Iraq and Gulf Analysis

False Alarm on Oil Exports or Not?

Posted by Reidar Visser on Wednesday, 2 February 2011 13:57

The surprising aspect of the failure to start oil export from Kurdistan yesterday was not the fact that the target date of 1 February was missed. This happens in Iraqi politics all the time: Each day, for almost every issue of significance, one can find someone saying it will be solved “in two days”, others claiming it will take “two weeks” and some maintaining “the rest of the month” is needed. Rather, the remarkable thing was that the messenger in this case was someone who has a businesslike reputation and is seen as reasonably realistic by friends and opponents alike – the prime minister of the Kurdish Regional Government (KRG), Barham Salih.

It is still unclear whether the delay means the oil-export issue will simply become one among several items in the growing quagmire of pending questions in Iraqi politics or whether a solution is actually around the corner. The new government that was announced in late December 2010 remains incomplete without security ministers. The controversial, US-supported strategic policy council remains bogged down in detailed disputes about the status of its chairman/president (that technical distinction is part of the dispute!) and the country has no legally elected vice presidents (not that they are needed, but this issue keeps deflecting energy from potentially useful discussions). Before parliament can give the budget the full attention it requires, it needs to elect more committee heads and update its own bylaws, and with the recent outrage over Maliki’s moves to bring the “independent” commissions under closer control by the executive, there is more talk than ever about actually trying to craft the special legislation for the federal supreme court called for under the constitution (which requires a two-thirds majority in parliament).

The oil-export issue itself has some additional problematic aspects that have received a certain degree of attention already and are likely to cause more widespread discussion once the issue reaches the full parliament through the budget, regardless of whether oil is actually about to start flowing (and some media reports suggest this is indeed the case). Ever since the first oil-export attempt was aborted in 2009 and local sales of oil were initiated in Kurdistan by the local authorities in order to compensate the foreign companies working there, voices critical of these local sales have been heard in Baghdad. When Ashti Hawrami, the KRG natural resources minister, told The New York Times on 8 July 2010, at a time when the local sales of oil were peaking, that proceeds from oil smuggled to Iran were being used to compensate foreign companies operating in the region, it certainly added to the controversy (even through Hawrami later claimed journalists had failed to understand his distinction between oil and oil by-products). At any rate, going forward, it seems clear that a part of the proposed new deal on oil “exports” from Kurdistan actually involves not exports as such but rather boosting production for local markets, and if this relates to some kind of special quota for Kurdistan that will be exempted from the general, population-based national revenue-distribution formula and hence less transparent – and if local sales are done according to a different formula than export oil (i.e. if more money gets pocketed by the foreign companies) – then it could certainly prompt criticism from Iraqi parliamentarians who are likely to ask tough questions about any deviance from the constitutionally mandated, universal pattern of distribution across Iraq. Again, it is critical to note that as far as oil is concerned, there is not one iota of difference between a federal region and a governorate when it comes to the relevant constitutional provisions.

Meanwhile, the Kurds have made one important gain in that Khalid Shwani has reportedly been made head of the important legal committee in parliament, a job which the secular Iraqiyya had been seeking. The position is potentially useful, though particularly as a tool of obstruction. The challenge for the Kurds is that their long list of demands to Maliki (the 19 points) involve complicated pieces of legislation on issues like the presidency council and energy that are likely to stay in parliament for a very long time before they ever reach the legal committee, no matter what Shwani does (or what Maliki has promised). Ultimately, though,  it is likely that these elected forums, rather than backroom deals, will decide the overall structure of Iraq’s oil-export regime in the long run, regardless of whether some kind of short-term fudge will enable oil to flow from Kurdistan in the near future.

21 Responses to “False Alarm on Oil Exports or Not?”

  1. JWing said

    It appears,at least from press reports that the delay in exports is a technical rather than a political issue. The real problem, is that Baghdad has only agreed to pay the companies for costs, not profits. That could lead to another breakdown as happened in 2009.

    Also, your point about whether the new deal will allow Kurdistan to increase production for local use I don’t think is a factor. Kurdish production has dropped to miniscule numbers since exports were cut off in 2009 because the region has lots of cheap gas and oil. Prices in Kurdistan were only a third of world prices at the end of 2010 as a result. There doesn’t appear to be any reason for the Kurds to increase production just for local markets then.

