Crude from Bai Hassan and Avana dome, fields formerly operated by federal authorities, is now flowing by pipeline to Turkey for KRG export.
ERBIL – Iraq’s autonomous Kurdistan Regional Government (KRG) is now exporting oil from fields it recently seized from federal authorities – a step that takes Kurdistan much closer to economic independence and farther away from political reconciliation with Baghdad.
The KRG is pumping about 120,000 barrels per day (bpd) from two areas formerly controlled by the federal Oil Ministry’s North Oil Company (NOC) – the Avana Dome, which is one of the formations of the Kirkuk oil field, and the Bai Hassan field. Much of that oil is now flowing by pipeline to Turkey, according to two senior NOC officials and an industry official in Kurdistan.
By adding the two fields to its network, the KRG has been able to increase its pipeline exports by about 50 percent. These rising sales are especially critical now that Baghdad has stopped paying the KRG’s allocation of the federal budget – about $1 billion per month – which has convinced many Kurds that they have no choice but to pursue economic independence.
“The revenue sharing hasn’t happened,” said KRG Minister of Natural Resources Ashti Hawrami, speaking at a recent conference in Erbil. “We must decide to pursue a genuine revenue sharing, at the source… We have the right to sell our own oil, for the highest prices possible.”
The Bai Hasssan and Avana fields largely fall within the current boundaries of Kirkuk province. But the area is at the epicenter of long-standing disputes over Iraq’s internal boundaries, and some Kurdish officials say the two fields historically belong to the Makhmour district of Erbil province and therefore belong to Kurdistan.
Kurdistan’s newest exports are likely to raise sharp objections in Baghdad, where the central government claims sole authority to sell the country’s oil. The exports could also stoke controversy in Kirkuk, where Gov. Najmaldin Karim, a Kurd, has previously expressed reservations about unilateral actions that could alienate the province’s large minority of ethnic Arabs and Turkomen.
Kurdish sales from Bai Hassan and Avana are especially sensitive because until recently, when the KRG took control, revenue from those fields went directly to Baghdad, with a small portion earmarked for distribution to Kirkuk province; now, the earnings from Kurdistan’s oil sales, including from Bai Hassan and Avana, is flowing directly to the KRG.
“It further complicates the [oil disputes] issue and makes the solution much more difficult,” said a senior adviser to Iraqi Prime Minister Haider al-Abadi.
Leaders in Baghdad and Erbil fundamentally disagree about how to interpret the Iraqi constitution and draw the lines of authority over the oil sector, which accounts for 95 percent of government revenues. Abadi’s administration claims significant federal control, while Kurdish leaders assert almost total autonomy to develop and sell crude.
Iraq’s oil disputes escalated in December, when the KRG began exporting through a newly built, independent pipeline to Turkey. In January, then-Prime Minister Nouri al-Maliki cut off the KRG’s budget payments, which deprived the KRG of its primary revenue source and precipitated a financial crisis in the region.
September brought some modest hope of reconciliation with the inauguration of a new prime minister. Abadi didn’t offer any specific oil policy concessions, but Kurdish leaders agreed to join the new government for at least 90 days – a grace period during which they would ostensibly pursue negotiations.
Now, more than two months later, there have been no formal talks.
“Nothing has moved forward,” said the senior advisor to Abadi. “Now the Kurds are moving the goal posts.”
The exports from disputed fields could also complicate the KRG’s relationship with Turkey. Although Ankara has become a close ally when it comes to energy, Turkish leaders are wary of the KRG’s expansive territorial claims in Kirkuk, which have caused great anxiety among Iraq’s ethnic Turkomen population.
A senior Turkish government official said that Ankara had not approved Kurdish pipeline exports from Kirkuk.
Hawrami and other senior Kurdish leaders have not publicly acknowledged that crude from Bai Hassan or Avana is being exported. A KRG official said all exports are consistent with the region’s legal rights.
“The KRG is exercising its Constitutional right to manage, produce, refine, or export and sell oil from the land under its control and does so for the benefit of the people of Kurdistan and Iraq,” the KRG official said.
Taking control
Like other oil facilities in and around Kirkuk, Bai Hassan and Avana have historically been under federal control. NOC has managed production, pumping oil to federally controlled refineries and exporting it via the Iraq-Turkey Pipeline (ITP) – when it was not offline due to sabotage – to be sold by the federal State Oil Marketing Organization (SOMO).
All of that changed in June, when the so-called Islamic State (IS) organization seized control of much of northern Iraq, causing federal forces to retreat en masse. Kurdish Peshmerga forces quickly moved to fill the security vacuum in many volatile areas, including oil-rich territory around Kirkuk.
The rapid deployment was a military necessity, but it also carried political overtones.
In the wake of the Hussein regime, which waged campaigns of ethnic cleansing and forced relocation throughout northern Iraq, Kurds, Arabs, and Turkomen have laid competing claims to a belt of territory stretching across the country. These internal boundaries were supposed to be decided by a legal process outlined in Article 140 of the Iraqi Constitution, but the disputes have defied resolution.
After the retreat of the Iraqi Army, the Peshmerga suddenly controlled most of the disputed territories; KRG President Massoud Barzani pronounced that Article 140 had been implemented.
Soon after, the KRG Ministry of Natural Resources (MNR) wrested control of Avana and Bai Hassan from the NOC, and commissioned the Iraqi-Kurdish company KAR Group to operate the fields. Many Kurdish officials now refer to them as “Makhmour fields,” and suggest that – like the Khurmala Dome formation of the Kirkuk field, which has been controlled by the KRG since 2008 – they belong to Erbil province, under KRG control.
