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Key Oil Pipeline May Spring Back To Life After Months-Long Stalemate

Since 25 March, hundreds of thousands of barrels per day of oil flows crucial to the semi-autonomous Kurdistan region of Iraq (KRI) and important to the oil sector as a whole have been prevented from being exported to Turkey on the basis that they are regarded as illegal by the Federal Government of Iraq (FGI) in Baghdad. The outcome of the current impasse between the two sides will determine the future of Iraq's oil and gas sector and of its geopolitical positioning for decades to come. According to highly reputable local news sources, the movement has been detected in the long-running standoff between the KRI and FGI. However, according to high-level sources connected to both sides spoken to exclusively by OilPrice.com last week, all may not be as it seems. 

The local Iraq sources highlight a series of meetings held recently between officials from Iraq's State Organization for Marketing of Oil (SOMO), the Kurdistan Regional Government (KRG), and Turkey's state-owned Petroleum Pipeline Corporation (BOTAS) in which detailed discussions took place concerning the technical and commercial issues involved in resuming oil exports from the KRI to Turkey. For many years, these oil flows used to average around 500,000-600,000 barrels per day (bpd) running through the Iraq-Turkey Pipeline (ITP), with plans having been made to increase this to 1 million bpd. At the point when the suspension was enforced, around 400,000 bpd were flowing through the pipeline, and these formed one key part of a two-part deal originally agreed between the KRI and the FGI in 2014, as analysed in depth in my new book on the new global oil market order. In brief, the deal was that the KRI would export up to 550,000 bpd of oil from Iraqi Kurdistan's oilfields and Kirkuk via the FGI's Baghdad-based SOMO. In return, Baghdad would send the KRI each month 17 percent of the federal budget (after sovereign expenses) - around US$500 million at that time. The agreement rarely functioned as it should. The KRI frequently and accurately was cited by the FGI in Baghdad for selling oil independently of SOMO, and the FGI in Baghdad was frequently and accurately cited by the KRI for not disbursing the requisite funds from the budget on time or in the correct amounts. 

The Iraqi Constitution was no help in shedding a definitive legal light on the issue. According to the KRI, it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 - the year that the Constitution was adopted by referendum. The KRI also maintains that Article 115 states: "All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region." As such, the KRI posits that as the relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. The KRI also highlights that the Constitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates. However, the FGI in Baghdad and Iraq's SOMO argue that under Article 111 of the Constitution, oil and gas are under the ownership of all the people of Iraq in all the regions and governorates. Consequently, it believes that all oil and gas developed across all of Iraq should be sold through the official channels of the FGI in Baghdad.

Periodically, after the budget disbursements-for-oil deal was agreed, the FGI showed a no-nonsense approach to enforcing its view on the Constitutional standing of independent oil sales by the KRI, with Iraq's Ministry of Oil, represented by SOMO, threatening to sue any buyer taking Kurdish crude oil except through SOMO. In the few months of 2014 that led up to the 2014 deal being agreed, more than 11 million barrels of Kurdish crude had been exported through the ITP and delivered to destinations such as Israel, China and Croatia, according to international legal sources close to the parties, exclusively spoken to by OilPrice.com at the time. Shortly after this, SOMO had initiated proceedings in the U.S. District Court for the Southern District of Texas against the United Kalavyvata, which had allegedly been carrying one such cargo of oil from Kurdistan. This said, from around 2014 to the end of the third quarter of 2017, the FGI often turned a blind eye to a degree of independent oil sales by the KRI. 

However, one of the four key turning points in the recent geopolitical life of Baghdad, as also analysed in depth in my new book on the new global oil market order, occurred in September 2017. This was the failure of the U.S. to support the outcome of the overwhelming vote in Iraqi Kurdistan for an independent Kurdish state. Washington had tacitly assured the Kurds that in exchange for their providing the boots on the ground (in the shape of the fearsome Peshmerga army) in the fight against Daesh, they would be granted independence. After the vote, the U.S. did nothing, instead allowing the Kurdish protests at the vote being ignored to be quashed by Iranian and Federal Government of Iraq forces focused on the Kurdish oil fields in the north. The second of these key turning points was that Russia was then allowed to effectively take over the KRI's oil sector through a three-pronged deal, analysed in full in the book. The third turning point came with the U.S.'s end of combat mission in Iraq in December 2021, which removed any obstacle to Baghdad moving even closer into the Russian-Chinese sphere of influence. 

Following these developments, 2022 saw the FGI move hard and fast on any independent moves from the KRI and even on Western oil firms that operated there. A letter sent on 2 June 2022 by Hassan Muhammad Hassan, the deputy director general of the state-run Basra Oil Company (BOC) called on "all lead contractors and sub-contractors" of Western oil firms working in Iraqi Kurdistan to pledge that they would no longer work there and that any current contracts should be terminated within three months. This was followed by an order from the BOC director general, Khalid Abbas, to "all lead contractors" that ordered them to "suspend dealing with the following subcontractors and never invite them to any future works or projects in BOC oil fields as per the licensing contracts signed with your companies". Any misunderstanding of what all this meant was cleared up just after the 10 March Saudi Arabia-Iran deal had been done - the fourth key turning point for Iraq. As exclusively relayed to OilPrice.com by a senior source working with the European Union's energy security apparatus, a very high-ranking official from the Kremlin said: "By keeping the West out of energy deals in Iraq - and closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West's final demise." 

This said, there are two reasons why Baghdad may well allow the ITP to reopen soon - albeit for perhaps only a brief period - as the local news reports suggest, particularly as Turkey said just over a week ago that it will soon be 'technically' ready for operation. The first is that Baghdad needs money as ever, given the endemic level of corruption in its oil sector, and Turkey owes it at least US$1.47 billion as compensation for buying oil illegally from the KRI, according to a ruling by the International Chamber of Commerce (ICC) in March. Baghdad believes it is more and may have angled for a higher sum during the months of negotiations since the ruling was made. More money will come to Baghdad from its take of the oil it allows to be sold through the ITP by the KRI. The second reason is that it needs time to complete the draconian re-writing of the laws in the Constitution that related to the sale of oil from Iraq. This process is currently underway and, as a senior source who works closely with Iraq's Oil Ministry exclusively told OilPrice.com last week: "When the new laws have been finalised, the KRI will not be able to sell a drop [of oil] without special permission from Baghdad." 

By Simon Watkins for Oilprice.com 

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More