Kurdish Oil Deal with Baghdad Unravels

A four-month-old oil deal between Iraq and the semi-autonomous Kurdistan region is close to unravelling after payments from Baghdad dried up, prompting Arbil to threaten to sue buyers and ramp up independent oil exports.

The dispute highlights fundamental differences between the two sides over who controls oil resources and revenues and will reinforce the views of many Iraqi watchers that Kurdistan would seek bigger if not full independence from Baghdad one day.

Baghdad cut budget payments to the Kurds in January 2014 as punishment for their attempts to export oil independently, plunging the semi-autonomous region into economic crisis and forcing it to seek loans at home and abroad.

Under a new deal, the Kurds committed to export an average of 550,000 barrels per day in 2015, in exchange for Baghdad resuming budget payments of over $1 billion a month to Kurdistan in 2015.

The agreement was hailed as a breakthrough that would help Iraq increase oil exports at a time when revenues are strained by low global prices and the cost of financing a war against Islamic State insurgents in the north and west.

But so far this year, Baghdad has paid only a fraction of the money, arguing that the oil handed over to SOMO does not match the expected volumes.

For its part, Kurdistan insists it has supplied almost 97 percent of the agreed volumes and is working to raise volumes further despite receiving no payments. Sources in Arbil are saying they will use all possible means to recoup the money.

"We are not being treated as part of the country but as a commercial oil producer," said a high-level Kurdish oil source. "In case we don't get the payments, we will have to go after the buyers because this crude still belongs to us."

In the past few months, SOMO sold Kurdish crude to buyers including Turkey's Tupras, Swiss-based trader Litasco, Spain's Repsol, Italy's Eni and BP .

Last year, SOMO threatened to sue direct buyers of Kurdish oil and has successfully stopped some sales.

The Kurd's latest threat to do the same may pose legal challenges for companies who have bought oil through SOMO because the deal between Baghdad and Arbil was preliminary and did not give clarity over who owns the oil.

According to shipping documents seen by Reuters, oil transferred to SOMO still belongs to the Kurdistan Regional Government (KRG).

Another potential legal pitfall is that oil sold by SOMO from the Turkish port of Ceyhan is being marketed as Kirkuk under the name of the same field in northern Iraq. However, only a third of oil in the pipeline is Kirkuk while the rest is different grades from other KRG new fields.

The preliminary deal in December also did not address debts owed to listed oil companies like Genel which helped Kurdistan develop its fields. Baghdad sees those contracts as illegal even though SOMO is currently selling crude from those deposits to buyers in Europe and beyond.


Punishment
Tensions spilled into the open this week at a forum in the Kurdish city of Suleimaniyah, where Iraq oil minister Adel Abdel Mehdi said Kurdistan had handed only some of the oil it pumped to Ceyhan over to SOMO and was exporting the rest independently.

Kurdish minister Ashti Hawrami said the region was committed to the deal, but since Baghdad was not sending enough money, the heavily indebted region was forced to sell some oil to repay creditors.

"Can somebody please explain to me why we are still being punished?" Hawrami asked. "If we continue receiving this little, what will happen to this relationship?" Both tried to end on a conciliatory note saying they would make the deal work.

Kurdistan has seen an inflow of over a million refugees from Iraq and Syria and had to raise billions of dollars via loans and oil export pre-payment deals with oil firms, trading houses, banks and Turkey to cover its budget shortfalls.

If the oil deal between Baghdad and Arbil collapses, the chances are high the KRG, which under the December deal currently sells 80,000-100,000 bpd independently from SOMO, will be moving back to ramping up independent sales.

"After April, the KRG would be technically able to export 825,000 bpd via its own pipeline system," a source in the KRG said. "We would be able to fully cover our budget needs with those exports by tightening our spending and providing our fighting forces their salaries on time."

By Isabel Coles, Rania El Gamal and Dmitry Zhdannikov