  2. Reidar Visser said

    Far from constituting “miniscule numbers”, local production from the DNO field alone peaked at 20,000 bpd last summer and was no less than 16,000 bpd in December 2010 after a dip in the months between. Also Asim Jihad of the oil ministry has indicated clearly that meeting the local demand for oil derivatives is part of the deal, viz:
    وذكر جهاد ان الوزارة “اتفقت على دفع مبالغ المستحقات لوزارة الثروات في الاقليم عن تطوير الحقول النفطية وتشغيل المصافي في اقليم كردستان وبطاقة 50 الف برميل لتوفير حاجة الاقليم من المشتقات النفطية اضافة الى سد حاجة محطاته الكهربائية من زيت الغاز
    Also, of course the players involved in this prefer to portray any issues as “technical” not “political” but it seems pretty clear that these issues will get debated when the budget is due for discussion in parliament. I agree that there are probably limits as to how long the foreign companies can go on delivering oil on a non-profit/cost-recovery basis.

  3. Salah said

    indicated clearly that meeting the local demand for oil derivatives is part of the deal, viz:
    I don’t think there is shortage of oil production in Iraq that drive “meeting the local demand for oil in Kurdistan.
    But I agree this is not purely political issue here if we take in account the geology and the topographic of Kurdistan region issue in account from petroleum exploration point of view, the cost of investing in that region comparing to the “walkcake” from Kirkuk to southern Iraq part were flat land so seducing to hold and exploring that flat land with easy low cost investments.

  4. Santana said

    For everyone’s info DNO and Hunt and others are NOT working at cost….it is only “cost” on paper…the cost numbers are all inflated…..I am sure Khalilzad knows the truth but will keep it a secret since DNO pays his salary based on direct orders from KRG to DNO to take good care of him.

  5. Reidar Visser said

    Salah, I agree with you that in theory there should be no reason for the central government to be hostages to the operators of a 50-100,000 bpd field in Kurdistan when there is an abundance of supergiant field with far greater potential further south. But then again, this shows that even if Shahristani may have been succesful with his long-term plans (i.e. the production boost in the south) he has not managed to do much in terms of increasing production in the short term, when the money is needed.

    Santana, regarding the DNO operation, the reason I mention the local sales is that the company has sounded more upbeat lately, indicating it is satisfied with the rate of recovery obtained on the basis of those sales. Some have even suggested that DNO may end up with more money from dicounted sales in the local market than on exports proper because the share they get from the KRG for those sales is better.

  6. JWing said

    Reidar, I have completely different numbers for oil production in Kurdistan. The Tawke field was down to 4,900 bar/day in March 2010 and then 4,000 bar/day in Nov. Oil was selling for only $25-$30 a barrel by the end of 2010 as well in the KRG.

    http://musingsoniraq.blogspot.com/2010/11/norways-dno-dramatically-cuts-back-oil.html

  7. Tore said

    I see you are very informed, Santana. Not… When did DNO start paying Khalilzad? He is not a DNO emplyee, nor a member of the board. He was going to become a board member, but withdrew before joining. He is a board member of RAK Petroleum, though.
    And do you have any documentation of inflated cost numbers? DNO is a publicly traded company on the Oslo Stock Exchange, and their accounting is published on a quarterly basis.

  8. Reidar Visser said

    JWing I have no idea where you get your figures from but why don’t you use the monthly DNO production reports? The one from December 2010 is available here:
    http://hugin.info/36/R/1483220/418458.pdf
    You will see that November was one of the worst months they had. No one is disputing the low price, but my guess is that doesn’t matter for DNO if the net they get is more for each barrel than they would get for exported oil under a “no profit oil” scheme.

  9. Kermanshahi said

    Most of the Kurdish “demands” or not really demands, but more, things the Kurdistan Alliance would like to see happen. Only 3 of the 19 points are really essential, one of which, the symbolical position of Presidency (to preserve equality in the power-sharing deal between Talabani and Barzani), has already been given. The second major demand is the oil-deal, this is important because the KRG wants money, but there is plenty of room for negotiation here and negotiation, compromise, is exactly what is now being done. There is only one point where there is no room for compromise at all, because it itself is already a compromise and it is is really so essential it is a matter of life and death, a matter which can cause war and peace, which can cause the government to collapse or even the nation to dissolve and that is the matter of Kerkuk referendum, without which the Kurdistan Region will for ever be seen as incomplete, without which the effects of the Ba’athist genocide against Kurds will always be felt and without which tentions both politically, in Baghdad and locally, and on the ground in Kerkuk between the Peshmerga and army and between the cities civilian, Kurdish majority V it’s Arab and Turkmen minorities, aswell as tensions with Turkey. As long as this is passed, al-Maliki can count on Kurdish parties as allies for long after the election, but this isn’t done within the nececary timeline it will create major problems.

