Turning of The Taps: Unraveling The Suspended Kurdistan Oil Exports Saga
Turkish Claims and Iraqi Inaction
In a span of twenty-four hours, Iraq bore witness to a visit from senior Turkish officials—Foreign Minister Hakan Fidan and Energy Minister Alb Bayrakdar. These visits preceded a forthcoming trip by Turkish President Recep Tayyip Erdogan to Baghdad, underscoring their significance.
Following the International Chamber of Commerce’s ruling on March 24, 2023, which mandated Turkey to disburse $1.5 billion in compensation to Iraq for unapproved Kurdistan oil exports, Turkey swiftly ceased operations on the Iraqi-Turkish oil pipeline (ITP) that channels to its ports.
Turkey’s rationale is grounded in seismic upheavals endured in February, which subsequently inflicted structural impairments—this includes the ITP system.
This suspension, dovetailing with the Paris court verdict, is widely interpreted as Turkey’s forceful repudiation of the compensation decree. Notably, Turkey’s government issued a communique on March 28, 2023, urging Iraq to make reparations based on four litigations pressed by Ankara against Baghdad in the same judicial forum.
In accordance with the Turkish narrative, preliminary appraisals conducted by the overseeing firm BOTASH divulged that the unaltered operation of the pipeline, bereft of requisite assessments and upkeep, exposes both nations to consequential detriments spanning health, safety, and the environment.
Furthermore, Turkey’s overture seeks a comprehensive report from Iraq’s Ministry of Oil regarding inspection and maintenance endeavors conducted within its confines, a measure aimed at ensuring operational security. Turkey contends that Iraq remained derelict in this duty until the recent sojourn of Turkey’s Energy Minister on August 24, 2023.
As asserted by Iraq’s Parliamentary Oil and Energy Committee, Turkey stipulates retraction of the stipulated reparations and a markdown of $13 per barrel of region-exported oil. To this are added transportation dues of $7 per barrel.
Turkey has, thus, unequivocally expressed its incapacity to continue the transference, warehousing, and loading of crude from Iraq via the ITP conduit, unless substantive inspection outcomes validate its functionality and security.
Resultantly, Turkey has effectively barred Iraq from future compensation claims stemming from losses accrued. Ankara attributes the halt of the Iraqi-Turkish oil pipeline to the exigent conditions and Iraq’s tardiness in submitting safety assessments from the Iraqi side.
Iraq’s losses attributable to the cessation of oil exports via Turkey (up to the report’s assembly date) eclipse $5 billion, surpassing Iraq’s compensation plea by threefold.
It appears evident that Turkey is placing blame on Iraq for the delay in submitting reports concerning the safety of the Iraqi-Turkish oil pipeline. Turkey asserts that pipeline (46) remains unrepaired, without any indications or clarifications from Iraq regarding the measures taken to reinstate its operation on the Iraqi side.
Observers in the oil sector discuss additional Turkish conditions imposed by Ankara for the reinstatement of Iraqi-Turkish oil pipeline operations, specifically relating to the complaint Iraq submitted to the International Chamber of Commerce in Paris and the fees for exporting Iraqi oil through Turkish territory.
According to the 1973 agreement signed between Iraq and Turkey concerning the use of oil pipelines, Iraq pays $1.19 per barrel exported through the Iraqi-Turkish pipeline. However, Turkey has been charging more than that, resulting in significant financial losses for Ankara.
Profit and Loss Accounts
Profit and loss calculations, however, seem to differ for the Turkish side compared to the Iraqi side. The concurrent visits of the Turkish Ministers of Foreign Affairs and Energy to Iraq hold a distinct implication, as expressed by Foreign Minister Hakan Fidan who urged the classification of the Kurdistan Workers’ Party as a terrorist organization.
This clearly points to the use of energy as leverage to exert pressure on Iraq in the security dossier, potentially yielding substantial security and political gains for Turkey that may outweigh its losses from halting the export of Iraqi oil through its territory.
On the other hand, Iraq has expressed its refusal to allow its territory to be a launching ground for any terrorist activities that threaten international security and peace. However, Turkey has not found this stance convincing and continues to maintain its position regarding the cessation of Kurdistan oil exports through its territory.
Turkey’s apportioning of blame on Iraq for the lag in furnishing safety reports on the Iraqi-Turkish oil pipeline raises inquiries spanning various issues.
Post the vigorous February 2023 earthquake in Turkey, an energy sector authority notified Reuters that the Kirkuk-Ceyhan pipeline which is responsible for Iraq-to-Turkey oil transport remained unscathed and oil flows endured.
Nonetheless, directly following the Paris court’s edict, Turkey, in the name of maintenance and damage revelations post-earthquake, abruptly discontinued pipeline operations.
