Crude oil flows from the semi-autonomous Kurdistan region of Iraq (KRI) through the Iraq-Turkey Pipeline (ITP from Kirkuk to Ceyhan resumed on Saturday (27 September) for the first time since 25 March 2023. This followed agreements between the various interested parties, comprised of the Iraq Kurdistan regional government (the KRG), the foreign oil and gas firms operating in the KRI, the Federal Government of Iraq (FGI), Turkey, and the U.S. This latter entrant into the two-and-a-half-year fray is the key reason for the sudden lack of objections from the FGI and Turkey, a senior oil industry source who works closely with Iraq’s Oil Ministry exclusively told OilPrice.com last week. Turkey had been insisting that any new agreement between it and the FGI (and by extension the KRG) should be for ‘full usage’ of the ITP. This would involve 1.5 million barrels per day (bpd) going through the pipeline, despite around 80% of Iraq’s total 3.5 million bpd currently going in the opposite direction to Asia. The FGI had consistently reiterated that it would only allow such a resumption of oil flows to Turkey if the country finally paid it the US$1.5 billion in damages for unauthorised exports by the Kurdish regional authorities ordered by the International Chamber of Commerce. However, the outlook for the continuation of these various deals and therefore for the ongoing flows of oil from the KRI into Turkey is bleak.
As it stands, up to 190,000 barrels per day (bpd) of crude oil will flow through the ITP from Kirkuk to Ceyhan, but this is planned to increase again to the 230,000-bpd level seen just before the pipeline’s closure in 2023, and then back to even higher levels over time. This is also the level the KRG committed the previous week to delivering to Iraq’s State Organization for Marketing of Oil (SOMO), while keeping a further 50,000 bpd for domestic use. As previously reported by OilPrice.com, US$16 of the sales price per barrel will be transferred to an escrow account and distributed proportionally to the KRI’s oil producers, with the rest going to SOMO. This effectively acts as a subsidy for production costs incurred by international oil companies operating in the KRI and replaces the previous offer of US$7.90 per barrel that was rejected by the KRG. All of this is thematically the same as the initial supposed landmark deal between the KRI and the FGI that was drawn up in November 2014, as analysed in full in my latest book on the new global oil market order. This laid out that the FGI would pay the KRG 17% per month of the central government of Iraq’s budget after sovereign expenses (around US$500 million at that time) in exchange for the KRG organising the export up to 550,000 bpd of oil from the Iraqi Kurdistan oil fields and Kirkuk to SOMO. Thes deal never worked properly, with both sides accusing the other of shortfalls in their respective deliveries. Even before this, though, problems could arise in the very short term from the foreign oil firms, as they are collectively still owed over US$1 billion by the KRG for oil produced and then sold previously. Norway’s DNO and its joint venture partner Genel Energy have long made it clear that they would not fully re-engage with crude oil exports through the ITP until they received assurances from the KRG that it would properly address the US$300 million or so of debt to the two firms. The eight other foreign oil producers that signed the initial agreement on Saturday to restart exports to Turkey will meet within the 30 days following the recent resumption of flows (so, 27 October at the latest) to flesh out a mechanism with the KRG whereby these debts can finally be settled. At a 12 July meeting of foreign oil firms operating in the KRI, the companies attending stressed the need for future export payments that are consistent with each’s existing, legally valid contracts, and transparent and prompt payments, either in cash or through in-kind transfers of crude oil entitlements.
In addition to potential disruption to the current oil flows resumption pact from the foreign oil firms, is the longstanding fundamental opposition to such an arrangement from the FGI in Baghdad, from Turkey, and from Iran, China, and Russia. In very basic terms from Baghdad’s side, it is in no way beneficial for it to have a semi-autonomous region with any real power, let alone one that has oil and gas riches which – if it was simply a regular region subsumed into the rest of Iraq – would be Baghdad’s to develop with whichever firms its wished and to freely bank the revenues. Whilst the U.S. and the Western allies continued to support the KRG – even promising full independence to the region for the crucial help of its Peshmerga in fighting Islamic State – Baghdad had little choice but to put up with it. However after the U.S.’s end of mission in Iraq in December 2021, the move was on in Baghdad to end all independence for the KRI, as also detailed in my latest book. Following the September 2017 Kurdish referendum on independence – which saw over 90% of voters in favour of the idea – the FGI’s then-Prime Minister Haider al-Abadi called the vote ‘unconstitutional’ and added that Baghdad would take control of border crossings linking the Kurdistan Region with neighbouring countries. He also restricted international flights to and from the region’s Erbil and Sulaymaniyah airports and sent troops to the disputed oil-rich region of Kirkuk – over which the FGI said it held sovereignty, despite it being recaptured by Kurdish Peshmerga troops in 2014. He further called on “neighbouring countries and countries of the world” to stop buying crude oil directly from Kurdistan, and only to deal with the FGI. Baghdad’s current view on any KRI independence was made extremely when Iraqi Prime Minister, Mohammed Al-Sudani stated that the new unified Oil Law -- run, in every way that matters, by the FGI out of Baghdad -- will govern all oil and gas production and investments in both Iraq and the Kurdistan region and will constitute “a strong factor for Iraq’s unity”. Turkey and Iran – both with very sizeable Kurdish populations themselves – also aggressively moved against the KRI after the independence vote, as they believe an independent Kurdish state would catalyse Kurdish independence movements in their own countries. The FGI’s stance on ending all independence for KRI aligns perfectly with the views of its key sponsors China and Russia. This was relayed to OilPrice.com some time ago by a senior energy source who works closely with Iran’s Petroleum Ministry: “By keeping the West out of energy deals in Iraq, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.”
At the same time, the KRI’s determination to maintain its semi-independent status, and to expand it if possible, equally reflects the view of its principal sponsors – the U.S. and its key allies. They want the Kurdistan region to act as a bridge from NATO member Turkey into the Middle East and therefore wants the KRI to terminate all links with Chinese, Russian, and Iranian companies connected to the Islamic Revolutionary Guards Corps over the long term. The U.S. and Israel also have a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran. It is little wonder, then, that early congratulations on the 27 September resumption of KRI oil flows to Turkey came from U.S. Secretary of State Marco Rubio, who also stated that Washington helped to facilitate the deal. In this context, Washington had begun to ratchet up the pressure on Baghdad to agree such a deal with the KRI in March of this year when -- in what was exclusively described by a senior Washington legal source to OilPrice.com as “a very frank conversation” -- Rubio also impressed upon Prime Minister al-Sudani the importance the U.S. attaches to Iraq becoming energy independent, and therefore to stop supporting Iran through continued purchases of its gas and electricity. It was made clear at that point that if Baghdad moved in these directions, then it would receive a lot more investment from the U.S, but if it did not then there would be no further investment, and more sanctions would be slapped on it and then laddered up in severity very quickly indeed. That said, with both the Global North and Global South having significant interests in KRI/FGI outcome, it remains to be seen which side’s carrots and sticks prove the most compelling for Baghdad.
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