Baghdad, Erbil at odds over the future of oil sector

08-12-2023 12:26


Iraq’s federal government and the Kurdistan Regional Government (KRG) continue their efforts to resume oil exports, according to officials. Both sides have agreed in broad terms to amend the contracts signed by the KRG with international oilcompanies (IOCs), but disagree on the details and have not yet achieved a final deal.

"We are constantly on the line with the oil ministry and the Iraqi government about how to amend the oil contracts and the changes that need to be made," a senior KRG source told Peregraf.

The source added that the main problem is the money that will be paid for oil production and the financial entitlements of the IOCs working in the Kurdistan Region.

"Iraq has proposed $6 per barrel for oil production…but the KRG considers that amount too low and the companies are also not ready to resume production with that money," they said.

“The KRG has signed contracts with companies to produce oil for much more than that, which varies from field to field. What Baghdad wants will reduce the profits of the companies and some of them will operate at a loss. So, neither the KRG nor the companies accept that,” the source added.

Erbil insists that the oil contracts it signed with the IOCs are legal and within the rights of the Kurdistan Region, but it isopen to amendments if they are acceptable to the IOCs.

Another major issue between Erbil and Baghdad is the financial entitlements of international companies. The KRG owes them around $1 billon in payments, but the federal government is not ready to take on this debt. Without a guarantee that this money will be paid, the IOCs are unwilling to resume production in the Kurdistan Region.

Oil ministry spokesperson Assem Jihad said in a statement that “some of the financial, legal, and technical problems related to the contracts between the KRG and oil companies need to be resolved.”

"The Iraqi Oil Ministry is working to change the legal form of the contracts to comply with Iraqi laws in terms of legal, technical, and financial [terms]," Jihad said.

Baghdad views the type of contract signed between the IOCs and the KRG — known as production sharing contracts (PSCs) — as giving too much money and control over the extracted oil to the IOCs. Under Iraqi law, control of oil is sovereign, so the PSCs violate the constitution.

Nevertheless, the IOCs view the PSCs as a successful arrangement, which has allowed for substantial investment in the Kurdistan Region’s energy sector and enabled high levels of production.

A group of seven IOCs operating in the Kurdistan Region calling itself APIKUR said in a recent statement that it is aware of meetings between Baghdad and Erbil, but that they have not been included in the talks.

“APIKUR member companies remain confident that their existing contracts are legally binding and enforceable; however, we believe concrete solutions can be implemented immediately that will satisfy all parties, protect the contractual rights of the IOCs and enable the resumption of oil exports from the Kurdistan Region of Iraq,” the group said in a statement.

Myles Caggins, the group’s spokesperson, added that “sanctity of contracts and clearly defined methods of past and future payments are essential for the resumption of full oil production and export by APIKUR member companies.”

“APIKUR members are ready to meet with [Government of Iraq] and KRG officials; continued delays only harm the economic livelihood of all Iraqis,” Caggins added.

Previously, the group said that it was prepared to resume oil exports under the auspices of SOMO, Iraq’s oil marketer, but only under the current terms of the contracts signed with the KRG.

On March 25, the International Court of Arbitration in Paris ruled in favor of Iraq in its case against Turkey. This resulted in the shutdown of the Kurdistan Region’s oil export pipeline. Flows have been suspended ever since then.

"The suspension of Kurdistan's oil exports has caused more than $7 billion in economic damage to Iraq," said acting KRG Minister of Natural Resources Kamal Mohammed.

The suspension of exports comes amid significant disagreements between Baghdad and Erbil over the budget and control of the oil and gas sector.

According to the three-year budget law passed this spring, the Kurdistan Region's annual share should be 16.61 trillion Iraqi dinars. However, the federal government is not sending this money because the KRG has not been supplying 400,000 barrels of oil per day to SOMO as required by the law.

While talks last month in Erbil  between the federal oil minister and the KRG raised hopes for a solution, there has been no public progress.

As a result of this impasse, the KRG is unable to pay its public servants on time. They are currently three months behind on their pay. Erbil is waiting for a new loan of 700 billion dinarsfrom Baghdad in order to pay salaries for September.

In response to these salary delays, tens of thousands of teachers in Sulaimaniyah governorate are on strike. As a result, some 700,000 students have been out of school all semester.

Resuming oil exports and resolving the budget disagreementswould go a long way to resolving the strike and the salary issue.