The Kurdistan Regional Government (KRG) has not abided by submitting the daily oil quota (250,000 barrel per a day) to Iraq’s State Organization for Marketing Oil (S.O.M.O). The figure is the KRG’s contribution to the national oil export which is a clause in Iraq’s 2019 Budget Law. The KRG’s lack of commitment to hand over its oil has started a tension between Baghdad and Erbil as multiple political groups and populist leaders in Iraqi Parliament are pressuring Prime Minister Adil Abdul-Mahdi’s government to take an action against the KRG.
However, it seems there is a mutual understanding between the both governments’ leaderships to let Erbil selling its oil in 2019 in order to pay back its accumulated debts, an estimated $14 billion. By the end of this year, they would reach a new oil-agreement to resolve their oil and financial disputes if the ongoing political pressure allows them.
The status quo will stay the same in 2019, and by the end of this year, they will start negotiating to reach a more comprehensive oil-agreement. Currently, the Iraqi leaders just want Erbil to keep paying its debts. “I think they would be happy to see us paying back most of the debts by the time we would ask for another agreement,” said one of the KRG’s leaders, talked to ICPAR on condition of anonymity.
The Erbil-Baghdad oil disputes started in mid 2000s, when the regional government invited international oil companies to invest in its oil and gas fields. The dispute is mostly over ownership of natural resources located in the region. Despite of being the subject of various lawsuits in local and international courts filled by the Iraqi Government, the KRG independently has contracted dozens international oil companies (IOC) and exports about 430,000 bpd according to multiple technical sources.
From 2014 till October 2018, the Federal Government of Iraq (FGI) cut off the KRG’s budget share under the pretext of independently exporting oil and not handing over its revenues to FGI. The 2019 Budget Law conditions the KRG’s budget share based on its contribution to national oil export, handing over 250,000 barrels of its oil to OSMO every day. Contrary to the previous years’ budget laws, the article 10 of 2019 budget law assures the KRG to receive some portion of its national budget regardless of the political disputes between the both governments or how the KRG abides by the law. This portion of budget is titled as salaries of the KRG’s civil servants. The KRG, received 453 billion IQD (about 379 million USD) every month for salaries of its civil servants, according to Rebaz Hamlan, the KRG’s Minister of Finance (MF).
Now, several political groups and factions are using the oil dispute as a case against PM Abdul-Mahdi’s government. Last week, Iraqi Parliament invited the Minister of Finance, Fuad Hussein and Minister of Oil, Thamir Ghadhban to explain why the KRG has not contributed to the national oil export while it received monthly transfer from FGI, according to Ghalb Mohammed, member of Iraqi Parliament’s Oil Committee. The ministers’ answers and MPs’ skeptical questions just reflect the ongoing pressures that some political factions have started on the Abdul-Mahdi’s cabinet.
Oil for Budget Agreement
The Erbil-Baghdad oil disputes are more complicated than what it appears as a financial discussions by some MPs and political figures. Dozens of IOCs and Turkey are also involved. The companies invested in the Kurdistan’s oil sector based on production-sharing contracts, and Turkey is also involved by letting the KRG selling its oil by the Kirkuk-Ceyhan pipeline, which recently joined to Kurdistan’s pipeline after ISIS demolished the Kirkuk’s pipeline.
The Federal Government of Iraq wants the KRG to hand over its oil, but it does not payback the KRG’s debts and financial dues of the IOCs that produce the oil. Five years of federal budget cut, ISIS’ war, and oil price crash indebted the KRG to almost $20 billion. Currently, the KRG’s local and international debts are estimated to be about $14 billions, according to an ICPAR’s rough estimate based on the KRG’s available data. Part of these debts that the KRG has to pay back were taken as pre-payment from IOCs and oil traders in advance of selling the region’s oil. Now, the KRG needs to honor its agreements with the IOCs and deliver its oil according to the agreement.
