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Triumphant Iraq faces new set of challenges in 2018

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Triumphant Iraq faces new set of challenges in 2018


Key elections loom for Iraqi leadership

Kurdish exports down 50% since referendum

Tensions with Kurds rising over oil revenues

For Iraq, 2018 should be solely focused on rebuilding cities and communal trust, but the country could be back racing toward the edge of a cliff.

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National and provincial elections are scheduled for the spring, and Iraqi politics are fractured perhaps like never before in the post-2003 era, which could set the scene for forgetting just how close to destruction the country came and what it took to avoid it.

Northern Iraq's oil infrastructure

Most of the country's most serious disputes are likely to play out in Baghdad, far from the southern province of Basra, through which most of the country's oil is exported and produced.

But attempts to tweak the terms of existing technical service contracts, approve field development sub-contracts and sign new production and exploration deals with the world's largest oil companies all risk coming to a standstill until at least elections are held and a potential multi-month government formation process is completed.

And then, it will depend on the political leanings of the next government, the technical proficiency of its economic prerogatives, and if the oil minister -- currently an experienced oil technocrat -- becomes merely a political reward posting.

This makes 2018's political machinations that much more important to watch as Iraq looks to not only continue its relatively new success, but avoid the trappings that threatened the country not so long ago.

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In 2014, Iraq almost lost it all, as a violent impostor-caliphate took over a third of the country.

At the same time the price of oil -- on which Iraq's entire economy depends -- began to slide to multi-year lows.

Three years on and Islamic State has lost all of its territory -- save for a few rural holdouts and inevitable sleeper cells -- and oil prices have strenghtened, ending the year at more than $10/b above budget expectations.

Iraqi Prime Minister Haider al-Abadi, who bested his predecessor and rival for the position in the post-IS invasion in the fall of 2014, is more popular than ever before.

That fact, heightened by the election season, means it is prime time in Iraq for the daggers to come out.

Ex-Prime Minister Nouri al-Maliki, who has edged closer to Iran and the more nefarious of Iraq's paramilitaries, and Abadi, who has struck an impressive balance of being ally to both Tehran and Washington, have almost equal support within their Dawa Party, arguably the country's most powerful.

The fracturing of the primary political parties could have an immediate impact on the economy.

The 2018 budget has only recently been sent to Parliament, which is on recess until early January. Budget hawks -- including Abadi, and backed by the IMF and World Bank pressing for austerity and a focus on nation rebuilding -- are already in a tough uphill fight against partisans tantalized by higher than expected oil revenues and the election season enticement of doling out state jobs to lure votes.


But the multi-billion dollar elephant in the room is in the semi-autonomous Kurdistan Region of Iraq, where independent oil exports -- opposed by Baghdad as unconstitutional -- have more than halved from a year ago.

Kurdish oil exports from Turkey's Mediterranean port of Ceyhan have dropped from around 610,000 b/d to 270,000 b/d after a seemingly innocuous, non-binding referendum on Kurdistan independence held on September 25, 2017 backfired.

Federal forces are threatening to take back control of the giant Kirkuk fields Avana Dome and retake control of the northern border crossing to Turkey where the Kurdish oil export pipeline flows.

The current export rates will deprive the Kurdistan Regional Government of the necessary funds to keep them afloat, especially paying the wages and salaries of their huge workforce, estimated to be more than 680,000.

Baghdad stopped paying any funds to the KRG under a landmark oil revenue sharing deal since June 2015.

But recent developments indicate that Baghdad has no choice but to revert to the old agreement, since it needs the KRG pipeline to export NOC's oil which could reach around 500,000 b/d after the return of the field annexed by the Kurds.

Indeed, recent surveys of the original Iraq-Turkey pipeline have shown it is beyond repair after the damage caused by IS.

Plans to build a completely new line on the same route are estimated to take at least three year even if financial investors are found.

If both sides agree to re-activate the oil revenue sharing deal, then what remains is the settlement of considerable debts owed by the KRG.

By all accounts the KRG have accumulated debts of around $3 billion to international oil traders and Turkey is claiming that the KRG owes it around $4 billion in transport and export fees.

While Abadi could negotiate a deal with the cash-strapped KRG, that would restrict its previous independent oil sector but allow it to earn more revenue sharing and ease post-referendum restrictions, doing so now could be political suicide for Abadi and easily overturned.

With Kurdistan's bills looming to oil traders, Turkey, local contractors and civil servants, "time is on Abadi's side," one Dawa Party insider said.

Still, Abadi -- and the country's financial picture -- does seem a bit brighter of late despite the looming risks.

Iraq is slowly increasing field production capacity, refining capacity, and export capacity, in large part due to successful partnership with foreign investors. And that's momentum that whoever is tasked with leading the next government will want to continue.