Iraq to increase oil income, decrease KRG's share

The Iraqi central government has loosened the embargo on the Kurdistan Regional Government (KRG), but it is planning to lower the budget share for the semi-autonomous region, amid projects to increase oil production. The embargo has been applied since the non-binding independence referendum in September.

Iraqi Prime Minister Haider al Abadi said in late February that they had reached an agreement with the KRG to resume all oil exports soon, giving no details on the timing.

On March 3, the Iraqi parliament passed the 2018 budget that lowered the KRG’s share to 12.67 percent, more than a five percent decrease, amidst protests by Kurdish MPs. 

The Iraqi government announced that the reason for lowering was according to the population of the semi-autonomous region.

Iraq will hold parliamentary elections on May 12, and the new budget share is expected to affect the voters' decisions.

Oil revenue was a source of crisis

According to the Iraqi constitution, 17 percent of the country's budget would go to the KRG. The KRG has complained about never getting more than 10 percent of the budget, and had signed bilateral agreements with other countries, which led them to export the oil without Baghdad's involvement. This created problems between Erbil and Baghdad, with the central government not receiving 83 percent of the oil revenues being paid to the KRG by importers. 

The Iraqi army has reclaimed most of the oil fields that were under KRG control in October, after the KRG held a non-binding referendum to declare independence from Iraq. The richest oil fields are in Kirkuk, which is a disputed area according to the constitution. The KRG controlled the region after its Peshmerga forces defeated Daesh in 2014. Since October, it has been under the control of the central government.

The KRG faced an embargo, not only by Baghdad, but also by neighbouring countries after the referendum, which led to the suspending of oil exports from the KRG-controlled fields.

Eventually, the KRG announced it would not seek independence, as a result of the referendum, which led to the resignation of KRG President Masoud Barzani.

Finally in February, Baghdad started to ease pressure on the region.

Oil output in Iraq

On Wednesday, Iraq's state-run North Oil Company (NOC) said it began testing operations on two oil fields in Kirkuk to increase supply at domestic refineries.

“We have started testing operations at Avana and Bai Hassan oilfields to prepare the initial pumping of more than 50,000 barrels per day,” the NOC official said, adding they haven’t reached any kind of agreement, even an initial one, with Kurdish authorities to resume Kirkuk oil exports to Ceyhan.

The KRG used to operate the twin pipelines that go from Kirkuk to Turkey’s Ceyhan, which were damaged by Daesh attacks.

And Iraq has been in talks with Russia’s oil giant Rosneft to repair the pipeline to reinvigorate and also increase its capacity.

Rosneft has emerged with an important role in talks between Iraq’s government and the KRG on resuming full oil exports from the semi-autonomous region, Reuters reported, citing two industry sources. 

The Russian oil major took over ownership of the region’s oil and gas pipelines last year and agreed to provide it with more than $2 billion in loans.

However, the deal is not recognised by Baghdad, which says independent oil exports by the KRG are illegal.

Last November, Iraq announced its intention to build a new pipeline that would ship oil from Kirkuk’s oil fields to the Ceyhan port in Turkey.

The new pipeline was to replace the old and severely damaged section of the Kirkuk-Ceyhan pipeline.

It would start from the nearby city of Baiji and span until the Fishkhabur border area with Turkey, the ministry said.

However, the two countries haven’t taken any concrete steps on the planned project.

In December, Iraq also announced striking a crude oil export deal with neighbouring Iran who supported Baghdad in the post-KRG referendum and closed its border gates with the semi-autonomous region.

“The agreement between Iraq and Iran helps Iraq export oil from the Kirkuk fields to Iran at the rate of 30,000-60,000 barrels per day through oil tankers until the completion of the oil pipeline [from Kirkuk to Iran],” the Iraqi oil ministry said following the agreement.

“The agreement signed by the Iraqi Oil Marketing Company (SOMO) with the Iranian side, requires the Iraqi side to transfer the quantities mentioned through trucks to the border point between the two countries near the province of Kermanshah [Kermanshan],” Allaibi added.

Steps taken to loosen the embargo

On Monday, the central government sent money to the KRG to pay salaries of civil servants for the first time since 2014, as another step to ease the tensions.

Other measures imposed by Baghdad to curtail the KRG in the wake of the referendum are gradually being eased, including a ban on direct international flights, which was lifted last week.

The first international flight landed at Erbil airport on Monday morning.

Iran opened all the border gates with the KRG in January.