis, as well as burdening it with large numbers of displaced people and hence increasing fuel and electricity demand.
As Jaafar Altaie of Al Manaar Energy Consulting and Project Management pointed out, the unresolved political and fiscal dispute between KRG and federal Iraq perpetuates the downward economic cycle.
“If the KRG does not have a strong relationship with Federal Iraq, which is vital for its survival at the moment, then it will not receive full payments from Federal Iraq,” Altaie said in an interview with OilPrice.com. Related: Top 5 Oil Producing Countries Could See Production Peak This Year
He went on: “In turn, it leads to not paying out all salaries to Kurdish government employees, government cash deficits, lower domestic spending, shortage of funds to establish infrastructure – both oil and gas infrastructure and public infrastructure such as railways – no payments to IOCs for exports and sales. No payments lead to halted developments, such as Exxon Mobil’s; withdrawals of IOCs, such as Hess and Petroceltic, Western Zagros. Also a planned withdrawal of Gulf Keystone, and even arbitration cases such as Dana Gas case.”
The dispute between the KRG and the central government couldn’t have come at a worse time. “They have a huge draw on the government budget in Iraq now because of the war with ISIS combined with the economic challenges.” Majid Jafar, the chief executive of Crescent Petroleum, a UAE-based company that has an equal share in the Dana Gas-run project in Iraq, said during the May 2015 World Economic Forum on the Middle East in Jordan.
As Iraq Oil Report explained in June, according to the KRG Minister of Natural Resources Mr. Ashti Hawrami, the total accumulated debt to oil companies in Kurdistan is over $3 billion, whereas the KRG has only received one partial payment from federal government in the last 18 months.
In December 2014, the KRG Ministry of Natural Resources and the Federal Iraqi Ministry of Oil seemed to have finally reached an agreement on the budget provision for 2015, under which KRG committed to transfer 550,000 barrels of oil per day (bpd) to the federal Iraq’s State Oil Marketing Organization (SOMO). In return, SOMO was expected to pay a 17 per cent share of Iraq’s federal budget minus some state operating expenses to KRG.
Minister Hawrami confirmed to the media in June that SOMO had earned nearly $800 million from its northern oil sales in May but the KRG had only received about half that amount.
Since June, the Kurds have taken full control of all oil exports from their regions and are shipping as much as 600,000 bpd from their fields without transferring any quantities to SOMO. Related: OPEC, Get Ready For The Second U.S. Oil Boom
However, by going around SOMO, the KRG has raised tensions with Iraqi authorities in Baghdad, with relations already strained due to the controversial dispute of KRG ownership claims to oil and gas revenues and their territorial independence. Given the current circumstances, another stretch of lengthy disputes will not benefit either party, so a renewed deal would have to be reached shortly.
“Keeping in mind the fight with the ‘Islamic State’ (ISIS) in the region, the KRG needs to maintain strong relationships with Federal Iraq to receive payments for the Peshmerga. ISIS remains a threat to border areas of the KRG and has interrupted oil and gas operations there,” Roa Ibrahim, a Consultant at Manaar Energy Consulting & Project Management, said in an interview with OilPrice.com.
The war with ISIS, combined with the existing economic challenges, brought a huge deficit in the government budget. In order to generate more revenues, the government relies on the experience and expertise of IOCs to explore, develop, and produce natural resource reserves.
The high security and political risk of conflicting natural resource claims between Erbil and Baghdad deters international oil and gas companies from pursuing development projects.
“In my opinion, Kurdistan has great oil and gas export potential, but its relationship with IOCs and the federal government of Iraq needs strengthening,” Roa Ibrahim said.
The potential is large indeed. According to Manaar Energy Consulting studies, discovered gas reserves to date are 200 billion cubic meters (BCM) (7 trillion cubic feet- TCF) of 2P (Proven and probable reserves) gas reserves and 615 BCM (22 TCF) of 2C (Best estimate of contingent resources) gas reserves. Related: Historic Deal With Iran Opens Up Oil Industry
Given this large resource base, even with a fast-growing domestic demand, the KRG has significant potential to export gas. The only feasible current markets for Kurdish gas are the domestic market, Turkey (with possible onward transit to Europe), and federal Iraq, given that Iraq’s current gas-flaring challenges may lead to shortages, especially in Baghdad.
KRG is currently producing about 3.5 BCM, entirely for domestic electricity generation, according to Manaar Energy’s figures, and it has plans to export 5 BCM/year by 2019 and 10 BCM by 2020 to Turkey.
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“With longer-term internal demand in the range of 10 BCM, these plans are consistent with a discovered resource base that could support 28 BCM/year or more of production from 2020,” Ibrahim pointed out.
The gas pipeline to Turkey is expected to start operating by 2019, and the feasible export price of gas from KRG to the Turkish border within the range of $3.50 – $6.59/ MMBTU is quite competitive compared to current Turkish gas imports prices from Russia, at a base price $8.75/MMBTU, and the Caspian region, at a base price of $7.16/MMBTU.
The Kurdish gas price for Baghdad of $3.50 – $3.80/MMBTU would also have a significant advantage over the current prices of Iranian gas supply to Bagdad in the range of $8.80 – $9.19/MMBTU.
By Ekaterina Pokrovskaya for Oilprice.com
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