Western oil companies grapple with uncertainty in Kurdistan

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The Supreme Court of the Federal Government of Iraq (FGI) in Baghdad rendered two landmark court decisions which have significant, if not catastrophic, implications for the exploration, development and extraction operations of international oil companies (IOCs) working in Iraq’s semi-autonomous northern region of Kurdistan. First, he ruled last week that oil and gas sales by the region’s government, the KRG, independent of the central government in Baghdad, were unconstitutional and that the KRG must hand over all oil production to the Iraqi federal government, represented by the Ministry of Petroleum. Second, and an even greater direct threat to all oil and gas operations of IOCs operating in the Kurdistan region of northern Iraq, the Federal Supreme Court has ruled that the Ministry of Petroleum has the right to: Track the invalidity of petroleum contracts entered into by the Kurdistan Regional Government with foreign parties, countries and companies regarding the exploration, extraction, export and sale of petroleum.

The basis for this court ruling dates back to an agreement reached between the two parties – the FGI and the KRG – in November 2014, in which the KRG agreed to export up to 550,000 barrels per day (bpd) of oil to from its own fields. and Kirkuk through the IGF’s State Oil Marketing Organization (SOMO), based in Baghdad. In exchange for this, Baghdad would send 17% of the federal budget after sovereign spending per month in budgetary payments to the KRG in Erbil. This agreement was replaced by another in October 2018 which required Baghdad to transfer sufficient funds from the budget to pay the salaries of KRG employees in exchange for the KRG handing over the export of at least 250,000 bpd of oil. raw at SOMO.

Since then, however, the IGF – nominally led by various prime ministers but controlled behind the scenes by the radical cleric Moqtada a-Sadr and his “Sairoon” (“Forward March”) faction – has not reliably poured the monthly financing of salaries of ARK employees and ARK did not reliably deliver the agreed volume of oil to SOMO. The main sticking point for the two sides in meeting their obligations agreed in November 2014 has been disagreement over the number of budget scatters and oil transfers that should be involved in the deal on an ongoing basis.

This disagreement over the number of FGI budget dispersals and KRG oil deliveries worsened further after the “yes” referendum vote for Kurdistan independence in September 2017, as analyzed in depth in my new book on world oil markets. Previously, Kurdistan hoped to boost its oil exports above 1 million barrels per day, becoming one of the fastest growing oil regions in the world and enabling the full resumption of the November 2014 agreement. the ‘yes’, the very basis of the agreement became null and void when the IGF and Iranian forces regained control of the oil fields in Kurdistan, including the main oil sites around Kirkuk.

The IGF argued that the Kirkuk oilfields had been illegally occupied in the first place, only being under Kurdish control since 2014, when the Iraqi army collapsed in the face of Islamic State and the peshmerga military force of Kurdistan intervened. Therefore, from September 2017, the FGI’s new starting point for any negotiations with the KRG for a new iteration of the original 2014 agreement on budget disbursements for oil was that they had to agree with the percentage of the population of Kurdistan in the total population of Iraq. That figure, according to the FGI, was 12.67% – a far cry from the 17% of the federal budget after sovereign spending that had been the fundamental assumption of the November 2014 deal.

As the 2017 stalemate unfolded, Russia stepped in, in its usual geopolitical strategy of exploiting pockets of chaos into which it can project its own solutions and thus extend its power. The Kremlin’s oil proxy, Rosneft, effectively took control of Kurdistan’s oil sector in 2017 through three main means. First, Russia provided the KRG with US$1.5 billion in financing through forward oil sales payable within three to five years. Second, it has taken an 80% direct stake in five potentially major oil blocks in the region, along with corollary investments and technical, technological and equipment assistance. And third, he established 60% ownership of the vital KRG pipeline through a commitment to invest US$1.8 billion to increase its capacity to one million barrels per day.

The price for Russia and Rosneft was double and the rest. First, prior to the recent increase in exploration activity in the KRG region, more than half of the exploration wells in Iraq had been drilled before 1962, a time when technical limitations and low oil prices defined much more precise of a commercial success. although it would not be the case today, as the International Energy Agency (IEA) points out. Based on previous limited exploration and development of oilfields in the ARK region, the figure for proven oil reserves was first estimated at around four billion barrels. This was later increased by the KRG to around 45 billion barrels but, again, this may well be a very conservative estimate, according to the IEA. Second, such a presence in northern Iraq would allow Russia to play against each other, thereby allowing it to expand its influence in each, and that is precisely what it has attempted to do ever since.

With Rosneft and its Kremlin supporters making their own claims in the KRG-administered north, Moscow then considered itself well placed to leverage that presence in an equally powerful position in the south. In particular, as also discussed in depth in my new book on world oil marketshe has sought to strike new oil and gas exploration and development agreements with Baghdad and to intervene for his own benefit in the dispute over budget disbursements for the oil deal. Moscow insisted through the KRG that oil flows would not restart until pipeline transit fees and pumping tariffs were paid to Rosneft, which then owned its 60% stake. in the Kirkuk-Ceyhan pipeline. Moscow also wanted the Baghdad IGF to review its decision to deem “invalid” the KRG’s award to Rosneft of five exploration blocks in Kurdish territory. These are estimated to have aggregate 3P reserves of 670 million barrels, and Rosneft has an 80% stake in each.

This may be partly the reason for the IGF Supreme Court’s newfound vigor in giving the Ministry of Petroleum the right to “monitor the invalidity of petroleum contracts entered into by the Kurdistan Regional Government with parties, countries and foreign companies”. concerning the exploration, extraction, export and sale of oil” is not primarily aimed at Western ICCs after all, but rather at controlling the rise of Russia in northern Iraq. This would fit with some signs in recent months that Baghdad is ready to offer Washington new ways to treat with her in the south after the United States’ “end of combat mission” in Iraq at the end of 2021.

The actual legal situation relating to the Iraqi oil industry and the distribution of its revenue sharing between the KRG region and the rest of the country does not help either the IGF or the KRG, as it is unclear, and the both parties asserted – with some justification – a right to revenues from disputed oil flows. According to the KRG, it has the power under Articles 112 and 115 of the Iraqi Constitution to manage oil and gas in the Kurdistan region extracted from fields that were not in production in 2005 – the year in which the Constitution was adopted by referendum. In addition, the KRG maintains that Article 115 states: “All powers not provided for in the exclusive competences of the federal government belong to the authorities of the regions and governorates which are not organized into regions. As such, KRG argues that, as the relevant powers are not otherwise stipulated in the Constitution, it has the power to sell and receive revenue from its oil and gas exports. The KRG also stresses that the Constitution provides that in the event of a dispute, priority must be given to the law of the regions and the governorates. However, the FGI and SOMO argue that under Article 111 of the Constitution, oil and gas belong to all Iraqi people in all regions and all governorates.

By Simon Watkins for Oilprice.com

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