Iraqi Economists Network

شبكة الاقتصاديين العراقيين

Energy, Oil & Gas PolicyIraqi Kurdistan Region

Senior Iraqi Oil Expert Mr Tariq Shafiq* commenting on the Iraq Finance Minister, Mr Hoshyar Zebari’s statements on the unpublished Agreement between the Kurdistan Regional Government (KRG) and the Iraqi National Government

My views and conclusion are summarised below:

The KRG will receive: 17% (“Ayad Alawi’s” gift, not the Parliament’s, regardless of their true population percentage) + a payment amounting to 17% of the sovereign expenses which is their legal budget obligation + a payment amounting to the net income of the open unspecified or defined oil production for internal consumption (which other producing provinces do not get) + the income from all past millions of barrels of Iraq national oil produced and smuggled as crude oil and/or products for the sole benefit of the KRG.

An agreement that grants so much of the national wealth to part of the nation without knowledge or approval of the nation must be politically motivated, which equates to blackmail. Mr Hoshyar Zebari’s statement however suggests that “the aim [of the national government here really was to bring Kurdish oil into the national pot”, whilst other politician may claim it is a price well worth it in return for the KRG to abandon past and current illegal and unconstitutional oil and gas plans, policy and practices.

However, in my opinion, based on the KRG’s past pursuits, declarations and objectives, this is a highly unlikely outcome. In fact, this Agreement provides encouragement for the KRG to demand more based on their policy objective which is to achieve the economic independence necessary for a Kurdistan independent State as soon as regional conditions and Western geopolitics become favorable.

This agreement grants de facto: exploration and production rights to the KRG, its consequential making of oil and gas plans and policy, including independence from the federal government and legitimisation of their PSA agreements.

Furthermore, this agreement signals a pattern that will shape the future Middle East, with ever further break up of national states into federally devolved enclaves, startingwith the break up of Iraq with the creation of an official con federal state of Iraq Kurdistan and an independent Kurdistan in the near future.

However, the sooner this takes place the better, provided it takes place in a peaceful way and on amicable and just terms for both parties, the Kurds and Arabs of Iraq, in order to end the present KRG con federal status, in which the Kurds’ ethnic partisan policy dominates Erbil and Baghdad.

But, God forbid if a divided Arab Iraqi nation follows suit on sectarian basis, creating further insecurity and instability and an escalation of serious bloody conflict, this amongst an Arab population who have lived in peace with each other as one nation for decades.

Please find below my comments marked in red on the statements made by the Iraq Finance Minister, Mr Hoshyar Zebari, with regards to the unpublished Agreement between the KRG and the Iraq National Government in response to interview questions by Mr Daniel Smith, published in the Iraq Oil Report.

“Q&A: Finance Minister Hoshyar Zebari

Then-Foreign Minister Hoshyar Zebari, now Finance Minister, meets with U.S. Secretary of State John Kerry in Baghdad on June 23, 2014. (THAIER AL-SUDANI/Reuters)

By DANIEL W. SMITH of Iraq Oil Report
Published Thursday, December 4th, 2014

ERBIL – As a Kurd sitting at the helm of the all-important Finance Ministry in Baghdad, Hoshyar Zebari straddles the political divide between Baghdad and Erbil – and has a unique view into the nascent efforts to bridge that gap.

On Tuesday, the Iraqi Cabinet unanimously approved a plan that could see Kurdistan facilitate some 550,000 barrels per day (bpd) of federal oil exports, in exchange for a 17 percent share of the federal budget. The deal has sparked rare talk of resolving oil policy disputes that have plagued Iraq for a decade.

It also raises a host of questions: The Dec. 2 agreement does not definitively address the most fundamental issues of control – over oil contracting, field management, and exports – that could determine the balance of power between the central and regional governments in the future.

Those issues will be debated in the Cabinet, and then the Parliament, when Iraqi leaders try to pass a 2015 budget law and a hydrocarbons law. Iraq’s oil disputes have derailed such attempts before.

Zebari spoke with Iraq Oil Report about the importance of the Dec. 2 deal, the ways it has already changed the tenor of debate in Bagdad and Erbil, and the fraught politics ahead.

Daniel W. Smith: How would you characterize the negotiations and their outcome?

Hoshyar Zebari: The negotiations really showed a great deal of commitment by the leadership of both sides to crack this nut. It will open up ways to normalize relations between the KRG and the federal government in other aspects as well: of security cooperation, of business, of trade.

DWS: What were the sticking points?

HZ: The major sticking point was the amount of oil production from the KRG. Originally, we had proposed 150,000 bpd, but because of the strains on the budget, Baghdad wanted to increase that amount as far as 250,000 bpd. Also, there are outstanding payments for public services, salaries, and Peshmerga salaries that have not been paid for a long time. There was a clear commitment by the government in Baghdad to make installment payments on the part of this that was owed to the Peshmerga.

DWS: And to be clear, from what you just mentioned, these installments were promised for just the Peshmerga portion, or any other portion as well?

HZ: The Peshmerga portion.

DWS: And this is not being deducted from the 17 percent?

