KRG to Baghdad: Negotiate oil and gas law, don't interfere in IOC contracts

Kurdish officials on May 23 asked federal Iraqi authorities not to unilaterally seize control of the semiautonomous region's oil sector and meddle in the contracts it has signed with foreign operators, in the escalating internal dispute in OPEC's second-largest crude producer.

Baghdad has said it will establish a new oil company in Kurdistan to negotiate new service contracts with international oil companies operating there, as it aims to implement a February ruling by Iraq's Supreme Court that ordered the region to hand over its oil assets to the federal government.

The Kurdistan Regional Government has said the court ruling is an attack on its sovereignty enshrined in the Iraqi constitution, and weeks of negotiations between Baghdad and Erbil have failed to reach a resolution.

"Unilateral decisions won't help any side; we prefer negotiation and dialogue to solve our outstanding issue," KRG spokesman Jotiar Adil told S&P Global Commodity Insights. "Any decision should be according to the Iraqi constitution. We are always ready to negotiate and solve outstanding issues through dialogue."

Iraq's oil ministry has sent letters to oil companies operating in the Kurdistan region to sign new contracts with federal state marketer SOMO, an official told S&P Global on condition of anonymity, confirming a previous media report, though he declined to elaborate on what the letters stated or if any companies have replied.

Baghdad reportedly wants the KRG to allow SOMO to open an office in Kurdistan and control its oil exports, which Erbil relies on for the bulk of its finances.

In April, Kurdistan exported 454,000 b/d of crude oil via the Turkish port of Ceyhan, out of Iraq 's total 3.834 million b/d, according to federal data. That is down from a peak of nearly 600,000 b/d in late 2017, before the federal government retook several Kirkuk-area oil fields the KRG had claimed when the Islamic State were driven out.

The Iraqi oil ministry on May 12 said its analysis of production contracts found that the financial terms in deals signed by the federal government were better than the KRG's.

'Arm twisting'

Kurdish officials have said Iraq needs a federal oil and gas law to regulate the country's production and exports, with several attempts over the years to draft one failing.

A number of international oil companies and traders have contracts with the KRG, including Chevron, Oslo-listed DNO, Russia's Rosneft and Gazprom Neft and the UK's General Energy and Gulf Keystone Petroleum.

None responded to requests for comment.

Shwan Zulal, managing director of Carduchi Consulting and a close follower of the KRG oil sector, said it was unlikely any of the IOCs would terminate their contracts with Erbil in favor of Baghdad, at least in the short term.

"But if SOMO takes over the marketing of the oil, the next step would be establishing relationships between the IOCs in [the Kurdistan region] and the federal government, as they will be getting their payments from Baghdad if oil sales go through SOMO," Zulal said.

Yerevan Saeed, a research associate at the Arab Gulf Institute in Washington, likened Baghdad's recent moves to "arm twisting ... to strengthen its negotiation position."

"Baghdad is aware that under no circumstance, the KRG will allow IOCs to operate in the Kurdistan region if they sign separate and independent contracts with Baghdad," Saeed said. "If they do, Erbil is likely to shut down their operations and take them to international courts for compensation. "

Turkish talks

Iraqi Oil Minister Ihsan Ismaael on May 22 also discussed "increased" oil exports through Ceyhan with Turkish Ambassador Ali Riza Guney and "overcoming current legal challenges," the ministry said.

The meeting was another sign that Baghdad is putting more pressure on the KRG regarding the region's independent oil exports through Ceyhan that started in 2014.

SOMO also ships about 100,000 b/d of Kirkuk crude through the Turkish port.

Baghdad has previously sued Turkey in the International Chamber of Commerce for this policy, but so far Ankara and Baghdad have not been able to overcome their disagreements.

The KRG also has ambitions to increase energy exports to Turkey, with officials saying that the region is hoping to become a net gas exporter to Europe.