In response, Iraq remained inactive until June 22, 2023—three months after the pipeline’s cessation—to request information from Turkey concerning the ITP system’s examination, despite suffering financial losses approximating $3 billion at that juncture.
This is evident from the letter sent by the Turkish Energy Minister to his Iraqi counterpart on August 2, 2023, which explains Iraq’s delay in its request to disclose the safety of the Iraqi-Turkish pipeline.
Leveraging the Crisis
The reluctance of the Iraqi Ministry of Oil to provide a report concerning the safety of the Iraqi-Turkish pipeline on the Iraqi side, despite Turkish demands, raises numerous question marks. This is in addition to the ongoing malfunctions in Pipeline 46, which Turkey has urged Iraq to repair since June 24, 2023.
Notably, the period spanning from March 24 to the present day in August, which saw the halt of Iraqi-Turkish oil pipeline operations, witnessed significant developments in energy markets.
During this time, oil prices experienced a pronounced decline, amidst concerns over China’s economic growth prospects. As a result, OPEC+ members, including Iraq, reaffirmed their commitment to oil production cuts.
Iraq currently produces 4.6 million barrels of oil per day, whereas its OPEC+ allocation stands at 4.431 million barrels per day. In July of last year, Iraq’s average exports dwindled to 3.444 million barrels per day, markedly lower than February’s exports of 3.74 million barrels per day.
Consequently, the Iraqi Ministry of Oil capitalized on the suspension of the region’s oil exports to underscore its commitment to production reduction, voluntarily curtailing output by 210,000 barrels per day, a measure aimed at stabilizing prices.
Moreover, Iraq entered a barter agreement with Iran, involving the exchange of 100,000 barrels per day of Iraqi oil for an equivalent value of Iranian gas. This swap is intended to generate electricity within Iraq and circumvent sanctions imposed on Tehran. Reports indicate that most of the oil designated in the barter agreement will originate from the Kirkuk fields, which were formerly routed through Turkish ports.
To capitalize on what remains of the region’s oil, which was once exported via Turkey, the Iraqi Ministry of Oil now receives 85,000 barrels per day for refining at domestic refineries to meet local consumption demands. This volume could potentially increase to 120,000 – 150,000 barrels per day.
This period also witnessed intense debate surrounding Iraq’s national budget. Forces aligned with “coordinating framework” insisted on directing the region’s oil revenues to the Iraqi government. Despite the political agreement that formed Prime Minister Mohammed Shia’ Al-Sudani’s government, these parties exploited the oil export suspension to pressure the passage of the budget.
Turkey, during this same period, held presidential elections and witnessed noticeable activity from the Workers’ Party, compelling the Turkish government to exert pressure on Iraq, curb these groups, target some of their leaders, and ban flights from Sulaymaniyah Airport to Turkish airspace.
Given the foregoing, it is evident that both the Iraqi and Turkish governments are not hasty in resuming Kurdistan’s exports via the Iraqi-Turkish pipeline.
This issue has transcended its technical nature, evolving into political and security bargaining chips for both sides. Nevertheless, the ultimate loser in this scenario is the Iraqi economy.
Oil and Gas Legislation
Foreign oil companies operating in the region previously suspended activities due to export halts and inadequate storage capacity for daily production quantities.
Furthermore, hundreds of employees were laid off, with demands for respect of contractual rights in terms of cost recovery and stipulated profits from production-sharing contracts.
These considerations are central in the formulation of Iraq’s oil and gas legislation, currently under negotiation between Baghdad and Erbil.
As of the preparation of this report, the two sides have not reached an agreement on the oil and gas law. This weakens the official Iraqi position during negotiations with the Turkish side.
The issue of oil production, exportation, and contracting with foreign companies remains contentious since Iraq’s constitution was ratified in 2005.
Each party interprets the clauses related to natural resource utilization from a constitutional perspective that diverges from the other party’s viewpoint.
Future Relations
The Iraqi and Turkish economies are intertwined through extensive trade relations. Trade volume between the two countries increased to approximately $15 billion last year, with a notable rise in the number of Turkish companies operating in the Iraqi market.
With Iraq’s plans to complete the development road linking Basra in the south to the northern border with Turkey, trade volume between the two countries is expected to reach $20 billion over the next five years.
Iraqis view this as a card in favor of the Iraqi negotiator, especially in terms of pressuring Turkey to increase water discharges, particularly after the significant drought affecting extensive regions in Iraq.
The water issue holds greater importance and impact on Iraq than the oil matter, significantly affecting the country’s food security and environment. While Iraq can withstand energy-related losses due to the suspension of the Iraqi-Turkish oil pipeline, the situation differs with water, necessitating a swift and urgent resolution to avert further problems and tensions between both nations.
