Nuts and bolts of Baghdad-Erbil oil dispute: interview with Ashti Hawrami

In a detailed interview with Rudaw, Kurdistan’s Minister of Natural Resources Ashti Hawrami explains the hurdles encountered by the Kurdistan Regional Government over an oil deal signed with Baghdad. That agreement was supposed to mend a year of tensions and restart payments from Baghdad for the running of the regional government. Hawrami explains why that has not gone smoothly. “The issue is not technical, it is money and political,” he explains.

Rudaw: What is the basis of your agreement with Baghdad?

Ashti Hawrami: Our agreement with Baghdad was signed in November of last year which was a temporary agreement for 150,000 barrels of oil per day. In return, Baghdad agreed to give $500 million to the Kurdistan Region monthly. That was to continue negotiating for an agreement for 2015. In reality, we expected $1 billion by the second installment, but they only sent half a billion. We gave up on that and continued with the 150,000 barrels. On December 2, 2014 we were in Baghdad talking about the budget. We agreed that we would produce from Kurdistan’s oilfields 250,000 barrels of oil daily for SOMO (State Oil Marketing Organization) in return for the 2015 budget. We also agreed that we would transport for them 300,000 barrels of oil from Kirkuk and hand it over to SOMO at Ceyhan port. That was our agreement, and in return the Kurdistan Region would receive its 17 percent share of the budget. That was our first and principal agreement, which was to go to the Iraqi council of ministers for passing. We then continued with exporting the 150,000 barrels through December while waiting for the agreement to become law. We continued for two or three weeks as a gesture of goodwill until we see the draft of the law. But in the first seven days they started complaining, saying, “You are sending us little (oil). You have to send 250,000 barrels.” We then said that we hadn’t even started yet. We said that we hadn’t said we would export for sure 250,000 barrels a day, and that that would be the case in the annual total sum.

Rudaw: Did you say those very words to them in the meetings?

Ashti Hawrami: Yes, we did. I then went to Baghdad on January 8, 2015 and met with (Iraqi oil minister) Dr. Adil Abdel Mahdi for about 4.5 hours. I was accompanied by Dr. Amanj and Dr. Roj (Nuri Shaways) joined us in Baghdad. There, we talked about the Kurdistan Region’s technical problems and their problems in Kirkuk and how we could meet their 300,000 barrels and our 250,000 barrels. We agreed that we would solve the technical problems together. Some of the issues were their part, some ours and some shared by both sides. For instance, the metering at Ceyhan or Pishkhabur: our part was repairing some pipelines and pumps; theirs were more or less the same. We agreed that it would take three months to take care of those issues, which means we wouldn’t be able to meet the set amount of production during those three months, but after the three months we would increase production in order to balance out the annual production of 250,000 barrels per day as agreed by the KRG.

Rudaw: But if you knew you were going to face those challenges, why did you sign the agreement in the first place?

Ashti Hawrami: The first agreement was only on 250,000 barrels per day that would go into the 2015 budget, and in the beginning of the new year we were still talking the budget. That initial agreement was just on how we would make sure to meet the 250,000-barrel requirement and how they would meet their part of the 300,000 barrels. During that period, the agreement was that the total sum of both sides was 375,000 barrels. We also agreed that at Ceyhan we would sell the oil at the same price. For example, if we had residue oil to sell, they told us not to sell it cheaper and that both sides would sell at the same price. We agreed on that one too. But then another week passed and they started to say once again that we were not exporting the right amount. Then Abdul Mahdi came to Erbil on January 22-23 and we met several times to talk about the nature of the 375,000-barrel expectation. I prepared for him a timetable for the whole year instead of just three months to make sure the problem would not rise again. He was pleased with the timetable and took it back with him to Baghdad. So, that timetable, the Baghdad meetings of December and the meeting here all became one package that was passed in the Iraqi parliament on January 29. It was all discussed and explained about the timetable, the technical issues and what KRG would do on its part and what Baghdad would do.

Rudaw: Then why is Baghdad not sending KRG’s money now?

Ashti Hawrami: There might be different reasons. One, they were surprised even though everyone knew that the price of oil had gone down. At first we were talking of a budget of 174 trillion IQD but then it came down to 125 trillion due to the fall in the price of oil. In spite of that, we didn’t ask for more. We said that we would only want our 17 percent, taking into account the fall in the price of oil. The agreement was that we would receive our budget of 1/12 monthly and we would continue producing the 250,000 barrels based on the agreed timetable. That is how Iraq’s budget in general is designed. For example, Basrah is expected to export 2.75 million of barrels daily, but it has been exporting less than 2 million barrels. Was anyone fined or punished there? No, because they expect to raise production in the following months and reach the goal and compensate it that way. That is the case with us, too.

Rudaw: Adil Abdul Mahdi says that in February the KRG had handed over to Baghdad only 40 percent of what was agreed at Ceyhan, but he is pleased with March.  And you say that you have honored 97 percent of the agreement. Also, as we speak, how many barrels of oil does the KRG export through Ceyhan per day?

