Baghdad plays hardball with oil producers in Kurdistan Region
With oil exports from the Kurdistan Region still suspended, PM Sudani emphasized this week that the best route to restarting production is to renegotiate the terms of the contracts of international oil companies operating in the Kurdistan Region.
During this week’s press conference, Sudani reiterated that the budget law prohibits the government from affirming the existing commercial terms of the contracts signed between the KRG and international oil companies. In February, Sudani emphasized the need for the government to either renegotiate the KRG's oil contracts with producers, or amend Article 12 of the federal budget to accommodate higher production costs in the Kurdistan Region.
Article 12 stipulates that compensation for oil production costs in the Kurdistan Region should align with the average production costs elsewhere in Iraq. However, contracts signed by the KRG with oil producers entail significantly higher costs than those negotiated with the federal oil ministry. During this week’s press conference, Sudani noted that the average production cost of a barrel of oil in the Kurdistan Region is $26, compared to only $8 for federal Iraq. He stated that the preferred approach was to renegotiate those contracts, claiming that the KRG had accepted this course of action.
However, the Association of the Petroleum Industry of Kurdistan (APIKUR), an interest group that represents eight international upstream oil and gas companies with contracts in the KRI, has remained unwilling to renegotiate its contractual terms with Baghdad since the pipeline shutdown last year. The mostly American and Canadian firms that make up APIKUR are:
DNO - Norwegian
Genel Energy - British-Turkish
Gulf Keystone Petroleum - British
HKN Energy - American
ShaMaran Petroleum - Canadian
Hunt Oil Company - American
WesternZagros Resources - Canadian
Kalegran - Swiss (subsidiary of MOL Group, which is Hungarian)
In a May 15 statement, APIKUR noted that its member companies were “prepared to resume exports, contingent upon reaching agreements which provide for payment surety for past and future exports and preservation of commercial and economic terms.” In March, APIKUR claimed that it had been repeatedly assured by the KRG that it was fully committed to their contracts. But Sudani told reporters this week that the KRG had no objection to renegotiating the contracts.
The alternative would be to amend the federal budget law. However, the government did not propose any amendments to the text of the law when it sent the revised budget tables to parliament earlier this week. Furthermore, even if the KDP sought to put forward an amendment to Article 12 in parliament, it would be very difficult to get it approved.
With oil prices comfortably above $80 per barrel and Iraq in a strong fiscal position, Baghdad is in no rush to resume oil exports from the Kurdistan Region and is happy to bide its time until the oil companies back down and accept to renegotiate their contracts.
Furthermore, so long as the KRG continues to receive its budget share to cover salaries, it will also feel little pressure to back the oil companies. Crucially, the Federal Supreme Court’s February ruling that mandates the direct payment of salaries to KRG employees means that these funds are no longer conditioned on the KRG handing over oil to Baghdad. The Sudani government’s revised budget proposal includes a further increase to the KRG’s share, amounting to 20 trillion IQD.