Likewise, the FGI’s debt is $ 162 billion, and it does not have the financial leverage to shoulder the KRG’s debts too, according to Ahmad Haji Rashid, member of Iraqi Parliament’s Finance Committee. The FGI officials would like to see the KRG is paying back its debts, but they are also under huge pressures from several political parties and blocs, who are also capitalizing on weakening the current Iraqi Cabinet.
How Serious the KRG’s Constrains?
Risking bad relation with Baghdad is not a viable choice for the KRG which has not recovered from its 5 years recession and financial crisis. The region needs 881 billion IQD/month as executive budget and salaries of its civil servants. It gets 453 billion IQD from the federal government 350 billion IQD from its oil exports in addition to some transfers from the US led coalition against ISIS, according to Hamlan.
Now, the KRG’s priority is to pay back its debts and continue paying its civil servants, according to Hamlan. The region’s leaders were hoping to get the FGI to pay the KRG’s debts back in exchange for handing over its produced oil to SOMO; however, this was a too bad of a bargain for the FGI. The KRG tried to push the FGI to share of the debts by dedicating some of the national budget to pay IOCs’ that work in Iraq, but that was also too wishful from the KRG. So, the choices are limited while the debts have to be paid. Since July 2018, the KRG has paid back more than $6 billion debts of its total loans which was about $20 billion in its peak as the following.
All the figures are taken from the KRG’s ministry of finance and Deliotte’s six reports on the region’s oil sector.
If the KRG keeps paying back its debts in the same rate, it needs two years and a half (30 months) to pay back all its debts. However, it is hard to believe that the region will get the FGI’s monthly transfers after December 2019 given the current political debates in Baghdad. If oil price does not go down and Baghdad keeps sending the monthly transfer to Erbil, by the end of this year, the KRG would reduce its debts to $9 billion.
The Secret Behind the Erbil-Baghdad Calm Relation
Although influential political factions and figures are pressing the MP Abdul-Mahdi’s Cabinet to act against the KRG and inflict the same financial penalty that the previous Iraqi governments imposed by cutting the KRG’s budget share, the Erbil-Baghdad relation is still good. Usually the both sides’ leaders insist on resolving all their oil and financial disputes by dialogue, and a KRG’s high official is expecting to have a new oil deal with Baghdad to address the current complications.
A high level KRG’s official said, “The Baghdad-Erbil disputes and complications over oil and national budget are expected to be eased. We have continuous talks with the PM Adil Abdul-Mahdi and other federal officials about the oil disputes. The federal government is waiting for Erbil to pay back its debts through its oil till the end of 2019, and then the both governments will broker a new deal over the oil disputes and the KRG’s share in 2020 national budget.”
The new deal is expected to be similar to the previews ones in term of obliging the KRG to hand over its oil to SOMO and making the FGI fully deliver the KRG’s national budget share. However, with the KRG paying back most of its debts, the reduced KRG obligations to IOCs will help the both governments reach a new compromise easier and sooner, according to the KRG’s official.
Recently, Ayad Allawi, the Interim Prime Minister of Iraq from 2004 to 2005 and leader of Iraqi National Accord, started mediating between Baghdad and Erbil, and in an interview with Al-Taghayer Satellite Channel stated that Masud Barzani, the former KRG President and head of the Kurdistan Democrats Party (the region’s ruling party) promised to send a delegation after Ramadan Eid to Baghdad, negotiating all the disputes over oil and national budget.
The both Erbil’s and Baghdad’s leaders expect to broker a win-win deal in which the KRG will be able to meet its obligations to the both SOMO and the IOCs, according to the KRG’s official. However, there is a risen pressure from several factions in Iraqi Parliament (especially Haidr al-Abbadi’s Nasr Coalition and Nuri al-Maliki’s State of Law coalition) to drive the Abdul Mahdi’s government against the KRG and cut its budget share, similar to what the former prime ministers did.