Impasse On Kurdish Exports Signals Broader Iraq Oil Uncertainty
Recent Kurdish statements downplaying progress on an agreement with Baghdad to resume Kurdish oil exports underscore the challenges facing the Iraqi oil industry despite renewed optimism in the wake of the new Iraqi cabinet.
In recent days, newly-appointed Iraqi Oil Minister Abdul Kareen Luaiby has expressed hope that Kurdistan would resume oil exports shortly, possibly within days. Luaiby initially suggested Baghdad would also recognize of oil deals signed by Kurdistan with international oil companies, before saying there were no new developments on the long-simmering controversy.
The optimistic tone of Luaiby's remarks seemed to confirm expectations among some Kurdish officials and outside analysts that the new Iraq oil ministry would be more sympathetic to Kurdish demands than previous oil minister Hussein al-Shahristani.
But Ali Hussein Ballo, an advisor to the Kurdistan Regional Government's minister of natural resources, said that Kurdistan won't resume exports absent a written agreement with Baghdad. While praising Luaiby's tone, Ballo said there is no time-frame to resume exports.
"We need a written agreement that regulates the mechanism of crude oil exports resumption and paying back contractors," Ballo said. "We are ready to start immediate negotiations."
The resumption of Kurdish oil exports, considered vital to Iraqi aspirations to boost production from today's 2.5 million barrels a day, is just one of myriad issues facing the Iraqi oil industry as it heads into 2011. Iraq has said it hopes to reach some 12 million barrels a day by the end of 2017. But most analysts are skeptical of those targets, citing a range of issues, including the lack of a national oil law and wanting security and logistics.
Although the two sides could very well reach an agreement soon to resume oil exports from the Kurdish fields, broader disagreements will continue to define the relationship between Baghdad and the Kurdish region, said Ahmed M. Jiyad, an associate of the London-based Centre for Global Energy Studies and an independent consultant.
"I don't think there will be an inevitable solution to the impasse," Jiyad said. "The Kurdish demands are difficult to implement." For example, the Kurdish production-sharing agreements are illegal under the Iraqi constitution, Jiyad said.
Kurdish officials have said the resumption of exports could add as many as 200,000 barrels a day to Iraqi production by the end of 2011. The exports have been largely curtailed since summer 2009.
Beginning in June 2009, oil produced in the KRG was exported via the pipeline to Mediterranean port of Ceyhan in Turkey, with all sales proceeds going to the Iraqi treasury through the Iraqi Development Fund at the New York Federal Reserve Bank. But foreign oil companies suspended Kurdish exports three months later, because of the lack of a payment system for compensating the exporters.
DNO International ASA (DNO.OS), which had been producing some 45,000 barrels a day before suspending most output in 2009, can ramp up to 50,000 barrels a day from the Tawke oil field "on short notice," a spokesman said.
"As soon as a robust system for exports and payment are in place, we are ready to start exporting," said DNO spokesman Tom Bratlie.
The KRG can also export additional 50,000 barrels a day from Taq Taq which is operated by a consortium consisting of China's Sinopec and Turkey's Genel Enerji.
Luiaby has said in recent days that the Kurds reached an agreement with Baghdad in April to export oil via the national export system, with revenues going to the central treasury, which would then compensate the companies.
But Ballo denied that they reached an agreement with Baghdad in April. "There were talks only," he said.
The Kurds, who have maintained semi-autonomous rule for almost the last two decades, are also pressing the Baghdad central government to recognize some 37 production-sharing contracts signed with private oil companies, and honor these multi-billion deals and pay the contractors' operating costs and capital cost recovery.
Baghdad argues that the Kurdish deals are null and void because they are yet to be approved by the central government, while the Kurds say that they are in line with the new constitution.
The other thorny issue that could impede any solution is the oil-rich Kirkuk. The Kurds want to annex to their region the northern Kirkuk province which is inhabited by Kurds, Arabs and Turkmen. While many Iraqi Arab politicians think Kirkuk should stay under the rule of the central government, the Kurds believe Kirkuk is Kurdish and that most of the Arabs were brought in by former Iraqi leader Saddam Hussein.
The Kurdish issues are "likely to be at the center of political tensions in the new government," said risk consultant Eurasia Group in a recent research note. Reaching an agreement on an oil and revenue sharing law in 2011 "will require a whole new round of protracted political bargaining" compared with recent compromises effected by Prime Minister Nouri al Maliki to assemble the cabinet.
While the emergence of the new Iraqi cabinet is "an extremely positive development," Eurasia Group cautioned the coalition could "still become unstable" in the coming months.
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