Resumption of Kurdistan Oil Exports Faces Legal and Financial Hurdles
The resumption of oil exports from the Kurdistan region via the Turkish port of Jihan has encountered multiple challenges, including legal disputes and financial disagreements. This comes as Baghdad has indicated its intention to appeal a recent ruling, concluding a two-year halt that resulted in estimated losses of $19 billion. Today, foreign oil companies are awaiting a definitive resolution as a prerequisite for continuing operations.
Iraq had successfully secured a ruling from an arbitration panel of the International Chamber of Commerce in Paris against Turkey concerning the unauthorized export of crude oil from the Kurdistan region without the involvement of the Iraqi Oil Marketing Company, known as Sumo. As a consequence of this ruling, the export of oil from Kurdistan—amounting to approximately 480,000 barrels per day—was halted on March 25, 2023.
The Oil Industry Association in Kurdistan (Apikor), which comprises foreign oil companies operating in the region, announced its readiness to restart oil exports through the Iraq-Turkey pipeline. This readiness is contingent upon reaching agreements between Baghdad and Erbil that preserve the existing contractual, commercial, and economic frameworks for the oil companies active within the Kurdistan region.
Apikor emphasized the importance of establishing formal written sales agreements with both the federal government and the Kurdistan Regional Government. These agreements should ensure transparency and guarantee payments devoid of political interference.
Prime Minister Mohammed Shia Al-Sudani’s stance was reaffirmed in a meeting held yesterday in Baghdad with the President of the Kurdistan Region, Nechirvan Barzani, highlighting the urgency to expedite the return of direct oil operations in Kurdistan and the subsequent re-export through the Turkish port of Jihan.
Oil Minister Hayyan Abdel-Ghani has announced a timeline for the reinstatement of oil exports from Kurdistan. On February 2, Parliament enacted amendments to the public budget, facilitating the re-export of oil from the Kurdistan Region to the Turkish port of Jihan after a two-year suspension. The amendments aim to support the production costs of international oil companies in the Kurdistan region and represent a crucial step towards resuming oil exports to Turkey. Specifically, the cost of extracting and transporting a barrel of oil in the region has been set at $16.
Minister Fouad Hussein recently noted at the Munich Security Conference that an agreement regarding the legal framework had been reached, covering technical aspects between oil companies and both the Iraqi federal government and the Kurdistan Regional Government to enable exports. Discussions are ongoing regarding the quantities of oil designated for domestic consumption versus those earmarked for export.
Historically, Iraq has exported between 400,000 and 500,000 barrels of oil daily from northern fields, including the Kurdish region, although these operations have faced interruptions due to pipeline issues towards Turkey.
Minister Hayyan Abdel-Ghani indicated that Iraq plans to transfer at least 300,000 barrels per day of crude oil once operations resume. The Iraqi government is also in the process of coordinating with the Kurdistan Regional Government for oil transport to Sumo, which is part of the Ministry of Oil responsible for marketing the oil.
Currently, oil production in the Kurdish region is estimated between 280,000 and 300,000 barrels per day, with local consumption needs, including energy generation, ranging from 110,000 to 120,000 barrels daily. Baghdad has expressed that a lower quantity may suffice for local needs.
The volume of oil pumped through the pipeline presents a challenge for Baghdad, which must adhere to reduced production quotas established under the OPEC Plus Agreement while attempting to manage the associated discounts.
Iraq’s production and exports are under increased scrutiny, especially following recent statements by high-level officials about the need to stabilize oil prices amidst fluctuating market conditions.
In prior discussions, oil and energy expert Kovand Sherwani highlighted that OPEC considers all oil produced from Iraq, including shipments from southern ports and the Kurdistan region, as part of Iraq’s official production share, initially set at 3.5 million barrels per day before being revised downward.
The Iraqi government is actively pursuing a compromise that would adjust its federal budget to facilitate payments to international oil companies operating in Kurdistan. This would be in exchange for a resolution with the Kurdistan Regional Government and international oil firms regarding the cost of extracting oil produced in the region.
In April 2023, the Iraqi government and the Kurdistan Regional Government signed an oil agreement stipulating the export of 400,000 barrels of oil daily through the National Oil Company, Sumo. This agreement also involves appointing a representative from the region as an assistant to the company’s presidency and establishing a dedicated account for proceeds from oil sales, which will be subject to oversight from the Federal Financial Supervision Bureau.