11 Apr 2016 – MUSINGS ON IRAQ- The Kurdistan Regional Government (KRG) is built upon an oil dependent economy just like the rest of Iraq. For years that appeared to pay off, but disputes with the central government, and the collapse in petroleum prices has put that all in jeopardy. The region has become dependent upon a pipeline to Turkey that is constantly being bombed by Kurdish insurgents and broken into by oil smugglers. It is also failing to meet its marks in pre-set deals with oil traders. All together that is putting the regional government deeper and deeper into debt, and several of its major producers are running into financial difficulties as well. Kurdish oil exports have been declining in 2016.
In December2015 the region had an average of 584,056 barrels per day. It then peaked at 601,811 barrels a day in January, before going down to 350,000 bar/day in February, and 327,371 in March. The major cause of the large drop in February and March was that the Turkish pipeline was bombed and then shut down by Ankara for a security operation in the area where the line runs through against the Kurdistan Workers’ Party (PKK). Kurdish oil could not flow to Turkey onto the international market until March 12, after being down for three weeks.
When the pipeline came back on line the Kurds ran into another issue, this time with the central government. The Oil Ministry ordered the North Oil Company (NOC) to stop providing oil for Kurdistan. The NOC runs several oil fields in Kirkuk, which had been supplying the Turkish pipeline since the summer of 2015. Oil Minister Adel Abdul Mahdi said Baghdad was withholding oil to pressure the KRG into budget talks after an agreement broke down last year. This was a major hit to the Kurds, because their fields cannot make up for this loss, and that will put them into more debt with the contracts they signed. The KRG’s Natural Resource Ministry (MNR) has signed pre-set export deals with oil traders. The Kurds have to export a set amount of petroleum each month to be paid by the companies. They can only meet that quota with oil from the NOC. Not only that, but if they do not meet their mark they owe money to the traders. For example, in January the KRG was supposed to export an average of 650,000 barrels a day, and received $650 million. Because it did not meet its requirements it owedaround $250 million to the companies. Kurdistan will not be able to get out of these debts now that Baghdad has cut off roughly 25% of its exports.
The decline in exports and growing debt is putting the regional government into a financial tailspin. In January it earned $650 million, then $303 million in February, and then $289.5 million in March. The KRG needs roughly $730 million a month to cover its bills. $424 million is necessary just to pay public workers and the Peshmerga. The KRG is now roughly four months behindin paying its employees, and have cut their wages 15-75% on top of that. This has led to constant protests by civil servants for months now.
The final casualty of this collapse is the international oil companies (IOCs) operating in Kurdistan. The KRG owesthose businesses around $3 billion in payments. Starting in September2015 it started making monthly appropriations for the corporations. That has led the IOCs to reduce their investments in the KRG and to a reduction in output. The Tawkw field for example run by DNO has seen a drop in output from 180,000 barrels a day in 2015 to 120,000 barrels a day in February 2016. That’s only half of the companies’ problems however. McDaniels and Associates cut the estimated reserves of Kurdistan from 683 million barrels to 356 million. Oil companies claim those reserves so that has been another hit to the IOCs. They like the KRG are now in a financial mess. Genel Energyonly has about one third of the reserves it initially estimated for the Taq Taq field, owes about $250 million to its creditors, and has seen a drop in its stock prices as a result. Gulf Keystone reported a $135 million loss in 2015, after a $248 million loss the year before. Many of these companies were originally planning on making an initial investment in Kurdistan, start producing oil and then sell their holdings to larger companies. They were also hoping to profit from the Turkey-Kurdistan oil pipeline when it finally opened. All together they are in much of the same state as Kurdistan with declining revenues and growing debt.
Kurdistan used to promote itself as the “other Iraq.” It was safe, it had a business friendly environment, and had no qualms about foreign private investment. It pushed for greater economic independence through petroleum exports topped off by the building of the pipeline to Turkey. That brought the wrath of the government of Prime Minister Nouri al-Maliki who cut off budget payments to the region. His successor Premier Haidar Abadi worked out a temporary reprieve, but that broke down when neither side met their obligations. That led to the deals with the oil traders. There were two major flaws. The over supply of oil has completely undercut prices. Just as important the Kurds are completely dependent upon the Turkish oil pipeline to deliver the amount of petroleum necessary to meet its obligations, and that line is constantly being bombed and tapped into by oil smugglers causing it to constantly shut down. All together that has put the region down an uncertain path.
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– “Gulf Keystone says still owed $178 mln by Iraqi Kurdistan for oil exports,” 3/17/16
– “Iraqi Kurdistan News in brief – January 11, 2016,” 1/11/16
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– “Sun sets on the great Iraqi Kurdistan oil dream,” 3/20/16
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