Oil and cash flow: the Kurds' conundrumSome ten days ago, the Kurdistan Regional Government (KRG) were reported to have sent Peshmerga units into the Bai Hassan and Kirkuk oil fields - formerly under the control of the North Oil Company (NOC) - and both of which are in areas of disputed territory.
The KRG subsequently told NOC's workers they had a choice: either work for the KRG, or leave.
The reason that the fields have been taken is pretty obvious - the KRG needs revenue and the only way to generate the right amount of homegrown cash is by selling oil.
The two fields now under control of the Peshmerga can - in theory - add some 500K bpd to the KRG's production profile and with oil prices north of $100 per barrel, that is an awful lot of money.
Houston, we have a problemActually, Irbil may have quite a few.
First: bringing crude oil to the world's markets will need a better Kurdish downstream infrastructure; second: there is the critical issue of physical security to consider; third: someone has actually to buy it.
The Peshmerga will need to hold the ground they have occupied while the oil workers try to connect the pipes together to send the crude on its way to Ceyhan. If they can do that, then the Kurds in effect have become the operators of two very large, potentially very lucrative oil fields.
The security issue is one about strategic width and depth. The Peshmerga have secured key sections of its borders, Kirkuk and the oil fields, but the defensive line is weaker around Mosul, in the west of which the Islamic State (IS) squats.
Irbil knows it has to create further security depth, so it has resorted to that old favourite of digging a moat - but a huge one stretching some 650 miles - to try to slow or stop the IS advance onto Kurdish territory.
By the way, to give this some context, it is 605 miles, line of sight, from Land's End to John O'Groats.
Digging big ditches is a favoured KRG tactic to lay physical and political claim to ground it has occupied, and has become a common tactic for the KRG to formalise authority over territory it claims or defends.
In Apr 14 they dug ditches between KRG territory and that of the Syrian Kurds in 'Rojava' - the name the Syrian Kurds give their land. This was not to the approval of the Syrian Kurds, anymore than the current ditch is likely to be to Baghdad or the IS.
But Irbil also faces a more localised potential security issue - namely the Sunni Arabs and Turkmen will not be best pleased to see their areas come under the sway of Irbil, and with it 'their' oil revenues.
Pipeline politics and problemsReturning to the thorny pipeline problem; before the political and security situation went to hell in a handcart, there was a joint Baghdad/Irbil proposal to use a company called KAR Group (
http://www.kar-k.com/) to link a 600 mile pipeline between the Irbil-controlled Khurmala dome to the K-1 pumping station located near the Baba dome.
KAR Group built the new KRG controlled pipeline that transports oil from Kurdish fields to Turkey without Baghdad's interference.
The intra-capital cooperation plan is now clearly off the table. Nevertheless, the KRG are likely to commission KAR Group to build the connecting pipeline with Kirkuk while Baghdad remains under siege.
However, it is not just as simple as building a pipeline; it is also about installing all the technology needed to connect the various elements of the infrastructure.
A sign of just how complicated it is likely to be was shown in Apr 13 when Baghdad contracted with BP to deliver technical assistance to NOC in stopping the production decline in the Kirkuk oil field - there was wastage from the creaking infrastructure.
This leads to the issue of which IOC or oil service company is willing to run the potential political risk of upsetting Baghdad, but which can render technical expertise to the KRG in keeping the production profiles of the Avana and Baba domes on track.
Irbil needs to get a move on, before security in Kirkuk comes under threat, and the inevitable consequence of which would be the IOCs and oil service companies reviewing their position in country.
Assuming that Irbil can sort out the downstream, get a technical supplier onboard, maintain security, and maintain production then there is the small matter of securing a buyer for the oil.
Baghdad will do all it can to block the sales, and Turkey and the US will, for the moment, officially sit on the fence, risking political piles.
But the KRG desperately needs the cash - fuel rationing has also started - and Irbil needs at all costs to avoid a domestic backlash.
A twist in the taleHowever, in a typical Middle Eastern twist, a senior official in the PUK said - somewhat unconvincingly - that the KRG was not even consulted before the Peshmerga occupied the oil fields.
Kurdpress reported that Salar Muhammad, a member of the PUK, went so far as actually to blame the KDP for taking control of the oil fields.
