The Iraqi federal government and the Kurdistan Regional Government (KRG) cut a deal earlier this week to resume the export via pipeline of some 450,000 bpd of Kurdish oil to Turkey. Flows have not resumed as of the time of writing, but the atmosphere was one of optimism.
The deal essentially means the Iraqi Kurds will be giving up some of their autonomy. In this case, it is autonomy that Baghdad claims was unconstitutional to begin with: The right to directly sell oil to the market, bypassing the Iraqi federal oil marketer, SOMO. The international arbitration ruling was in favor of Iraq against Turkey, where the Kurds are exporting their oil unilaterally.
The ‘temporary’ deal that has been agreed to says that the KRG will sell its oil through SOMO from now on, and the revenues from that will be paid into an account that Erbil will control. This is exactly what Erbil has been fighting against for years, not willing to have SOMO hovering around its operations and introducing more scrutiny and financial oversight. These oil exports are its only independent revenue stream.
This long-running battle, however, has begun to climax this year, increasing the risk for foreign oil companies operating there, and spooking investors. The Supreme Court ruled in February last year that only the federal government’s SOMO had the authority to export crude, placing foreign oil companies in violation of Iraqi federal law by signing contracts with…
The Iraqi federal government and the Kurdistan Regional Government (KRG) cut a deal earlier this week to resume the export via pipeline of some 450,000 bpd of Kurdish oil to Turkey. Flows have not resumed as of the time of writing, but the atmosphere was one of optimism.
The deal essentially means the Iraqi Kurds will be giving up some of their autonomy. In this case, it is autonomy that Baghdad claims was unconstitutional to begin with: The right to directly sell oil to the market, bypassing the Iraqi federal oil marketer, SOMO. The international arbitration ruling was in favor of Iraq against Turkey, where the Kurds are exporting their oil unilaterally.
The ‘temporary’ deal that has been agreed to says that the KRG will sell its oil through SOMO from now on, and the revenues from that will be paid into an account that Erbil will control. This is exactly what Erbil has been fighting against for years, not willing to have SOMO hovering around its operations and introducing more scrutiny and financial oversight. These oil exports are its only independent revenue stream.
This long-running battle, however, has begun to climax this year, increasing the risk for foreign oil companies operating there, and spooking investors. The Supreme Court ruled in February last year that only the federal government’s SOMO had the authority to export crude, placing foreign oil companies in violation of Iraqi federal law by signing contracts with the Kurds. The March international arbitration ruling in favor of Iraq simply maintained the momentum toward a climax.
One argument (that Baghdad finds convenient) is that if Erbil gave in to SOMO, and the legal battle was put to rest, investors would no longer be squirmish, and more money could pour into Kurdish E&P. In other words, it could mean growth for the Kurds, which rely on disbursements from the Iraqi federal budget; their unilateral oil export revenue isn’t enough. Another argument is that the Kurds want their independence, and the only reason they couldn’t get by without the federal budget allotment is that they lost the disputed, oil-rich Kirkuk to Baghdad. But the reality is rather more nuanced. What could possibly go wrong now? The deal reached this week was between Baghdad and Erbil only; however, the pipeline was shut down by Turkey following the international ruling, and deal or no deal, Turkey has to agree to resume exports. Turkey is now using its leverage here to try to negotiate the settlement it has to pay to Iraq.
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