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Baghdad makes oil deal with the KRG

The agreement reached in early December still faces many obstacles, writes Kirk Sowell

Adel Abd al-Mahdi became Iraq's new oil minister on 8 September when parliament approved prime minister Hayder al-Abadi's government. Abd al-Mahdi, who has been both finance minister (2005-06) and vice-president (2006-10 and 2010-2011), belongs to the Islamic Supreme Council of Iraq (ISCI), a party known for its staunch Shia Islamism. Yet Abd al-Mahdi has a reputation for political pragmatism and personal affability, making him broadly acceptable for sensitive posts. 

Abd al-Madhi hit the ground running, visiting the besieged oil refinery in Baiji, Salah al-Din his first day on the job. He also visited Basra in an effort to smooth over complaints about neglect. His boldest move, though, came in an agreement reached during his 13-14 November trip to Erbil, capital of the autonomous Kurdistan Regional Government (KRG), where he met with KRG prime minister Nechirvan Barzani. The context of Abd al-Mahdi's visit was a long-term breakdown between Erbil and Baghdad, which reached a climax when the KRG began pipeline exports through Turkey in December 2013, prompting Baghdad to cut off payments the following month. (Baghdad only made two near half-month payments in March.) The Kurds' refusal to export solely through the federally controlled State Oil Marketing Organisation (Somo) was a key stumbling block. 

In Erbil in mid-November, Abd al-Mahdi and Barzani reached a deal designed to break the impasse. It included three elements: first, a payment of $500 million by Baghdad to the KRG; second, KRG exports of 150,000 barrels of day (b/d) of oil through Somo; and, third, the KRG's pledge to send a delegation to Baghdad led by Barzani to discuss broader issues. In November the KRG reported exports of 300,000 b/d, predicting 400,000 at the end of 2014, and 0.5m by April 2015. KRG oil exports began, arriving at the Turkish port of Ceyhan on 25 November, and the promised payment arrived a day later.

The cabinet took the next step on 2 December, endorsing a deal by which the KRG is to export 'no less than' 250,000 b/d through Somo, plus another 300,000 b/d from Kirkuk fields through the KRG's pipeline network, while Baghdad must resume payments to the KRG, including money from the defence budget to pay for the Kurdish Peshmerga security forces. Kirkuk oil must now be exported through the KRG because the Kirkuk-Ceyhan pipeline was severely damaged and shut down in early March - a problem made worse when Ninawa, the province through which the pipeline passes to Turkey, fell to Sunni insurgents. The infrastructure is now so damaged that it will be years before Baghdad can export Kirkuk oil any other way. 

The KRG's agreement to export through Somo is a key concession. Although Baghdad offered to work through KRG oil contracts last January - de facto, if not de jure recognition of their existence - it insisted that KRG fields export entirely through Somo with all money deposited in the Development Fund for Iraq (DFI) in New York, the repository for all Iraqi oil-export income. The Kurds refused, demanding a separate channel they would control, and repeatedly insisted throughout 2014 that they would not work through Somo.


Yet the 2 December cabinet decision did not include comprehensive terms, and the ambiguities that remain could sink the deal, as it would need to be passed as part of the 2015 budget. One ambiguity is what the KRG can do with oil exports above the 250,000 b/d they must hand over to Somo. If the budget draft allows the KRG to export this oil by pipeline through Turkey, it is unlikely to pass. Abadi himself, in a 30 November presentation to parliament, addressed the matter directly, saying that while the interim agreement provided for only a certain amount of KRG oil to be exported through the federal system, a final deal would require this of all KRG exports. Abadi made an equally clear statement during a visit to France, telling Iraqi state television that all oil from both the KRG and Kirkuk would go into the federal system.

Fadi al-Shamari, a lawmaker from Abd al-Mahdi's party, has said that the KRG could use excess oil domestically to produce refined products, a compromise which would likely pass. The KRG will presumably also continue trucking some across the border, mostly to Iran. This longstanding practice brings criticism from Arabs, but Iranian influence should insure that Baghdad continues to overlook it.

A second key ambiguity is the budget allotment of the KRG itself, set at 17%. This is accepted by most parties, but there are disputes over how to compute this figure since 'sovereign expenses' - defence, foreign affairs, federal administration and the like - are deducted, so the KRG ends up with closer to 10%. Sadrist MP Majida al-Tamimi, who is the interim chairwoman of the finance committee, reiterated recently that the KRG share was too high. The Sadrists have traditionally been centrists, and having supported Maliki's cut-off of the KRG last January have said that they 'welcome' Abd al-Mahdi's negotiations without endorsing the deal so far. 

A related argument surrounds the KRG's budget payments for 2014, which were about $1bn a month based on the 2013 budget. While getting Peshmerga funding is an advance for the KRG, funding for 2014 may be entirely lost. In his testimony before parliament on 30 October, finance minister Hoshyar Zebari, who belongs to the Kurdistani Democratic Party, reiterated the KRG was claiming $16bn in missed payments for 2014; an estimate apparently based on receiving a higher net percentage share than present. Given lower estimates for federal revenues for 2014, the total owed would more likely be around $8bn after deducting the nearly $1bn paid in March. They may not get even that amount, given Iraq's fiscal problems and the view of most Arab factions that the January cut-off was justified. 

A third ambiguity relates to the 'disputed territories,' most notably Kirkuk, and how they are affected by an oil deal. The Kurds will likely need to agree to export through the federal system enough oil to give Baghdad a clear profit on payments back to the KRG, as otherwise it could imply acceptance of Kurdish control of territory in Kirkuk they gained in June. KRG President Masud Barzani caused controversy following Abd al-Mahdi's original deal when he said the 150,000 b/d the KRG promised would come from Kirkuk, not the KRG. Even ISCI refused to defend the statement.

Relatedly, as noted by the Iraq Oil Report, the Bai Hassan field and the Avana Dome, which are part of the Kirkuk oilfield but are close to the Kurdish-claimed Makhmur field (southeast of Erbil and lying between Kirkuk and Mosul), are under dispute. While Baghdad claims them to be properly under federal control, the KRG claims them to be part of Erbil province. If that latter claim were accepted, then oil pumped from them would count toward the KRG's 250,000 b/d instead of Kirkuk's 300,000 b/d.

In testifying before parliament on 17 November, Abd al-Mahdi presented the KRG agreement as a solution to Iraq's fiscal crisis, although most of his comments related to the impact of lower oil prices. He met scepticism from MPs, with some raising the issue of whether the KRG could do what it wished with quantities above the then-agreed 150,000 bpd. This issue will come back if the budget is vague.

Kirk H Sowell is the principal of Uticensis Risk Services, a Middle East-focused political risk firm which is the publisher of the biweekly newsletter Inside Iraqi Politics

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