Ashti Hawrami: I will show you the dates and details on a chart later, but I would tell you that at the moment we are giving to SOMO 275,000 barrels of Kurdish oil daily. So if we are talking today, then yes we are providing to SOMO more than the agreed 250,000 barrels. And the North Oil Company isn’t really providing 300,000 barrels. It is around 130-140,000 barrels which we hand back to them too. We do this extra because, during the first 40 days, we produced less and our commitment is to meet the agreed amount. But sometimes the power goes off in Turkey, or the pipelines get hit, which results in shutting down the exporting process and in turn would affect our both sides. We both (Erbil and Baghdad) have to then accept the reality, because it is something happening outside our areas. For instance, the exports stopped for four days this month. The pipes were hit and it took time to repair them, but as soon as it was done we provided to SOMO 275,000 barrels.

Rudaw: Who is targeting the pipelines?

Ashti Hawrami: People who steal the oil. In an area about 20-30 km behind the border some people hit the pipes and steal the oil and it takes a day or two to find the damage and fix it. We do not have any disputes over the figures. Mr. Abdul Mahdi and I have the same numbers. The issue is the overall production. When you talk about budget, all over the world that is how it works, you look at the total sum of export not the day-to-day.

Rudaw: Then what is the dispute about?

Ashti Hawrami: One of the disputes is that they say you have extra exports which you are not giving to us, therefore we will reduce your budget share. But that was not our agreement. Our agreement was that we will give them 250,000 based on the timetable and chart I showed you. If we have extra exports, it is to pay back the cash we borrowed last year to pay the salaries of August, September and October. That extra oil had already been sold and we are only giving it back to the contractors who had bought it.

Rudaw: Had that point -- of paying back in oil the money you had borrowed for salaries -- not been agreed in your talks with Baghdad?

Ashti Hawrami: Let me tell you this way: in our first meeting in December when our delegation under Prime Minister Barzani went to Baghdad, they asked us to give them the entire amount of oil. We said we will give you 150,000 barrels. They said 150,000 is not enough and because we will give you the budget, try to increase the number. We agreed to raise it to 250,000 barrels on the condition that they will add the payments of the Peshmerga forces in their budget. We made that condition very clear. But they insisted on the extra production we have. We admitted that we have that, but also told them that we had borrowed money because they had not paid us the budget of 2014. We said give us back that money (for 2014), then we can talk about giving you all of our production. They said we have no money and we said then we are not obliged to give you more than 250,000 barrels. We said we need the rest. Then, in the January 8 agreement, it says in their own handwriting that we would sell our oil on a fixed price. It shows that they agree to our right to exporting extra oil. We had agreed on the price, on transparent sales, on accountability, etc. They knew all that. But now they have reneged and use the extra oil as an excuse to play down our honoring of the agreement from 97 percent to 73 percent. They also hold all the challenges with the pipeline in Turkey and other technical issues against us to say that we have honored only 40 percent of our agreement. But even then, at 40 percent which is their calculation, Baghdad should still give us $440 million a month. But when we ask for it, they say they have no money, so try to cope like everyone else.

Rudaw: What do they mean by everyone else?

Ashti Hawrami: They mean the rest of Iraq.

Rudaw: But the rest of Iraq receives salaries all right.

Ashti Hawrami: I know. Then they cut the $440 million in half under the pretext that they need to pay the rest of the country, in which case they end up giving us $200 million, which might only be enough to cover the Peshmerga and one government department.

Rudaw: Is the 150,000 barrels in Kirkuk produced by the KRG?

Ashti Hawrami: No, it is handed over to us by the North Oil Company and we will hand it back to them at Ceyhan. We also hand to them our 275,000 barrels, which adds up to 425,000 barrels in total. Iraq has not been able to meet the 300,000-barrel commitment yet due to infrastructural problems that I mentioned earlier.

Rudaw: Do you have faith that Baghdad will send the 17 percent share of KRG’s budget once you have fully met your side of the agreement and export the oil they ask?

Ashti Hawrami: That is a political question, and one has to find out what the intentions of the federal government are on this subject. If it is just a technical issue, we have explained it all and met our commitment. So the issue is not technical, it is money and political. That is how it should be addressed.

Rudaw: If you couldn’t reach a deal with Baghdad, can the Kurdistan Region provide its own budget without Baghdad?

Ashti Hawrami: Our budget has been calculated on 550,000 barrels of oil. That is what our 17 percent budget share reflects at $56 per barrel. Therefore, if we can produce 550,000 barrels per day and sell it at $56, there we have our budget.

Rudaw: Can the Ministry of Natural Resources export 600,000 barrels per day?

Ashti Hawrami: From April on we can export 550,000 barrels without even the portion of the North Oil Company. The following month we are talking 600,000 and the following months it will be even more, but it won’t be fewer than 600,000 barrels. But even with that increase, taking into account the infrastructural challenges, etc, we will still get the amount that we initially agreed with Baghdad.

