Iraqi Kurdistan economy unsustainable amid budget dispute

10 June 2015

Regional government warns economy could collapse if budget grievances are not resolved

  • Iraqi Kurdistan’s economy will become unsustainable if it does not receive higher budgetary payments
  • Regional government accuses Baghdad of underpaying for its contribution to oil exports
  • Erbil was paid $424m for May export

Iraqi Kurdistan’s economy will become unsustainable if it does not receive higher budgetary payments from Baghdad, according to the regional government’s natural resources minister.

Ashti Hawrami, speaking at the Iraq Petroleum conference in London on 9 June, accused Baghdad of underpaying the Kurdistan Regional Government’s (KRG) for its contribution to oil exports.

The two governments hammered out a deal in late 2014 for Erbil to export 550,000 barrels a day (b/d) of crude under the federal umbrella in exchange for 17 per cent of the national budget.

Iraq Oil Report claims that Erbil was paid ID508.8bn ($424m) for its May exports. The KRG says that it is now meeting its commitments but is still receiving less than half of its share of the budget.

“On the ground level we see no problems but… regrettably to date the federal government has only been able to provide the KRG with a third to 35 per cent of what was agreed in the budget,” said Howrami.

“It is very difficult to see how that can be sustained. Receiving only half of government salaries, let alone the support service and investment projects and so on,” he added.

The regional government has also been unable to pay the full salaries of the Peshmerga forces fighting against Islamic State in Iraq and Syria (Isis) along its borders.

Howrami described the combination of the fight with Isis, the influx of over 1.5 million refugees and the drop in oil prices as a “perfect storm” for the Kurdish economy.

“If the economic stability of Kurdistan continues to be undermined then it is very difficult to see how our future can be secured… eventually it will collapse in front of us,” Howrami said.

According to the Kurdish Ministry of Natural Resources’ official figures, the KRG delivered 449,000 b/d of crude to the federal Oil Marketing Company (Somo) in April

Somo disputes that the KRG has been underpaid by Baghdad.

“There is a misinterpretation of 17 per cent [of the federal budget],” said Somo’s director general Falah Alamri. “It is the matter between the government of Iraq and the KRG to sit together and resolve issue.”

Alamri said that the price was based on a crude price of $56 a barrel, but the exports were receiving less than $50 a barrel.

Iraqi Deputy Prime Minister Rowsch Shaways said that the budget payments to the KRG would rise along with increased exports.

“It is important that both sides work on keeping the agreement keeping discussions going. Until they deliver the oil there will be problems from both sides,” said Shaways.

Alamri suggested that Baghdad should speed up the passing of a new oil and gas law covering oil distribution and financial agreements.

The lower-than-expected budget payments has made it difficult for the KRG to pay the international oil companies (IOCs) producing oil and developing new fields in Iraqi Kurdistan.

“Contrary to the fact that their counterparts in the south have been paid, in Kurdistan in the last 18 months – apart from one-off payments – the operators continue producing almost free of charge,” said Hawrami.

“They are complaining but they are still supporting the policies. How do we go on increasing the production on one hand and on the other hand say ‘just wait one more year’,” added the KRG minister.

Howrami said that the KRG had significantly expanded the region’s export infrastructure. The capacity of the Kurdistan export pipeline into Turkey has been expanded to 700,000 b/d and in the next eight months will rise to 1 million b/d, he said.

Norway’s DNO, which is one of Iraqi Kurdistan’s largest oil producers and operator of the Tawke field, agreed that the situation is unsustainable.

“We can’t sustain this level of investment and we do expect to receive our outstanding receivables. We need additional investment to sustain these high production rates,” said DNO Chief Operatinf Officer Jeroen Regtien.

According to Regtien, DNO has invested $1bn in the Tawke development, which is now producing an average of 150,000 b/d.

“Kurdistan has enormous resource potential and further developments are possible. But the existing operators must get paid according to their production sharing contracts,” said Regtien. “The current situation is not sustainable.”

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