This will be paid by the Defence Ministry in Baghdad. The KRG will receive the entire 17 percent, and sovereign expenses will not be deducted from this. (So, the nation pays not only 17% but much beyond. I wonder if HZ may be claiming that the Defence Ministry’s budget is not part of the national budget!)

DWS: Were there any major disagreements on this issue?

HZ: No, it wasn’t a difficult issue, and I don’t think it will be one. It’s all a done deal. We are now already preparing the 2015 budget, and we have included the 17 percent KRG share (do not forget it is net of Sovereign expenses).

DWS: Passing previous Iraqi budgets hasn’t usually been an easy thing to do, and parties have commonly tried to block or amend parts of them. How do you see this playing out in the Finance Committee in Baghdad, and then right before it gets voted on?

HZ: This time, there was a unanimous agreement between all the political parties that are represented in the government. This is what was needed before a budget passes. There wasn’t a single objection, really.

DWS: Was it a verbal agreement, or an actual written and signed agreement?

HZ: It is a written agreement, and was announced as a written agreement.

DWS: Will it be released to the public, so Iraq’s citizens can see what specifically was agreed upon?

HZ: No, but the main points were announced publicly in press conferences. (Why bother? The chiefs have decided in accordance to their definition of transparency!)

DWS: When does the deal begin to be implemented, and what needs to happen first?

It is being implemented immediately, actually. It was endorsed by the Iraqi cabinet, and it’s a done deal that goes into effect immediately.

DWS: Does Bai Hassan and Avana dome remain under KRG control, and thus part of KRG exports, or Kirkuk?

HZ: I’m really not very familiar with the details of all the oil fields. The amount of 300,000 barrels should come from Kirkuk (Kirkuk oil Field or Kirkuk governorate’s oil fields?) – this is the deal. (We made up our minds, do not confuse me with the facts!)

DWS: The deal says 250,000 bpd from KRG. But KRG plans to export more than 250,000 bpd this coming year, so who sells that extra oil, SOMO or KRG?

HZ: Additional oil produced will go for local consumption, within the region. That is the agreed target. (This additional produced oil, must be a bonus, it is over and above the 17% gross national proceeds.)

DWS: Are you saying that, according to the agreement, anything produced over 250,000 bpd will not be sold, and used exclusively for local consumption. (I.E., KRG gets: 17% “Ayad Alawi’s” gift, not the parliament, regardless of their true population percentage, + a payment amounting to 17% of the sovereign expenses + a payment amounting to the net income of an open unspecified or defined oil production for internal consumption+ all past billions of barrels of oil produced and smuggled as crude oil and/or product)

HZ: This deal is acceptable to both sides, and this point is not a problem for either one. The aim here really was to bring Kurdish oil into the national pot to get it flowing. (This politically motivated agreement equates to blackmail. Never the less, it could be a price well worth it so long as KRG abandon past and current illegal and unconstitutional practices. But I doubt KRG change of past attitude.) Because of the deficit, the balancing of the oil costs, the other problems we have with the expenditures that all wasn’t working. All the experts were advising us, “The only way you have is to increase oil production, and the only available oil is in the north.”

(1-            ,It is not clear whether the 300,000 shall be produced from whether Kirkuk oil Field’s three domes: Baba, Khurmala and Avana? Or from Baba alone, so long as KRG seems to have taken over Khurmala Dome under a complete silence of the MoO and the national government and occupied and produced Avana in recent months. Therefore: the Agreement, one must assume, Khurmala produced oil accounts towards KRG 250,000bpd oil production and not toward the 300,000bpd national oil? How about Aavana Dome produced oil, which is occupied by KRG, does it contribute towards KRG oil or not National oil?)

(2-            The experts, in reference to the minister’s statement, seem to have forgotten that: A shut in Kirkuk oil well takes time to be revived into a flowing state. And many wells may need work-over and above all the experts need first to be enlightened if Kirkuk Field is meant to be Baba dome alone or Baba plus Avana or truly Baba, Avana and Khurmala? The old Kirkuk Oil Field is known to have had the capability to produce multiples of the 300,000 from its Avana, and Baba domes (with Khulmala awaiting further development) might have already been reduced to around 300,000bpd under past over production, injection of oil residues into Baba producing wells with wrong too dense spotty development spacing? NOC and BP under its present consultancy contract should have been consulted had the agreement not been rushed.)

DWS: What happens to the KRG exported oil currently out at sea? (Good question)

HZ: I think they were silent on that. It is not the most important issue. (Well what is meant is: what is mine is mine and yours we share!)

DWS: What happens to the revenues KRG already made from sales?

HZ: The same. (Another good question with same answer!)

DWS: From what you’re saying, I’m getting the impression that neither of the sides are making too many demands about things that have already happened, such budget payments not made and oil already sold or shipped. (Iraq muhasasa must have moved into a new face of compromise to the stronger party.)

HZ: Definitely. We are not talking about all the past problems. It is a new beginning. (A good answer: a compromise mode!).”

(*) Former President of Iraqi National Oil Company (INOC)

(**) Interview by Daniel Smith, Iraq Oil Report, published Thursday, December 4th, 2014

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