Rudaw: Is it in Kurdistan’s interest to sell its oil independently or with Baghdad?

Ashti Hawrami: It is a lot better for the KRG if it can do so with Baghdad, and that is why we went to Baghdad and signed an agreement. The agreed budget was also in our interest. We could pay back our debts on the side and would receive our budget, which wasn’t perfect, but still satisfactory. We agreed that this agreement and cooperation with Baghdad was best for us and would also pave the way to resolve other bigger issues, such as the $13 billion Baghdad owes from last year. But now it all turned out complete opposite. We give them the full amount of oil and receive half or quarter of the money. So, economically it would have been best for us to work with Baghdad, but now it would be three times worse if we continue.

Rudaw: You are the minister of natural resources, so can you provide Kurdistan’s budget from the sales of Kurdish oil and give up on Baghdad if these problems continue to persist?

Ashti Hawrami: Economically, I can answer your question. But in politics it is not just about money. There are other calculations. But if you are asking about money, then yes, I can say that by April and May I can provide the equivalent of the budget that is expected to come from Baghdad. But there is the question of having a market, not having technical or transportation issues, etc. In that case, yes we can provide full budget in April and May.

Rudaw: Have you found the right market for your oil? Do you have buyers?

Ashti Hawrami: Yes. When we started last year, we had some problems with the first tanker, but later both tankers went through without a problem. We have up to now exported 50-60 tankers of oil and it has all been sold at market price. We have also received all the money in Kurdistan and used it for government salaries. After 12 months of problems last year, everyone has now learned how to deal with Kurdistan’s oil. Also, when new oil shows up in the market people do not understand it in the beginning. It would take a while for them to know what it can produce for them, how to handle it technically, how to make the most of it, in what refinery to refine it? The world learned all that in the last 12 months.

Rudaw: You had told Rudaw earlier that by the end of 2015 your production could reach 1 million bpd. Do you still stand by that?

Ashti Hawrami: We had drawn the plan three years ago to reach 1 million bpd of production in the Kurdistan Region. We would of course use some of that amount for local refining, but our goal was to export 1 million barrels and even more in the following years. But we got 3-6 months behind because when we made those plans there was no ISIS, our budget had not been cut, the companies were not unpaid. Then some companies walked out for a while as you know, which affected our investment, and oil prices have fallen now. But our goal is 800-850,000 barrels by the end of the year. If we can do just 600,000 it would still be the equivalent of our budget from Baghdad. If we reach 600,000 barrels, we can also compensate the companies which would encourage them for more investment.

Rudaw: You said that some companies left due to the ISIS war. Have they returned?

Ashti Hawrami: Yes, all of them have returned.

Rudaw: Speaking of transparency, is there corruption in the oil sector in the Kurdistan Region?

Ashti Hawrami: In the investment and production contracts of which I am in charge, I have made sure there is no corruption at all. In the case of production and the oil giants, I have not let any corruption or anyone to benefit directly or indirectly from the contracts.

Rudaw: Because of the financial crisis, the government is in debt. I want to know how much it has borrowed and from whom?

Ashti Hawrami: As far as I am aware, we have borrowed $500 million from Turkey.  They have promised another $500 which they might send sometime soon. That is a loan which we can decide in the future whether they will get it back in oil, gas or the money.  There is another kind of loan which we have done as the ministry. We have borrowed cash advance in return for oil. We later agree on the payback mechanism. Some companies and buyers have lent us money, around $1-2 billion which we will pay back, and that in itself is proof that Kurdistan’s oil has a market. So, this one is less of a debt. It is cash advance for a commodity they have bought and wait to receive.

Rudaw: How about the domestic loan?

Ashti Hawrami: The domestic loan is also two parts. One has to do with the ministry of natural resources where we buy gasoline for the power plants. It is quite a burden on the government everyday spending $9-10 million on the production of electricity. Back when we had local production and used to get our budget from Baghdad, we would simply give money to contractors to provide the fuel for the power plants. But in 2014 when we stopped receiving our budget, we could not pay the local contractors, yet we still need the fuel. So the MNR owes these contractors the debt which has accumulated and we will pay them back in the form of crude oil, some other byproduct or in cash. We also have borrowed cash from some companies.

Rudaw: Finally, I would like to hear your response to a news article in Korea Times that said $31 million had gone missing in contract deals.

Ashti Hawrami: We answered that report in a statement. It is completely baseless. Obviously, there is an internal dispute in South Korea which I don’t want to get into the details. An MP has made the accusation against one of their former prime ministers and had mentioned us in the case. We pulled out our files and archives and proved that any amount of money we had received from Korea had gone into the KRG coffers and used for government projects. We published these documents and sent the evidence to the Korean MP, the prime minister and the newspaper as well, and we sent them to the local newspapers here that had published the report.