KAR quickly moved forward with a project connecting the fields to the Kurdish pipeline network. The first test flows began in July and by October the pipeline was fully operational.
The two senior NOC officials and the Kurdistan industry official confirmed that oil is now flowing by pipeline from both Bai Hassan and Avana up to Khurmala, where it is blended with Khurmala crude. One of the NOC officials said 80,000 bpd are currently flowing from Bai Hassan and 40,000 bpd from Avana. Khurmala is producing about 100,000 bpd, according to industry officials.
From that blend – a total of roughly 220,000 bpd – about 80,000 bpd feed the Kalak refinery outside of Erbil. Remaining volumes are flowing through the KRG export pipeline, the NOC and industry officials said.
The pipeline is now consistently pumping about 300,000 bpd, according to an MNR statement, which was corroborated by the Kurdistan industry official. In addition to the oil from Khurmala, Bai Hassan, and Avana, the pipeline is taking roughly 115,000 bpd from the Tawke field, operated by Norway’s DNO, and 50,000 bpd from Taq Taq, operated by Anglo-Turkish Genel Energy.
Two NOC officials also say the KRG is exporting as much as 18,000 bpd from the Ain Zalah and Sufayah fields in Ninewa province, which have historically been operated by NOC. The crude is being trucked from the fields up to the Kurdish town of Feyshkabour, where it is being added to the pipeline to Turkey.
Political fallout
Leaders in Baghdad and Erbil say their political disputes over oil and the budget should be resolved through dialogue, but they are also insisting on mutually incompatible preconditions to begin negotiations.
Abadi this week called on Hawrami to come to Baghdad for talks. On Monday, KRG Prime Minister Nechirvan Barzani said he would not send a delegation unless the central government first re-starts revenue-sharing payments.
Abadi faces internal political pressures from other members of his Shia Arab-dominated governing coalition, many of whom characterize Kurdistan’s independent oil sales as illegal smuggling. Moreover, the Iraqi government is suffering a cash shortage of its own, due to years of budgetary and fiscal mismanagement, rising military expenses, and the falling price of oil.
“The monthly budget payments to the KRG would be politically difficult to swallow, and economically unpalatable,” said the Abadi advisor. “The prime minister would suffer a knock-out blow for his government… he needs something in return from the KRG.”
In April, one area of mutual interest appeared to rise out of Iraq’s security crisis. After the repeated bombing of the federal pipeline to Turkey, which runs through territory now controlled by IS militants, the NOC was unable to export crude and had to shut in production, costing the government hundreds of millions of dollars per month. The NOC began negotiating directly with Kurdish leaders to prepare infrastructure that would enable Kirkuk production to be exported through the KRG’s independent pipeline.
The plan had the potential to establish a measure of economic interdependence between Erbil and Baghdad. If the central government were to rely on the KRG to help generate billions of dollars every year, then the Kurds would gain leverage to help assure payment of their budget allocation.
It is not clear whether Maliki or the federal Oil Ministry ever endorsed that plan. But now some members of Abadi’s Cabinet have begun to revive the idea, including federal Minister of Transportation Bayan Jabr al-Zubaidi, who appeared on a panel beside Hawrami at a conference in Erbil last week.
“Why don’t we link Kirkuk with the KRG oil, and then export it through the KRG?” Zubaidi said. “This gives a guarantee to the KRG… it’s not just the federal government that could cut; now the KRG could do the same.”
The incentives for Kurdistan to pursue such cooperation with Baghdad appear to be dwindling. Now that the KRG has incorporated much of the NOC into its oil sector, it is approaching financial self-sufficiency: by December, Hawrami said, exports will rise to 400,000 bpd, and will hit 500,000 bpd in the first quarter of 2015.
“We have increased our production and exports,” said KRG Deputy Prime Minister Qubad Talabani. “We will continue this way: we can agree [with Baghdad] to continue this way, or we can disagree, and continue in the same way.”
On the fundamental issues of how to divide the powers of the state, the two sides appear to be far apart. Speaking to reporters in Turkey, Iraqi Foreign Minister and former Prime Minister Ibrahim al-Jaafari reiterated Baghdad’s position, that only the central government can sell Iraqi oil.
On Monday in Erbil, KRG Prime Minister Nechirvan Barzani asserted the opposite position.
“We firmly oppose the idea of Kurdistan’s oil being exported by SOMO,” Barzani said.
Barzani also spoke last week at the Erbil conference, where the theme was dialogue and reconciliation. Barzani suggested that leaders in Baghdad were viewing Iraq through an old paradigm, and that the political conversation needed to shift in accordance with changing facts on the ground.
“The priority is to find a solution through dialogue,” Barzani said. “The problem is solving the problem based on a realistic understanding. If reality is taken into consideration [in Baghdad], they can reach an agreement.”
Barzani also implied that Kurdistan’s growing oil sector enabled the KRG to negotiate from a position of strength.
“In a meeting in Baghdad, they told Dr. Ashti that selling oil isn’t like selling tomatoes and cucumbers,” Barzani said, recalling a previous round of oil negotiations. “Ashti replied, ‘You’re right, selling oil is easier.'”
Source: Iraq Oil Report, published Tuesday, November 11th, 2014
Ben Van Heuvelen, Patrick Osgood and Rawaz Tahir reported from Erbil. Ben Lando reported from the United States. Iraqi staff reporting from Baghdad are anonymous for their security.
Comment here