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Simon Watkins

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…

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Baghdad’s Bold Move To Take Over Kurdistan’s Oil Sector Is A Blow To Russia

  • Russia has long been a thorn in the side of any and all attempts by the U.S. to adopt a constructive realignment of its relationship with Iraq.
  • Iraq’s Oil Ministry is proposing the creation of a Kurdistan National Oil Company under the federal ownership of the government in the south of Iraq.
  • Kurdistan’s regional government may be set to lose authority over its heavily Russian-dominated oil industry.

Following two recent landmark legal rulings by the Supreme Court of the Federal Government of Iraq (FGI) in Baghdad, news emerged last week that Iraq’s Oil Ministry is proposing the creation of a Kurdistan National Oil Company under the federal ownership of the government in the south of Iraq. This is aimed at stripping any authority that the government of the semi-autonomous region of Kurdistan (the KRG) in Iraq’s north has over its heavily Russian-dominated oil industry and would render all previous contracts entered into between the KRG and oil companies subject to review. In fact, Iraq’s Baghdad-based Oil Ministry has now ordered the KRG to supply copies of all oil and gas contracts signed between the region’s government and external parties over the past 18 years, as well as statements of related revenues. In an apparent show of support for Iraq’s Federal Government in Baghdad, the U.S. government last week granted Baghdad one of its longest-ever waivers to continue to import gas and electricity from Iran as an interim solution to its domestic energy supply problems. 

Russia has long been a thorn in the side of any and all attempts by the U.S. to adopt a constructive realignment of its relationship with Iraq, having effectively taken control of the oil infrastructure in the northern region of Kurdistan in 2017, as examined in depth in my new book on the global oil markets. Spotting an opportunity to project its own power into the chaos that followed the Kurdistan ‘yes’ vote on independence from the rest of Iraq in 2017, Russia – via its corporate oil proxy, Rosneft – at first provided the KRG government with US$1.5 billion in financing through forward oil sales payable in the next three to five years. Then it took an 80 percent working interest in five potentially major oil blocks in the region together with corollary investment and technical, technology, and equipment assistance. Finally, it established 60 percent ownership of the vital KRG-Turkey pipeline by dint of a commitment to invest US$1.8 billion to increase its capacity to one million barrels per day. Moscow considered itself well-placed at that point to leverage this presence into a similarly powerful position in the south of the country, in particular by striking new oil and gas field exploration and development deals with Baghdad. These new deals were to follow Russia’s role in intermediating in the perennial dispute between Kurdistan and the Federal Government of Iraq in Baghdad on the budget disbursements-for-oil deal. In reality, Russia – far from mediating effectively to find a solution – instead sought to sow further discord between the two sides, which has undermined the efficacy of the budget disbursements-for-oil deal since Rosneft effectively took over control of Kurdistan’s oil sector in 2017. 

According to sources close to Iraq’s Oil Ministry, spoken to exclusively by OilPrice.com at the time, Moscow insisted through the KRG that oil flows would not restart until pipeline transit fees and pumping tariffs were paid to Rosneft, which by that point had its 60 percent stake in the Kirkuk-Ceyhan pipeline, through which much of Iraq’s oil was exported. Moscow also wanted the FGI to look again at its decision to deem ‘invalid’ the assignment to Rosneft by the KRG of five exploration blocks in Kurdish territory. These are estimated to have aggregate 3P reserves of 670 million barrels, and Rosneft has an 80 percent stake in each. Rosneft’s demands when allied to its central involvement in the Kurdistan region of Iraq not only threatened Iraq’s plans to meet its new in-house oil production targets but also its potential export routes for the new flows. The original Kirkuk to Ceyhan Pipeline – the Iraq-Turkey Pipeline (ITP) – consisted of two pipes, which had a nameplate capacity of 1.6 million bpd combined. The FGI-controlled pipeline’s export capacity reached between 250,000 and 400,000 bpd when running normally, although it was subject to regular sabotage by militants of various descriptions. The KRG, in response to the regular attacks on the FGI pipeline, completed its own single-side track Taq field-Khurmala-Kirkuk/Ceyhan pipeline in the border town of Fishkhabur. This was part of its drive to raise oil exports above 1 million bpd.

Under the FGI administration of Haider al-Abadi, the signs were that some accommodation of the demands of Rosneft and the KRG might be in the offing. There had been some movement on the percentage basis for the budget compensation to be paid to the KRG, up from just under 13 percent. There had also been a ratification of the idea that Baghdad would return significant volumes of oil to Kurdistan for local refining and it had even been acknowledged that a pumping tariff might be paid to Rosneft. At that time, then-Oil Minister Jabar al-Luaibi even said that he was willing to accommodate Rosneft in the Kirkuk oil hub itself, highlighting that Baghdad did not want to close the doors in the face of anyone ‘who wanted to help’. The only condition at that point was that Rosneft should work with BP which, as BP owned a 19.75 percent stake in Rosneft, did not appear to be an insurmountable requirement. The view of the KRG at the time was that the de facto leader of Iraq, Moqtada al-Sadr, would eventually go along with what had been agreed, as the KRG thought that he was more likely to do deals with Russia than deal with the U.S., which regards him as a dangerous enemy combatant at best and an out and out terrorist at worst.

All of this contributed to a constant lack of adherence on both sides to the budget disbursements-for-oil deal, exacerbated by the lack of legal clarity on the issue. According to the KRG, 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. In addition, the KRG 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 organized in a region.” As such, the KRG maintains that as 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 KRG 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 and 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. 

The new stridency of Iraq’s Oil Ministry in proposing the creation of a Kurdistan National Oil Company under the federal ownership of the government in the south of Iraq underlines it is extremely serious about implementing the earlier rulings of the Supreme Court of the Federal Government of Iraq (FGI) in Baghdad. These rulings were that sales of oil and gas by the KRG, independent of the central government in Baghdad, are unconstitutional and that the KRG must hand overall oil production to the Federal Government of Iraq, represented by the Ministry of Oil. Additionally, the Supreme Court ruled that the Oil Ministry has the right to: “Follow up on the invalidity of oil contracts concluded by the Kurdistan Regional Government with foreign parties, countries, and companies regarding oil exploration, extraction, export and sale.” 

By Simon Watkins for Oilprice.com

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