ERBIL, Kurdistan Region - A slump in the world price of oil is adding to the woes of the Kurdistan Regional Government, where the fight against Islamic State militants and the burden of harbouring refugees is putting strains on the local economy.
Benchmark Brent crude this week fell to less than $88 a barrel, its lowest level since 2010.
All producers are feeling the pinch. However, the low price is a particular threat to the KRG because it undercuts its strategy of pursuing independent oil exports, according to Richard Mallinson, geopolitical analyst at Energy Aspects in London.
He told Rudaw the low price, reflecting abundant world supply, made buyers less likely to incur Baghdad’s wrath by buying Kurdish crude.
“The market is well supplied so why take a cargo from Kurdistan if oil from West Africa or Libya is available,” he said.
The KRG will also be under pressure over paying the generous terms offered to the international oil companies as inducement to develop Kurdish fields. They have suffered being blacklisted by Baghdad as a result.
“It is still a challenge for the KRG to export and now there’s less yield per barrel so it will more difficult to pay the companies,” said Mallinson. “The KRG may try to delay payment and this might strain relations with the companies.”
The low oil price is due to a range of factors, including rising production in North America, Libya and Iraq and slow economic growth, particularly in Europe and China.
Key Middle Eastern producers have signalled they will keep output high even if that meant lower prices. Saudi Arabia can accept oil prices between $80 and $90 a barrel, Reuters reported.
Iraq, which is also suffering from the price slump, by contrast needs oil prices at around $106 a barrel to avoid an annual budget deficit, according to International Monetary Fund estimates.
Energy Aspects has forecast low oil prices to last until late next year.
“In Iraq, the domestic and military challenges require as large a budget as possible and the oil price is not helping,” Olivier Jakob, managing director of Petromatrix, a Swiss oil research firm, told Rudaw.
Baghdad remains locked in a dispute with the KRG, which insists it has a constitutional right to pursue independent oil exports via a pipeline to Ceyhan in Turkey. But these exports, which started in May, have not been enough to offset Baghdad’s refusal to pay its 17 per cent share of the federal budget since February.
The KRG earned $1.3 billion from selling 14 million barrels of oil from February to September, with the money deposited at Turkey’s Halkbank, Sherko Jawdat, head of the natural resources committee in the Kurdish region’s parliament, told Bloomberg earlier this month.
The regional authority spent $400 million of the oil money to pay civil servants and will send the remainder to the central government once Baghdad and Erbil reach an agreement, he said. Both sides are heavily dependent on oil to pay up to 70 per cent of the workforce who depend on the public sector for salaries.
Given the potential oil wealth, there will also be pressure to pay towards the costs of the military campaign led by the US.
Under US pressure, Erbil agreed to join a new federal government in Baghdad led by Haider Al Abadi in early September but set a three-month deadline to reach agreement on a number of issues including oil exports and the status of oil-rich Kirkuk, which Kurdish Peshmerga took control of in June after Iraqi forces fled an ISIS advance.
Iraq is the second-biggest producer in the Organisation of Petroleum Exporting Countries after Saudi Arabia. Thanks to increased production in Basra, which is out of the reach of ISIS, Iraq’s oil exports increased last month to 2.5 million barrels per day.
Few analysts expect any action to cut production and raise prices at the next Opec meeting on November 27. Iraq’s State Oil Marketing Co, known as Somo, announced on Sunday it will sell Basra Light crude to Asia at the biggest discount since January 2009. Iraq followed Saudi Arabia and Iran in cutting prices as the producers compete for market share and try to shore up their domestic budgets.
Although most oil companies have returned to Iraqi Kurdistan and restarted activities after quitting the region before US air strikes halted an ISIS advance to within a few miles of Erbil in August, they would be assessing the longer-term prospects in terms of both security and exports, Mallinson said.
Should Erbil find it difficult to meet payments, there could be another case similar to that involving Dana Gas.
In July, the UAE-based company won an interim arbitration award to force some outstanding payments from the KRG. It launched London arbitration proceedings in October, 2013, demanding payment of receivables for products delivered and a confirmation of its rights under a 25-year contract to develop the Khor Mor and Chemchemal gasfields.
Meanwhile, analysts are watching closely for any progress in the negotiations between Baghdad and Erbil. These are taking place while Baghdad continues to apply legal and commercial pressure, including most recently the blacklisting of international tanker companies that have taken delivery of Kurdish crude at Ceyhan.
“Baghdad has had some success in limiting but not preventing Kurdish exports,” said Mallinson. “There’s a lot riding on these negotiations and the market will be watching to see if their positions are narrowing or preparing for a blame game.”
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