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Iraq cobbles together an oil deal

Erbil and Baghdad have struck an agreement on exports through Turkey, though many of the old problems could still ruin it

Are things looking up in Iraq's northern oil sector?

In early September, the Kurdistan Regional Government (KRG) and the federal one in Baghdad reached a deal resolving the five-month dispute over sales of Kirkuk oil via the KRG-operated export pipeline to Turkey's Mediterranean coast. The agreement reflected the broader effort in both Erbil and Baghdad to fix one political problem ahead of a bigger effort by both sides to expel Islamic State (IS) from Mosul. Yet factionalism in Kurdistan and Baghdad's own political chaos could yet ruin it all.

Shipping Kirkuk crude through the KRG's infrastructure is a potentially big breakthrough. The months of stalemate starved both Erbil and Baghdad of export revenue. A visit by KRG premier Nechirvan Barzani to Baghdad in late August to meet with Iraq's prime minister Haider al-Abadi helped bring the sides closer. Production from North Oil Company (NOC) in Kirkuk can now resume.

But back in Kurdistan, Barzani's Kurdistan Democratic Party (KDP), which runs the KRG, has come under pressure from rival Kurdish factions, the Patriotic Union of Kurdistan (PUK) and Gorran, elements of which took issue with the KRG's robust stance towards Baghdad and aren't happy about the new deal either.

It will see the KRG and the federal firm, State Oil Marketing Organisation (Somo), split Kirkuk's 100,000-150,000 barrels a day of output evenly. (This will be complex, and involve metering and separation of the two sides' oil in Turkey's Mediterranean port of Ceyhan.) In exchange, the federal government will pay over $1bn to the region.

It should give a lift to Kurdistan's heavily embattled oil sector, newly reeling after Korea National Oil Corporation withdrew from the Sangaw South oilfield project in early September.

The KRG's own exports via Ceyhan in August were down 10% on the previous month, at 411,727 b/d. As a result of the new deal, the KRG planned to boost oil exports to 0.57m b/d in September. The money from Baghdad is even more important for a region that is now heavily in debt and struggling to stay afloat.

New agendas

The agreement might imply the KRG has abandoned, for now at least, its plans to forge greater autonomy on the basis of independent exports.

It might also suggest Erbil and Baghdad could eventually resurrect a revenue-sharing agreement on terms already established-a 17% share of federal revenue in exchange for Somo marketing 0.55m b/d of Kurdish crude.

But problems are festering. The PUK, junior partner to the KDP in the KRG's government, has lobbied Abadi to nix the agreement, shattering notions of Kurdish unity on the matter. The PUK didn't agree with the KDP's seizure of disputed oilfields-or the KDP's control of the oil sector-and would also rather see some crude shipped through its territory to Iran. Baghdad, meanwhile, has not conceded its view that Kirkuk and the nearby fields of Bai Hassan and Avana Dome-held by Kurdish forces since 2014 and, with 180,000 b/d of output, crucial to KRG autonomy hopes-belong to federal Iraq, not the KRG. A deal on the 17% terms would trump all that, but involve a big climb-down by the KRG.

Further south, the news is also mixed. The appointment in mid-August of veteran former South Oil Company chief Jabbar al-Luaibi as oil minister has been warmly welcomed.

For one thing, the country now has a person in charge of its most important industry-an achievement in itself, given the political paralysis in Baghdad in recent months. Luaibi is also widely respected in Iraqi oil circles. He also wants to resolve the Kirkuk problem quickly.

The deal might imply the KRG has abandoned, for now at least, its plans to forge greater autonomy on the basis of independent exports

But Abadi's government is still struggling. In August, defence minister Khalid al-Obeidi was impeached for corruption. More recently, accusations have been leveled at finance minister Hoshyar Zebari. This too, has a Kurdish-political element: many in the KDP, of which Zebari is a member, believe the accusers are pursuing a political agenda.

But a $5.34bn IMF loan, made in July, will take some pressure off Baghdad. The IMF's involvement means the government has been able to unlock another $18bn in international loans and aid-mostly for the war against IS-and reconstruction. It should also enable the government to settle the billions of dollars it owes to international oil companies (IOCs) working in the south. In early August, Iraq reached agreement with BP, Shell and Lukoil to restart stalled investment in oilfields. This should allow for an increase in production next year.

The best news remains production. Despite all the politicking, Iraqi oil output in August averaged 4.64m b/d, the highest level since January. Exports are also resilient: Somo expects to sell 3.28m b/d in October, 23,000 b/d more than in September. Of that volume, 0.694m b/d is scheduled to be lifted as payback for IOCs. In total, Iraq's IOC contractors are expected to lift 1.02m b/d in October, the fifth month in a row in which they have received increments above 1m b/d.

Luaibi still has his work cut out. He must now craft a new remuneration regime with IOCs to better reflect the weaker oil price. Refashioning service contracts agreeable to both host government and contractor will take time. If the patchy Kirkuk oil deal can stick for now, that will help.

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