The disputes between Kurdistan and Iraq are deepening, while gas and oil would be essential for the EU

The age-old dispute over how oil flows are managed in the semi-autonomous region of Kurdistan in northern Iraq – administered by its government (the KRG, in Erbil) – and how the region is rewarded by the Federal Government of Iraq (FGI) in Baghdad for its cooperation in this area has undergone a series of dramatic legal twists in the past week. The outcome of these developments will have significant and potentially catastrophic implications for the exploration, development and extraction operations of international oil companies (IOCs) operating in the KRG-administered region.

The basis of the controversy dates back to the formation of the new system of government in Iraq in 2003, immediately after the fall of Saddam Hussein. At the time, it was widely agreed that the KRG would export a certain volume of oil from its own fields and Kirkuk through the Iraqi State Petroleum Marketing Organization (SOMO) and would not independently sell oil from the fields on international markets. In return, Baghdad would make a certain level of payments from Iraq's central federal budget to the KRG. From 2003 to November 2014, both sides consistently contested that the other had failed to abide by the terms of the agreement. In November 2014, however, an agreement was reached between the FGI and the KRG, in which the latter agreed to export up to 550,000 barrels per day (bpd) of oil from its own fields and from Kirkuk via SOMO. In exchange, Baghdad would send the Kurds 17% of the federal budget net of sovereign expenses (at the time about 500 million dollars) per month.

This agreement – which also worked correctly only sporadically in this case – was then superseded by an agreement reached between the KRG and the new Iraqi federal government formed in October 2018 and focused on the national budget law of 2019. the FGI transferred sufficient funds from the budget to pay the salaries of the employees of the KRG and other financial compensation in exchange for the sale by the KRG of the export of at least 250,000 bpd of crude oil to SOMO. Since then, however, the FGI – nominally led by various prime ministers, but for a long time controlled behind the scenes by the radical cleric Moqtada a-Sadr – has delivered funds for the salaries of KRG employees on a monthly basis in an unreliable manner and the KRG delivered the agreed volume of oil to SOMO in the same way.

In addition to the complications arising from al-Sadr's entry into the deal, things were further complicated by Russia's huge presence in the KRG-administered region, especially after 2017. In that year, Russia effectively took over. of oil infrastructure in the northern Kurdistan region – through its oil procurement company, Rosneft – first providing the KRG government with $ 1.5 billion in financing through forward oil sales payable over the next three to five years. It then acquired an 80% operational interest in five potentially important oil blocks in the region, along with side investments and technical, technology and equipment assistance. Finally, it acquired 60% ownership of the vital KRG-Turkey pipeline, pledging to invest $ 1.8 billion to increase its capacity to one million barrels per day. At that point, Moscow felt it was well positioned to leverage this presence to gain an equally powerful position in the south of the country, in particular by entering into new agreements with Baghdad for the exploration and development of oil and gas fields. These new agreements would follow the intermediary role played by Russia in the perennial dispute between Kurdistan and the FGI in Baghdad over the agreement for the disbursement of the budget in exchange for oil. In reality, Russia has stirred up tensions in order to gain an advantage between the two sides.

It is extremely worth noting that Baghdad's irritation over the KRG's occasional adherence to any version of the 2014 budget oil disbursement agreement began to manifest itself in lawsuits incurred only after international sanctions imposed on Russia for the invasion of Ukraine. The lawsuit began in earnest with two recent FGI Supreme Court rulings in Baghdad and the Iraqi Oil Ministry's proposal to create a Kurdistan National Oil Company under federal government ownership in southern Iraq. The goal is to deprive the KRG of any authority over its heavily Russian-dominated oil industry and would make all previous contracts entered into between the KRG and oil companies subject to review. In this sense, the Iraqi Oil Ministry has ordered the KRG to provide copies of all oil and gas contracts signed between the regional government and the IOCs over the past 18 years, as well as the related revenue reports. In an apparent show of support for the Iraqi federal government in Baghdad, the US government granted Baghdad one of the longest waivers ever granted to continue importing gas and electricity from Iran as an interim solution to internal energy supply problems.

Last week, a Baghdad court postponed the hearing of the oil ministry's lawsuit against seven IOCs operating in Kurdistan to June 20, to allow all defendants to serve subpoenas and prepare the necessary documents to send authorized representatives. Around the same time, the KRG reportedly filed a separate lawsuit against the Ministry of Oil, on the grounds that the provisions of its Oil Act ("Law No. 22 of 2007") did not they violate the Iraqi Constitution and therefore should be recognized as "permanent laws".

Lack of legal clarity has been at the heart of this ongoing dispute since Hussein's fall in 2003. According to the KRG, he has the authority, under Articles 112 and 115 of the Iraqi Constitution, to manage oil and gas in the region. Kurdistan, extracted from fields that were not in production in 2005, the year in which the Constitution was adopted by referendum. Furthermore, the KRG argues that Article 115 states that: "All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region." As such, the KRG argues that, since relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive the proceeds of its oil and gas exports. The KRG also stresses that the Constitution provides that, in the event of a dispute, priority is given to the law of the regions and governorates. However, the FGI and SOMO argue that, under Article 111 of the Constitution, oil and gas are owned by the entire Iraqi people in all regions and governorates.

The stakes for oil companies operating in the Northern Kurdistan Region and for Baghdad could not be higher, given the huge realized and potential oil and gas reserves in the region and the fact that much of the key infrastructure for the The entire country's oil export to Europe passes through the area administered by the KRG (in the form of pipelines to the Turkish port of Ceyhan). In 2012 the International Energy Agency (IEA) found that, prior to the recent increase in exploration activities in the KRG area, more than half of the exploration wells in Iraq had been drilled before 1962, "an era in which the technical limits and the low price of oil gave a much narrower definition of a commercially successful well than the current one ”. Based on the previous limited exploration and development of oil fields in the KRG area, the figure of oil reserves ascertained during that period was initially estimated at around 4 billion barrels. The KRG later updated it to around 45 billion barrels but, again, the IEA said in 2012 that this could prove to be a very conservative estimate. Furthermore, he added, the Kurdistan Ministry of Natural Resources estimated in 2012 that there are billions of cubic meters of precious natural gas, important for Europe and not far from the gas pipelines. This makes the legal disputes between Erbil and Baghdad essential for Europe.

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The article The disputes between Kurdistan and Iraq are getting worse, while gas and oil would be essential for the EU comes from ScenariEconomici.it .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/le-dispute-fra-kurdistan-e-iraq-si-aggravano-mentre-gas-e-petrolio-sarebbero-essenziali-per-la-ue/ on Thu, 16 Jun 2022 06:00:28 +0000.