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Iraq's tussle with semi-autonomous Kurdish region seen complicating energy policy

Highlights

Kurdish political parties divided over oil talks with Baghdad

Kurdish production remains opaque vs Baghdad

OPEC+ compliance often blamed on lack of Kurdish support

Dubai — Iraq's federal government has a complicated energy relationship with the Kurdish region that is unlikely to be resolved due to differences within the semi-autonomous entity itself and Baghdad's own struggle with OPEC+ compliance, according to analysts.

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While the 28-year old Kurdish region has its own parliament and government, differences between the two dominant parties -- the Patriotic Union of Kurdistan and the Kurdistan Democratic Party -- on how to deal with Baghdad over the oil portfolio is standing in the way of a lasting agreement. Kurdistan Regional Government officials often visit Baghdad to try to resolve the standoff over oil sales and revenue distribution, which has long been a stumbling block for the OPEC producer to have a unified energy policy.

"There is a difference of opinion on how to approach Baghdad and what to demand and what to give away in terms of the negotiating stance," said Shwan Zulal, head of Carduchi Consulting.

"KRG in one sense is not ready to deal with Baghdad on the issues because there is no solid position yet. That puts Baghdad in a very difficult position, because what they might tentatively agree on is not going to produce any firm results as there is no agreement in Kurdistan itself."

OPEC+ cuts

Baghdad, a laggard in adherence to OPEC+ cuts, often blames the Kurdish region and its opaque production data as hurdles in the way of its compliance.

Unlike Baghdad, Erbil does not publish monthly figures for production and exports, which it markets itself and sells from oil production deals that are not recognized by the federal government. Baghdad markets its oil through the State Oil Marketing Organization.

Oil minister Ihsan Ismaael has emphasized the need for a single oil policy in Iraq and is keen to have Kurdistan contribute to OPEC+ cuts.

Although Iraq's compliance in June improved, it is not known how much the Kurdish contribution was, since SOMO does not break down production figures in its monthly data reports.

Erbil's current negotiations with Baghdad include the marketing of oil, whether KRG should give its oil to SOMO, and the distribution of federal government revenue to the KRG to pay for salaries.

However, Baghdad's compliance with OPEC+ is not just about Kurdish production, which may be just rhetoric, according to experts. Baghdad needs associated gas as a feedstock for its power stations and has already been rocked by protests due to electricity cuts.

"Going forward, the challenge will be for Iraq to cut output to compensate for overproduction in May-June," said Ahmed Mehdi, research associate at the Oxford Institute for Energy Studies "This will be challenging as Iraq has to carefully manage output cuts by ensuring dry gas processing and extraction operations remain uninterrupted, particularly as peak seasonal power demand kicks in."

Political struggle

Whatever Iraq's OPEC policy may be, its tussle with Erbil over energy and revenue will continue, according to analysts.

For example, Erbil does not have the ability to borrow internationally or tap into central bank reserves, unlike Baghdad.

"The only thing they have is forward oil sales," said Ahmed Tabaqchali, a senior fellow at the Institute of Regional and International Studies in Kurdistan. "This is very expensive borrowing."

Kurdish Prime Minister Masrour Barzani said in a May 22 speech that the region has $27 billion in debt and raked in only $30 million in April from oil sales that went into government coffers.

The Kurdish region pumped on average more than 468,400 b/d in 2019, according to a Deloitte audit. The net cash balance received by the KRG for sales and related activities was $4.515 billion last year.

"It's a political power struggle apart from the control of finances," said Zulal. "In the long term, the KRG knows if they concede too much to Baghdad and oil prices go back to $60 or $70 they will be kicking themselves."

Oil debt

One sticking point is whether Baghdad will have to take on the KRG's oil debt if it were to take control of Erbil's oil.

"How is this going to be brought under one umbrella and who is going to pay the operators [in the Kurdish region]?" said Zulal. "There is a huge amount of complexities around it and that's why a permanent fix of a magic bullet does not really exist."

Some sweeteners may be thrown in to make a deal possible. Former oil minister Thamer al-Ghadhban discussed with a KRG delegation the possibility of using Kurdish gas to power stations in Iraq. Baghdad currently relies on Iranian gas and electricity imports and is under US pressure to wean itself of these supplies.

"If you look at just oil then the government pretty much loses out no matter what it does if it pays the KRG share," said Tabaqchali. "If you include water, gas, electricity...and you look at prices holistically then you have an agreement that will be sovereign enforced."

(Corrects title.)