  10. JWing said

    Reidar,

    The numbers I have are from news reports. The pdf file you provided from DNO shows that production went up and down last year. Down in Q2, up in Q3, down in Q4.

    The following article:

    Holter, Mikael, “UPDATE 2-DNO says new Iraq govt to boost its oil export push,” Reuters, 11/11/10

    Said DNO had drastically cut back production from 16,000-18,000 bar/day in Oct. 2010 to just 4,000 bar/day in Nov. because the Kurdish market was being flooded with cheap oil and gas. Same article said a barrel of oil was selling for only $25-$30 in Kurdistan at that time as a result. In that month Iraqi oil was selling for an avg. price of $80.59 on the world market, and international prices were $5-$10 higher. DNO also reported that it had lost $21 mil in operating costs from July to Sep.

    Again, none of that news points to DNO making much money off of increasing domestic production for Kurdistan.

  11. Salah said

    There is all time none certain numbers or news that for sure telling what Iraqi oil export. this on-going saga from early days of occupation of Iraq and Paul Bremer refusal to install the oil meters whish was long time a case so no one in fact certain what the oil production in Iraq only conflicting numbers and figure from time to time some announcing and other decline those figures.
    Can any one of grantee the meters were installed on those oil fields or on the ports either in southern Iraq or on the Turkish Jihan Oil export? If any of you have any reference or sources pleas show us.

    So today Shuhristani telling this about Kurdistan oil export, but read the rest of the news its defiantly make any one wonder where the truth is.

    قال حسين الشهرستاني نائب رئيس الوزراء العراقي أن صادرات النفط الخام من منطقة كردستان استؤنفت يوم الاربعاء بمعدل 10 الاف برميل يوميا من حقل طاوكي…
    وقالت الحكومة العراقية ومسؤولون محليون يوم الاربعاء ان العراق أوشك على استئناف تصدير النفط الخام من منطقة كردستان بمعدل أولي متوقع عند 10 الاف برميل يوميا من حقل طاوكي.
    وقال حسين الشهرستاني نائب رئيس الوزراء العراقي أن صادرات النفط الخام بدأت تتدفق بمعدل 10 الاف برميل يوميا لكن مسؤولين محليين في قطاع النفط قالوا انهم مازالوا حتى الان في المراحل النهائية للاستعداد لاستئناف التصدير.
    وقال الشهرستاني وهو وزير النفط السابق في مقابلة خلال مؤتمر للطاقة في اسطنبول “كان من المفترض أن يبدأ ضخ النفط في أول فبراير شباط. حدث تأخير لمدة يوم واحد. بدأوا اليوم.”
    وتابع “انهم يرفعونه تدريجيا. أعتقد أنهم بدأوا هذا الصباح بمعدل نحو 10 الاف برميل وسيرفعون ذلك.”
    وقال مصدر قريب من شركة دي.ان.أو النرويجية أحد مشغلي حقل طاوكي ان كل ما جرى هو ضخ النفط الى خط أنابيب استعدادا لتصديره وقال مسؤولان في شركة نفط الشمال العراقية انه لم يتم تصدير النفط حتى الان.
    من ناحية أخرى قال برهم صالح رئيس وزراء كردستان العراق ان الشركتين تعكفان الان على الاستعدادات اللازمة لبدء التصدير قريبا.
    وتوقفت صادرات كردستان بسبب خلاف محتدم بين سلطات الاقليم شبه المستقل والحكومة المركزية في بغداد بشأن قانونية العقود التي وقعها الاكراد مع شركات نفط أجنبية.
    وتدفقت الصادرات لفترة وجيزة في 2009 لكنها توقفت بعد ذلك عندما رفضت بغداد دفع أموال للشركات.

    http://www.irqmedia.com/siteapps/3527/htdocs/index.php?option=com_content&view=article&id=1418:2011-02-02-14-11-25&catid=1:latest&Itemid=1

  12. Tore said

    False alarm, huh? http://www.newsweb.no/newsweb/search.do?messageId=275250

  13. Reidar Visser said

    JWing, I see no point in relying on secondary newswire reports and interpretations by journalists when the primary source can provide a better picture. The December report confirms the high volumes in summer 2010 and the growth from December (16,000 bpd) with higher volumes expected in Jan 2011, as I explained above. The reason I’m highlighting the local sales is that company watchers and indeed the company itself have been more upbeat about the income made from them lately than I realised. Recently Tom Bratlie of DNO said “Sales from DNO’s Tawke field have been at a level that at least ensures healthy profit even though we are only selling oil to the local market at discounted prices.”