Speaking on Radio Nawa, he said the KRG should discuss with the governor of Kirkuk and its governorate every decision it makes concerning the city. Moreover, Salar asked KRG President - and KDP Leader - Massud Barzani to deal with Iraq developments more rationally and carefully.
Furthermore, he said that 'Our problems are not oil and natural resources but retaking the soil and its nation and parties should accept the outcome of their injudicious decisions.'
Equally strangely, the Kurdish Governor of Kirkuk Najmadin Karim of the pro-Iran PUK said the action by the Peshmerga was done in defiance of the previous arrangement with Baghdad that saw coordination over military operations in the disputed areas.
The Peshmerga forces, which took control of the two oilfields, are affiliated to the KDP, which means that Kurdish domestic political rivalries are conspiring to undermine the push for national independence.
Kurdish intra-party rivalryClearly the seizing of the oil fields by the KDP associated Peshmerga has to be seen in the context of historic Kurdish rivalry in eastern Iraq.
In the past, Kirkuk was heavily swayed by the influence of Iraqi President Jalal Talabani's PUK, which, over the years, has secured both political and military goals in Kirkuk.
Kurds agree generally that the disputed regions should be absorbed into Kurdistan. But over and above consensus on the need for oil exports to pay bills, the PUK seems to be more and more an irritant to the KDP - which lines up with Turkey.
The KDP knows that the PUK influence in oil-soaked Kirkuk gives it considerable political leverage - he who controls the spigots controls the cash.
Therefore, seen through that lens, deploying KDP-aligned Peshmerga units into the oilfields could be viewed as an attempt to stave off future political challenges by the PUK - which did not do well at the last election, being given a close run for their money by Gorran.
However, given the wolves of the IS are close to the door, the PUK will not dare to raise the stakes in the dispute. The KDP and PUK are united in seeing off the threat from the IS, as well ensuring another Kurd takes the Iraqi presidency, which happened on 24 Jul 14.
In the short-term therefore, we see it likely that there will be consensus between the two rivals in maintaining a united front to Baghdad's naked political aggression, while still trying to extract concessions from the latter on oil revenues, and the thorny issue of the federal budget allocation.
Flashpoints in oil fieldsKirkuk and the control of its super-giant oil field and other big fields has long been seen as a flashpoint between Baghdad and Irbil, a truism exemplified by the mere existence of Article 140.
However, it is not generally recognised in the west that Kirkuk has long also been a flashpoint between Kurdistan's political rivals.
There is a threat here that should be carefully noted. The Shi'a regimes in both Baghdad and Tehran seek to quash the drive by the KRG towards independence and closer links with Turkey. Just to nail that point home, last week the KRG announced an agreement with Turkey to increase oil exports, as well as a revenue mechanism.
KRG spokesman Safin Dazia said
'a delegation from the KRG including Vice President Qubad Talabani, Minister of Natural Resources Ashti Hawrami, Minister of Finance and Economy Rebaz Muhammad visited Ankara on Monday, and held a series of meetings with officials on the framework agreement on cooperation in the energy field between Kurdistan Region and Turkey.'
As we noted above, the PUK broadly align with Tehran, and have a closer relationship with the Shi'a regime in Baghdad than the KDP, so no one should be surprised if the PUK and Iraqi Shi'a groups conspire to undermine President Barzani and the KDP's plans for independence and closer ties with Turkey in particular.
It seems therefore possible that the experts at divide and rule in Baghdad and Tehran may seek to drive a wedge between the major constituent parties in the KRG.
The queue for cashOn 22 Jul 14, the PM of the KRG Nechirvan Barzani moved to reassure the Kurds that government and private salaries 'will not be lost' and confirmed that the KRG continues its efforts to address the slow distribution of salaries.
Since early 2014, Irbil has not received its monthly $1.2B budget provided for through the Articles of the Iraqi Constitution. Barzani made it clear that he saw Baghdad hoping that their withholding of the federal budget revenues Irbil is owed is a way of forcing the Kurds to submit to Baghdad's will. Barzani used the word 'surrender'.
To set some context, the $1.2B would roughly cover KRG employee salaries, as well as infrastructure projects (which also can attract external CAPEX and FDI). But the KRG suffers to an extent from the Baghdad Bloated Bureaucracy Syndrome, with somewhere near three quarters of a million government bureaucrats.
