The story: Iraq’s oil export dynamics are facing a major potential shift. An arbitration ruling by the International Chamber of Commerce (ICC) has resulted in the closure of a critical pipeline to Turkey. The shutdown has temporarily halted all shipments from Iraqi Kurdistan. The disruption has profound implications for Erbil’s ability to manage independent exports and gives Baghdad more leverage in its bid to take control over energy operations across the country.
The coverage: Iraq filed an arbitration case against Turkey in 2014, alleging that Ankara had violated a 1973 agreement governing the Iraq-Turkey Crude Oil Pipeline (ITP) by facilitating independent exports from Iraqi Kurdistan to the Mediterranean port of Ceyhan.
- The Paris-based ICC ruled in Iraq’s favor on Mar. 23 and ordered Turkey to pay 1.4B USD in penalties. The decision had been anticipated for some time. Argus Media, an outlet focused on the global energy industry, was first to break the news.
- At the time of the ruling, the pipeline was used to transport approximately 445,000 barrels of crude oil per day (bpd); 370,000 bpd from fields controlled by the Kurdistan Regional Government (KRG) and some 75,000 bpd from operations in Kirkuk controlled by Baghdad.
- Of note, the top-three purchasers of oil sold by landlocked Iraqi Kurdistan are Israel, Croatia, and Italy. It is unclear how the current shutdown may impact these clients.
In the afternoon of Mar. 25, Iraq stopped pumping and Turkey stopped accepting oil through the pipeline by mutual agreement and in recognition of the ICC ruling. Authorities in Ceyhan also stopped loading oil exported from Iraqi Kurdistan onto ships for export.
- According to the Iraq Oil Report, crude being pumped from Iraqi Kurdistan was being diverted into storage tankers, but that capacity would be reached within days. Some oil could be sent to local refineries, but these can only take a limited volume.
- On Mar. 27, Canadian-based Forza Petroleum announced that it had ceased production in the Hawler license area.
The Iraqi government released statements claiming a long-awaited victory, but it was unclear whether Ankara would have to pay the sum outlined by the ICC.
- Middle East Eye quoted sources noting that the 1.4B USD award was far less than the 26B USD sought by Baghdad. One source also suggested that the KRG was liable for the payments, based on an indemnity clause in the ITP deal.
- Turkey’s energy ministry on Mar. 28 stated that the ICC had “overruled four out of five demands from Iraq” and that the court had “ordered Iraq to pay a compensation to Turkey.” No further details were mentioned.
The KRG rushed a delegation to the Iraqi capital on Mar. 26 for talks on how to restart the flow of oil, but there was no immediate agreement. A second delegation was dispatched on Mar. 28.
The analysis/context: The arbitration ruling deals a potentially fatal blow to Iraqi Kurdistan’s independent oil exports, which have caused considerable tension with Baghdad.
- The KRG is almost entirely dependent on oil exports for its expenditures given that a federal budget is not yet in place. If exports do not resume in the near future, it will be unable to pay public sector salaries, fund government operations, reimburse international oil companies, or service its debts.
- There are already high levels of public frustration with governance by the ruling parties in Iraqi Kurdistan. A failure to pay public sector salaries will exacerbate the situation.
- Oil exports were the foundation for Iraqi Kurdistan’s drive toward independence, which culminated in the 2017 referendum. The ICC ruling deals a symbolic blow to any residual hope of secession from Iraq.
Baghdad has long attempted to exert greater control over oil operations in the Kurdistan region, and particularly over the past year.
- In Feb. 2022, Iraq’s Federal Supreme Court ruled that the KRG’s oil and gas law was unconstitutional.
- Iraq has yet to pass its 2023 budget, which includes new mechanisms for managing oil production in Iraqi Kurdistan. Both Baghdad and Erbil have signaled a willingness to tackle the long-delayed national hydrocarbon law after the budget is in place.
Most oil production in the Kurdistan region takes place in areas controlled by the Kurdistan Democratic Party (KDP), while most natural gas reserves are located in territory run by the rival Patriotic Union of Kurdistan (PUK).
- PUK officials have so far been excluded from the talks between Erbil and Baghdad in the wake of the shutdown of oil exports from northern Iraq.
- There are major tensions between the KDP and the PUK, with disagreements over their shares and control of natural resources among major contentions. These differences could further complicate efforts related to the negotiation of a national hydrocarbon law.
The future: While the shutdown of exports through northern Iraq is only costing Baghdad an estimated 75,000 bpd of oil sales, the KRG cannot function without revenue from the oil trade.
- The federal government has major leverage in its effort to re-centralize control of the country’s natural resources. It can afford to take its time in finding an agreement with Ankara and Erbil to resume flows through the ITP.
- Apart from the financial difficulties related to the temporary suspension of the northern oil export route, the KRG faces a major threat to its independent export policy.
Looking ahead, Iraqi and Turkish officials are expected to meet in the coming days to discuss new arrangements for exporting oil through the Kirkuk-Ceyhan pipeline.
Source : Amwaj