MESOP REPORT : Why Kurdistan Still Doesn’t Have its Oil Money

By Alexander Whitcomb – RUDAW  – 13-7-2014 – ERBIL, Kurdistan Region – A delegation of Kurdish ministers is in Turkey to sign new oil export agreements.  But its members also have a much bigger task: they must make sure the Kurdistan Regional Government (KRG) can ultimately be paid for its oil sales.

“The purpose behind the visit regards a bank account for Kurdish oil revenue, which has been sold through Turkey, and transferring the account into the Kurdistan Region,” said Rebar Muhammad, the KRG Minister of Finance. He is part of the delegation that is headed by Deputy Prime Minister Qubad Talabani and Minister of Natural Resources Ashti Hawrami.

Despite the fact it has at least $93 million in its account at Halkbank, a state-owned Turkish Bank, the autonomous region hasn’t been able to withdraw earnings from the sale of oil exported via a new pipeline to the Turkish port of Ceyhan.

Due to ongoing disputes over the legality of KRG’s independent oil sales, the Turkish government has been waiting for an agreement between Erbil and Baghdad over how to divide the revenue.

“Previously the KRG has indicated it would retain 17 percent and transfer 83 percent to Baghdad in line with its interpretation of the Iraqi constitution,” says Richard Mallinson, an analyst with London-based consultancy Energy Aspects. “But the suspension of fiscal transfer from Baghdad, and KRG claims of historic underpayment, have brought that into question,” he adds.“The Turkish government has previously indicated it will not allow money to be transferred out of Halkbank until Erbil and Baghdad had agreed the distribution, which I think may still be the main hold-up.”

Such an agreement looks out of reach for the moment. Kurdish cabinet members have boycotted participation in the Iraqi government following Prime Minister Nouri al-Maliki’s accusation that Kurds are harboring terrorist leaders in Erbil. Meanwhile, efforts to form a new government in Baghdad have been unsuccessful. Mallinson indicates there may still be hope for the cash-strapped Kurdish government, which relies upon the oil revenue to safeguard its economic and political autonomy.

“Perhaps Turkey can be persuaded to allow a transfer,” he suggests. “After all, they have shifted to allowing cargoes to load without Baghdad’s approval,” deciding to let Kurds ship their oil without waiting for a green light from Baghdad. Yet even if the KRG can withdraw the funds, major obstacles remain to secure a steady stream of oil income.  Baghdad has used international legal and diplomatic pressure to scare away potential buyers, including suing Turkey and the Turkish pipeline operator, BOTAS, for facilitating the sale.Iraq hired Houston–based energy firm Vinson & Elkins to target potential buyers, writing letters threatening legal action and denial of access to the 75 percent of Iraqi oil produced in the rest of the country.These tactics have been successful thus far, as only one of four tankers filled with Kurdish pipeline oil has unloaded its cargo, sold to an anonymous buyer. Baghdad also cut off the region’s budget to pressure the KRG to halt independent oil sales.

Kurdish Minister of Natural Resources Ashti Hawtami remains confident that the region’s oil exports will be sold.”We will be self-sufficient by year-end. In terms of revenue, yes,“ Hawrami told reporters a day before his Turkey trip. “See, Baghdad made the wrong calculation,” he continued. “They thought that they were strangling us by cutting our budget unfairly, illegally and unconstitutionally as a punishment. They have miscalculated the will of the Kurdish people; they fight back and we will match that expectation we have. We will be free with our own revenue as opposed to be being under the thumb of dictators in Baghdad.”