ERBIL, Kurdistan Region - The Iraqi government and the Kurdistan Regional Government (KRG) reached a preliminary agreement on Friday about exporting the Kurdistan Region's oil through the Iraq-Turkey pipeline, according to a well-informed source.
Oil firms operating in the Kurdistan Region have stopped production or reduced output and diverted it into storage after a Paris arbitration court last week ruled that Turkey had violated an agreement with Iraq by allowing the Kurdistan Region to begin independent oil exports in 2014.
Kurdistan Region President Nechirvan Barzani and Prime Minister Masrour Barzani were in contact with Iraqi Prime Minister Mohammed Shia' al-Sudani to find a solution to the problem.
The details have the deal have not been made public, but the source said other meetings will be needed to clarify the KRG’s contracts with international oil companies (IOCs) as well as finding new buyers for the oil at Turkey's Mediterranean Ceyhan port. The agreement is expected to provide stability for the IOCs and buyers.
Oil firms operating in the Kurdistan Region have said they expect the stoppage to be temporary and exports will resume as soon as an agreement is reached between the regional and federal governments.
Energy analysts and experts have expressed hope that Erbil and Baghdad will compromise and strike an agreement.
"We have seen talks going on before the arbitration handed down its ruling," Richard Bronze, an analyst at Energy Aspects, told Bloomberg on Friday. "There is a reasonable chance for them to come up with some kind of deal that allows the restart of the pipeline sooner rather than later.
An agreement between Erbil and Baghdad could relieve the KRG of its debts.
"The federal government would likely inherit responsibility for the KRG's debts. There is room for compromise – but Baghdad may well push hard, to seize in political power over the Kurds what it could not win in cash from Turkey," said Robin Mills, CEO of Dubai-based Qamar Energy.
Gulf Keystone Petroleum Ltd., the operator of Shekhan oil field in the Kurdistan Region, said on Friday that it "continues to believe that the suspension of exports will be temporary," adding that it "understands" that discussions between the KRG and Iraq's oil ministry are ongoing.
The London-listed company announced that it expects to shut-in production at Production Facility 1 while continuing the flow to Production Facility 2 at reduced rates before a probable shut-in after two weeks.
The Kurdistan Region has a significant crude oil refining capacity, with the KAR group and Lanaz refineries in Erbil and Qaiwan refinery in Sulaimani processing a total of 230,000 barrels of oil per day. As such, around half the oil produced in the Region that cannot be exported can be sent to the refineries to produce gasoline and other fuels.
On Friday, the United States urged Baghdad and Ankara to end the week-long halt of the flow of the Kurdistan Region's oil. "We have urged the governments of Turkey and Iraq to resume the flow of oil through the Iraq-Turkey pipeline," a US State Department official told Rudaw's Diyar Kurda on Friday.
The suspension of the Region's oil exports from the port of Ceyhan has had a significant impact on the oil market. Oil prices rose an average of 5.7 percent in a week when the Kurdistan Region’s 400,000 barrels per day were taken out of the market.
The KRG is heavily reliant on oil revenues and an extended inability to sell its crude will severely impact its economy. The government has struggled for years to pay over a million civil servants on time and in full.
Additional reporting by Julian Bechocha
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