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Damir Kaletovic

Damir Kaletovic

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OPEC Commitments Push Iraq Towards Oil Export Deal With Kurds

Amid the ongoing struggle over oil control between the Iraqi Kurds and the Iraqi central government in Baghdad, the Iraqi central authorities have halted exports of oil from Kirkuk via the state’s marketing authority, SOMO—agreeing to let the oil all go to the Kurds.

Crude exports had only been resumed in September after the two sides reached a revenue-sharing agreement to jointly export crude from the giant Kirkuk field, with the intention of splitting the oil between Baghdad and Erbil.

Instead, the oil produced in Kirkuk will now be transferred to refineries in Kurdistan, according to Kurdish news agencies.

The export and sale of oil produced in Kirkuk has been a complicated issue between Baghdad and the Iraqi Kurds. This oil is produced by the Iraqi federal government in northern Iraq, but exported via a pipeline system owned by the Kurdistan Regional Government (KRG). At the height of the squabble, Baghdad was considering attempting to bypass the Kurdish pipeline and trucking the Kirkuk oil to Iran.

The September agreement came after five months of haggling, and only after a change in regime at the Iraqi Oil Ministry.

It remains unclear why Baghdad has now agreed to send all the Kirkuk oil via the Kurdish pipeline to Kurdistan to be refined, and Kurdish news agencies have offered no additional details of this deal.

The move comes as a surprise as Baghdad has long insisted that only SOMO could market Iraqi crude, while the Kurds have continually accused Baghdad of reneging on an earlier revenue-sharing agreement. The September deal for a 50/50 split had appeased both sides for the first time in almost half a year. Related: GreaseBook: Reporting Oil Production Just Became Much Easier

The OPEC output cut deal reached on the 30th of November is cause for concern as far as the Iraqi Kurds are concerned. While Iraq has the majority of its production from the oil-rich south to rely on, the Kurds will have a much harder time cutting from their smaller share while still feeding the budget of the KRG.

Shortly after the OPEC deal was announced on 30 November, the Wall Street Journal cited a leaked document purportedly showing that SOMO had plans to increase shipments by 390,000 barrels per day in January.

Since the deal was implemented, analysts have questioned Iraq’s ability to cut output in line with its commitments, in part due to contractual obligations to supermajor international oil companies, and in part due to the difficulties of striking an agreement with the Kurds.

In late December, Iraqi Oil Minister Jabbar al-Luaibi reportedly stated that the KRG would take part in the OPEC cuts—but the Kurds have strongly denied this.

Iraqi Prime Minister Haidar al-Abadi has already accused the KRG of exporting more crude oil than the 550,000 b/d permitted under the federal budget for 2017, which was passed on December 7, 2016. Related: The Rebound Is Here: Megaprojects Back On The Table

Producing around 12 percent of Iraq’s total oil output. Kirkuk’s oil production in October 2016 amounted to 614,071 bpd, of which 49,388 barrels per day were produced by Iraq’s North Oil Company. In line with Iraq’s commitment to the OPEC deal, Kirkuk would possibly have to cut around 25,000 barrels per day. It’s a small sum in the wider scheme of things, but for Kirkuk, which is desperate to pay for security against the Islamic State and struggles to pay workers and oil companies, any cut is hard to handle.

At the end of the day, Baghdad does not have enough influence to force the Kurds to cut production, and cutting in Kirkuk is complicated. There is a possibility that by shifting the Kirkuk production to the Kurds, Baghdad will avoid the need to have Kirkuk cut—if OPEC were to consider this ‘Kurdish oil’ beyond the central government’s control.

In 2013, the Kurds built their own oil pipeline to Turkey and began exporting oil via Turkey without Baghdad's approval—essentially bypassing the central government and depriving it of those revenues.

With this in mind, it’s unlikely the Kurds will help Baghdad with any cuts, but what just happened in Kirkuk could be a trade-off for a new deal.

By Damir Kaletovic for Oilprice.com

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