About $600K per month goes on the KRG staffers, and the 200K strong Peshmerga. There has been some phasing of salary settlements - which means some people will wait for their money - but pragmatically the front-line of the Peshmerga need to be paid on time.
And after the cash has been spent on key posts, then the IOCs line up for their fair share. But the IOCs have experienced painfully long delays in payments of receivables, a bit like in Egypt. As far as can be ascertained, the KRG owes the IOCs something around $5B.
The KRG tried the neat tactic of asking for cash up front from the IOCs to pay for the government-controlled oil security force but this has been met with a cool response from some of the IOCs whose patience is starting to grow short.
The International ATMLocal major businesses have helped prop up the KRG's creaking finances; but outside the domestic private sector, many international banks are not keen to lend cash to the KRG.
The KRG secured a substantial loan from Ankara in Mar 14 - around the $2-3B mark - but has had to go back asking for more - a delegation was recently in Ankara, and there are reports that three Lebanese banks have been supporting Iribil financially.
For Irbil, strategic cash flow is indivisibly linked to oil flow. What is quite clear is that although the KRG has control of the Kirkuk oil fields; it is still desperately short of cash. The only country likely to help is Turkey.
As noted above, the Kurds are trying to connect Kirkuk's production into the Kurds' downstream infrastructure.
It is a moot point how the Kurds can use the crude; Kirkuk is heavy crude so it needs to be blended with the crude from Taq Taq to make it lighter and easier to sell, but purchasers are less happy to buy blends as they are of variable consistency. Given the shortfall in oil from Baiji, we think it more likely that the Kurds would refine the crude for their domestic market.
So the KRG has a debt pile that is only growing, and still faces problems in gaining international acceptance and kosher clients for its crude oil - whose sale is the only realistic way of generating enough revenue to pay down the debts and build up its strategic finances if it wants to go down the independence flightpath.
But Baghdad is still as intransigent as a Russian nationalist and maintains its position that any oil sold by Irbil is illegal oil.
A week ago, Ankara stopped the pumping of oil to Ceyhan - not for any malicious reason, but a practical one - their storage tanks are full of unsold Kurdish crude.
Ankara holds lots of cards and lots of cash. $93M to be precise - the revenue from the first cargo of Kurdish crude. The cash is being held in a Turkish Halkbank account.
However, Ankara will step carefully before deciding to release the funds as both Baghdad and Washington are opposed to its disbursement to Irbil. The KRG sent a delegation to Ankara to resolve the issue over delivering the cash to Irbil, but nothing officially appears - as yet - to have happened
Dollars and dealsBut dollars equal deals. There will be we think an energy/political deal between Ankara and Irbil which will relate to the Kurdish drive towards independence, about which Turkey remains officially ambivalent.
Ankara hopes to control the intent of the KDP towards secession, as much as Tehran wishes through the PUK to limit Turkey's influence and Ankara's financial grip on Irbil.
However, the Kurds are dealmakers, and there is enough cash in domestic wallets to allow the region to stagger on while the politics play out in the background, and ISIS manoeuvres malevolently to the south and west.
But the shortage of cash will lead to a shortage of patience between the KDP and the PUK. The longer Baghdad and Irbil remain at loggerheads, the greater Ankara's financial and influence grows in Irbil.
This means Tehran will seek to offset Ankara's influence through support to the PUK, while the third key political party - Gorran - a PUK splinter group - will also seek to mitigate Ankara's influence on the KDP.
On 18 Jul 14, Tehran shut the border to Kurdish oil tankers, shutting off a major source of revenue. This is also a kick in the wallet for IOCs that need to sell their oil. Iran had been providing a discreet route to market for more than 25% of the Kurds' oil production.
If the border is shut to wider trade goods, then Tehran will in effect have placed the KRG under an economic embargo, the aim of which will be to increase economic pain across the region and which could cause political pain in the PUK if the KDP sees Tehran trying to play divide and rule.
The political litmus test will be if Tehran reaches out to Iraq Shi'a political parties to persuade them to work with cooperative Kurdish politicians, while the new government forms in Baghdad.
If that happens, then we will know The Great Game is afoot, and we will be able to expect further edgy political dance steps as each party manouevres for position and advantage, and Kurdistan edges towards independence.
http://www.oilvoice.com/n/Oil_and_cash_ ... 7051a.aspx
Author: Anthea » Sun Jun 22, 2014 11:20 am 
