Baghdad, Arbil Close to A Deal Over Oil Dispute

Source: Reuters 2/6/2014, Location: Middle East

Iraqi Kurdistan and the central government in Baghdad are close to resolving a long-standing dispute over the sharing of oil revenues, said the president of Genel Energy, which operates in the region.

The Kurdistan Regional Government (KRG) and Turkey signed in November a package of energy deals providing for exports of the semi-autonomous regions' rich hydrocarbon reserves abroad without having to get clearance from the central government.

An infuriated Baghdad, concerned about what it saw as a move towards the region's independence, threatened to sue the companies that lift Kurdish oil via the KRG pipeline.

While fiery statements between Arbil and Baghdad escalated, the talks between the two sides have also continued. Mehmet Sepil, the president of Anglo-Turkish firm Genel Energy who has knowledge of the talks, said he saw a deal approaching.

"We have never been this close to a deal," he told Reuters in an interview. "The issues that caused an impasse have been identified. There's been quite a bit of progress made."

The central government insists it has the sole right to export Iraqi resources, including those from the northern Kurdish region, which gained de facto autonomy after U.S.-led forces defeated Saddam Hussein in 1991.

The KRG says its right to exploit and export reserves under its soil is enshrined in Iraq's federal constitution, which was drawn up following the U.S.-led invasion in 2003. The region has passed its own hydrocarbons legislation.

Failure to reach an agreement could deter international oil companies from lifting Kurdish crude. Genel, one of the first companies to export oil from Kurdistan, stands to benefit from a resolution of the dispute.

Hussain al-Shahristani, Iraq's deputy prime minister for energy often known by his feisty statements, said on Feb. 1 that 'some progress' had been made in talks and that a solution could be found soon.

One official from the central government said, however, that the Kurds were still insisting on handling exports through its own marketing company and that Baghdad strongly objected. He did not see that a breakthrough in the talks was imminent.

Sepil said that according to the latest update he has on the talks, the hurdles have been narrowed down. "There are three issues now that need to be tackled."

He said those sticking points were whether the oil sales will be carried out by Baghdad's oil market company or Arbil's; the choice of bank account in which the revenues will be deposited; and the oil payments owed to companies operating in Kurdistan.

Baghdad has agreed to pay 17 percent of total revenues to the Kurds, Sepil said, based on the Iraqi constitution. Each side will then pay their own contractors, which would eliminate the discussion on the legality of the Kurdish contracts.

Previously, Baghdad paid contractors for its southern fields first from the common revenues and then allocated the Kurds' share. The region then had to pay its own contractors, which meant in the end that its share of the total only was around 10 percent.

The Kurds have set up the Kurdistan Oil Marketing Company (KOMO), which they insist should be authorized to carry out oil sales. They say they welcome officials from the central government's State Oil Marketing Corporation (SOMO) to inspect the process.

Sepil said a possible structure that would include representatives of both companies is now being discussed and that a joint operation between the two might be possible.

"The trickier issue is the bank account. Baghdad wants the revenues to be deposited in the Development Fund of Iraq (DFI) instead of a Turkish state bank," Sepil said.

DFI was created in 2003 under a resolution from the United Nations Security Council to receives revenues from Iraqi oil and gas sales, which are used in part for the its reconstruction efforts.

Last but not least, the outstanding oil payments to companies operating in Iraqi Kurdistan are a major issue that needs to be ironed out, Sepil said.

Companies operating in Kurdistan have stopped exporting through the federal pipeline after not being able to receive their full contracted entitlement from Baghdad. The Kurds did not have sufficient revenue out of their share to make up for the difference.

"The total amount owed to the companies from past exports is around 50 million barrels worth of oil money," Sepil said. "We don't want to keep exporting into a black hole. We are listed companies, we have shareholders. We can't just forget about this money," he said.

While the talks have continued between Arbil and Baghdad, the Kurds have started to ship oil independently via the new KRG pipeline into Turkey's Mediterranean port of Ceyhan, which links with the Kirkuk-Ceyhan pipeline at the border.

This oil has not yet been sold while the dispute with Baghdad has been unresolved, but companies expect to get their contracted share of those eventual revenues.

So far close to 500,000 barrels of crude oil have already been stored at Ceyhan, Sepil said, or one fifth of a total of 2.5 million barrels of storage that Turkey's state pipeline operator BOTAS has allocated for Kurdish oil.

The KRG had announced that it would open a tender to sell its oil at the end of January but that has not materialised.

"Surely that 500,000 barrels could be tendered. Much smaller amounts are being trucked, why not sell that parcel But I think now is the time to wait for the diplomacy to bear fruit," Sepil said.

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