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Iraqi Kurdistan begins its recovery after a difficult year

A resurgent energy sector and likely better relations with Baghdad make for a brighter KRI future

The Kurdistan Region of Iraq (KRI) started 2018 in an awful mess. After a misjudged independence referendum in October 2017, the region lost almost half its land—and oil export capacity—as federal forces retook a swath of contested territory, including the oil-rich city of Kirkuk. The Kurdistan Regional Government (KRG) faced insolvency, and its leadership felt betrayed and isolated.

However, the KRG's pipeline exports, which collapsed from around 580,000 bl/d to a post-Kirkuk level of 230,000 bl/d, have since recovered to around 400,000 bl/d.

There is even better news ahead: planned upgrades and drilling programmes could add around 100,000 bl/d of new production capacity by the end of 2019.

A consistent record of timely payments to IOCs has been critical. The KRG has gone further, paying back hundreds of millions of dollars in overdue pipeline fees to Turkey and oil allocations to major trading houses.

Flush with payments, DNO quickly brought the Peshkhabir field on stream, more than making up for declines at the nearby Tawkee field. Second-tier operators, like Gulf Keystone Petroleum and Taqa, could ramp up 20,000 bl/d apiece by year end. GazpromNeft doubled production at the south-eastern Sarqala field.

Moscow's main interest, however, lies with Rosneft, which signed wide-ranging energy agreements with the KRG in 2017. Rosneft operates the main export pipeline to Turkey, putting it in the room for KRG-Baghdad energy deals. At least one Rosneft-contracted rig is working in the east, and Rosneft continues to buy Kurdish crude from Ceyhan. In 2019, Iraqi Kurdistan will be another area of the Middle East where the US will face increasing Russian influence. By lobbying for agreements to get northern Iraq's oil to market as Iran sanctions bite, the US will help Rosneft garner pipeline tariffs and cement its position on the KRG's energy scene.

The US helped broker a restart to oil-production sharing from Kirkuk fields after a year's hiatus. Currently, the deal remains provisional and susceptible to differing interpretations. Yet diplomatic pressure, shared revenue interests, and the continuation of sharing arrangements for oil, fuel, refining and power all provide a brighter outlook for a productive truce on energy disputes in 2019.

Iraq's chaotic election in 2018 resulted in a weak federal prime minister, strengthening the Kurdish position in Baghdad. Regular federal transfers of around $270mn a month have stabilised the KRG's independent oil sector, while Western military aid—and the associated diplomatic ties—are secured for 2019.

Politics remain the wildcard. Iraq's draft 2019 budget is yet to be agreed, much less approved by parliament, and other potential blow-ups include a long-delayed federal dispute over the constitutionality of the KRG's independent oil exports. Progress is unlikely on any of the final-status issues that have eluded the KRG and Baghdad for the last decade.

While the KRG is unlikely to get all it wants from Baghdad, the status quo leaves enough for payment of oil-sector dues, salaries and pensions, with a little left over to restart stalled capital investments. After the referendum bust, renewed pragmatism could make 2019 the year the KRG's oil sector is finally insulated from Iraq's fractious politics, and allowed to grow at its own pace.

Patrick Osgood is a KRI Energy Analyst

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