Iraq’s legal move on oil companies raises doubts over Kurdish exports

ERBIL, Kurdistan Region - An energy executive on Friday criticized the Iraqi oil ministry’s legal action against international oil companies contracted by the Kurdistan Regional Government (KRG) and warned that the move casts further doubts on the swift resumption of Kurdish oil exports, which Baghdad had said would begin in a matter of hours after nearly two years of suspension.

“We were very shocked to see legal action taken this week” by the Iraqi oil ministry, Matthew Zais, a vice president at Hillwood Energy and HKN Energy, told Rudaw's Omer Moradi.

The ministry was “challenging our contracts’ validity” after “the Iraqi government was proclaiming that they were ready to resume exports,” he explained.

His remarks come amid reports by Arab media that Baghdad’s oil ministry has filed a new appeal before an Iraqi court, challenging the legality of production-sharing contracts between producers and the KRG.

These reports - yet to be refuted by Baghdad - come despite Iraqi Prime Minister Mohammed Shia' al-Sudani stating on Wednesday that the federal government wants to open a “new chapter” with oil producers in the Kurdistan Region. The oil ministry said on Friday that the resumption of exports would be announced “in the coming hours.”

Zais criticized the contrasting actions, saying they “cast another shadow of doubt over the intent of the Iraqi government and the Ministry of Oil to honor contractual terms.”

“We are ready to export, but we are adamant that our contracts are valid under English law and under Iraqi law, and that's the only way companies can operate without any legal uncertainty,” he added, noting that the international community is watching whether Iraq is a reliable place where “contracts and investments are protected and honored.”

“Western companies have invested billions in the Kurdistan Region,” he said. His company alone invested $2 billion, all based on the assumption of “contract sanctity.”

He criticized previous legal action against his company as “obviously a political decision,” adding that there “were elements within the Iraqi system that wanted to take over the contracts and the [oil] fields and invalidate the sector.”

“Reopening the Iraqi-Turkey pipeline is critical for the investment environment, both in the Kurdistan Region and all of Iraq,” he said.

Of note, the Association of the Petroleum Industry of Kurdistan (APIKUR) on Friday said it is ready to resume exports, but first needs a formal agreement about payments.

“As has been repeatedly made clear, APIKUR member companies remain prepared to immediately resume exports as soon as formal agreements are reached to provide surety of payment for past and future exports consistent with our existing contractual legal and commercial terms. There has not yet been any outreach in this regard to APIKUR member companies,” Myles B. Caggins III, spokesperson for APIKUR, told Rudaw English on Friday.

Oil exports from the Kurdistan Region through the Iraq-Turkey pipeline were suspended in March 2023 after a Paris-based arbitration court ruled in favor of Baghdad that Ankara had violated a 1973 pipeline agreement by allowing Erbil to begin independent oil exports in 2014.

Zais explained that the Kurdistan Region's oil production has decreased to 300,000 barrels per day (bpd) from over 400,000 bpd two years ago. He attributed this decline to selling oil at a heavily discounted rate, which “does not allow us to make any investment decisions that can sustain production or even increase it.”

However, once the pipeline reopens, Zais is confident that “all of our companies - provided we have payment security and contract sanctity - will be in a very different position” to increase production and sustain growth.

Zais added that it would take at least a year for oil companies to increase production and return to the previous export levels of 400,000 bpd.

He said that “the legislative steps” that have been taken by the Iraqi parliament and “the political agreements that have been made” between the federal government and the KRG are “sufficient for IOCs [international oil companies] to export oil.”

The Iraqi oil ministry had confirmed on Wednesday that Baghdad and Erbil “reached an agreement that guarantees joint cooperation for the operation of the Turkish port pipeline” to restart the Kurdistan Region's oil exports. The KRG on Sunday confirmed the deal.

Zais said however, that despite the agreements, oil producers, like any other companies, require commercial agreements to preserve their contractual rights and guarantee payment. He said that “the two main categories of agreements” that still need to be reached are critically important for moving forward with Kurdish oil exports.

He also touched on the Iraqi parliament’s passing a budget amendment in early February that increased the production and transport rates for international producers operating in the Kurdistan Region to $16 per barrel, a substantial boost from the $6.90 set in the 2023 federal budget.

Zais explained that “there is a narrative in the Ministry of Oil and in federal Iraq that our cost of production is higher than the cost of production for companies in the federal Iraq. That is factually not true.”

“The biggest difference between the oil sector in the Kurdistan Region and the oil sector in federal Iraq is that the oil sector in the Kurdistan Region is completely financed by international investment,” he explained. While “the Iraqi government pays the Kurdistan region $16 for all the barrels that it produces, which is 300,000 barrels now,” the fees go into “a pool of money that is then proportionally allocated to each IOC relative to their current contractual terms.”

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