    Oil is already flowing today as attested to by the report linked to by Tore above. Before we go bananas over this, though, I would add that DNO is supposed to be a commercial company and as of today there is no indication that export sales will actually provide the company with any profit under the new deal. That makes it particularly interesting to see what kind of mix of export and local sales is decided on when production gets underway in earnest.

    Kermanshahi, you must be dreaming with respect to the presidency council. The Kurdish demand was that the old presidency council be perpetuated with veto powers until the formation of the senate. This has not happened of course, since it would require special legislation by parliament and a popular referendum. What has happened is in fact the opposite, i.e. the abolition of the presidency council has been confirmed through the passage of a law on the election of one or more deputies to the president with limited powers (and certainly no veto). It all just shows that there is no point in attaching much weight to what Maliki signed or did not sign with respect to the Kurdish demands: Since many of them tend to be vague, dependent on further legislative action, or outright unconstitutional, it will be fairly easy for Maliki to walk away from them.

  14. Salah said

    DNO is supposed to be a commercial company and as of today there is no indication that export sales will actually provide the company with any profit under the new deal

    No one can believe in single word of the above, I can Imagine that any CEO or board of directors will sty in their job when their company make no profit at all with their work in Iraq oil fields. this unbelievable statement and unfunded at all unless DNO is Charitable Organisation..

    Just to add that DNO stock was risen hugely when they took their work in Kurdistan Area and there are many sale between some investors/ owners of shares due to to hold the big bench of shares to some folks within the company, in additions the number of shares was hugely increased and sold for investors after the deals and progress of there work in Kurdistan region.

  15. Reidar Visser said

    Well, they are probably hoping that one day there will be agreement between Baghdad and Arbil on the validity of their contract, which could enable them to make a profit in the future, probably even if the terms are adjusted (as Baghdad seems to want). As I have stressed before, that crucial aspect, which has been a problem since 2004, is not addressed by the new arrangements.

  16. Tore said

    What about this one, Reidar: من جهته، أعلن وزير النفط الحالي عبد الكريم اللعيبي الشهر الماضي ان بغداد ستعترف بالعقود الي وقعتها حكومة الإقليم، وان عمليات التصدير ستبدأ مطلع شباط/فبراير الحالي.

    http://pukmedia.com/2009-10-23-12-01-47/12831-2011-02-03-06-32-47

  17. Reidar Visser said

    Tore, that is just a reiteration of comments by Luaybi given around Christmas just days after he had been appointed. The statement was superseded by comments from people like Ali al-Dabbagh that confirmed the basic issue had not been resolved. If the contracts had been recognised there wouldn’t have been any talk about paying cost oil only.

  18. Santana said

    Hey Tore- You are living in lala land if you think just cuz DNO is a publicly traded company than they have complete transparency…Khalilzad not only gets a salary from them but also crude oil to sell thru his company Khalilzad and Associates in DC…..look it up then call them and tell them you want Iraqi Crude (Kurdish Crude to be specific)….see if I am “informed” or not…oh and by the way…this is not an abberation-corruption and “under the table” deals are rampant in Iraq and KRG is one of the leaders in corruption…but ofcourse I will wait to hear your defense of them and how they are all angels with halos above their heads.

  19. Tore said

    JIIIIHAAAAAAA!!!!!!!!!!!

    http://www.firatnews.com/index.php?rupel=nuce&nuceID=40069

  20. Reidar Visser said

    Tore, my Turkish is limited but I sense the gist of it and the full English version is out now. More soon.

  21. Kermanshahi said

    Reidar, the Kurds prefered the President position to be as powerfull as possible, but it wasn’t really that important. The only reason Talabani wants this position is for symbolical reasons. The importance goes to the referendum.

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