This time last year, a high-stakes dispute over a tanker filled with Iraqi Kurdish oil came to a head in a Texas court. Iraq’s central government and the Kurdistan Regional Government (KRG) wrangled over the semi-autonomous region’s right to sell its own oil and a crude carrier that had made its way to US shores.
The oil was never delivered to Texas after the KRG declined to risk a judgement in court. But fast forward 12 months and the KRG has taken further steps towards establishing a steady stream of independent oil sales.
The world’s biggest oil traders, including Vitol and Trafigura, have handed over billions of dollars to lock in supplies of Kurdish crude, which is now regularly being shipped to refineries in Israel, Italy, France and elsewhere. Both Vitol and Trafigura declined to comment.
The move has accelerated in the past three months after a crude-for-cash deal struck with Baghdad late last year effectively collapsed. The federal government withheld payments to Erbil soon after the deal began due to its own budget crisis, while accusing the Kurds of not transferring the agreed volumes of oil.
Since May, the Kurds have taken matters into their own hands and sold almost 40m barrels of oil to traders via the Turkish port of Ceyhan, all shipped via pipeline, providing Erbil with vital funds as they battle Islamist militants and shelter hundreds of thousands of refugees.
Distracted by rising insecurity, Baghdad’s reaction has so far been muted. Embroiled in its own fight with Islamic State in Iraq and the Levant (Isis), the federal government — unlike last year — has not sued and blacklisted those companies handling Kurdish oil.
Sales from Iraqi Kurdistan and northern Iraq have averaged 450,000 barrels a day since May, according to shipping data. This contributed to record Iraqi output, until flows on the Kurds’ pipeline were disrupted by sabotage earlier this month.
“Baghdad knows exactly what is going on. They are not pleased with the KRG selling its own oil, but they have plenty on their plate right now,” said one adviser to the KRG’s finance ministry. “They will pursue this, but they can’t fight every battle at the same time,” the adviser said.
The KRG says it has no choice but to pursue the sales independently of Baghdad. Dwindling state funds have meant the KRG has struggled to pay its Peshmerga forces or the energy companies operating in the region. It has racked up huge debts with domestic banks and business people.
“Revenue from crude oil export through the pipeline to Ceyhan represents the Kurdistan region’s main means of survival,” the KRG’s ministry of natural resources said this week.
Although revenues from oil sales are below Kurdistan’s agreed 17 per cent share of the federal budget, it is still more than the several hundred million dollars a month that Baghdad was transferring over at the start of the year, said industry participants.
The KRG said it has received more than $1.5bn in payments from oil traders in the past two months.
Baghdad said on Thursday the KRG is in “violation of the agreement” the two sides struck late last year. In a statement on the website of the Iraqi embassy in Washington the Iraqi government argued it has transferred funds in proportion to every barrel of crude the Kurds have given to Iraq’s state oil company.
“Dissolving financial links between Baghdad and Erbil weakens national unity at a critical time,” the statement said. “Strengthening co-operation between Baghdad and provincial capitals will help stitch back together seams in society that Daesh (Isis) has been able to exploit.”
The KRG has said it still wants co-operation with Baghdad, though it has long said it defends its right to sell oil independently. Many think its oil push is a precursor to a bigger move for full political independence.
“Trust levels are very low,” said Robin Mills at Dubai-based Manaar Energy Consulting. “The longer Baghdad leaves it the more problematic it will be. The Kurds will have established export routes and have a customer base dependent on their oil,” Mr Mills added.
The KRG’s independent oil sales have also come under scrutiny at home by ministers opposing the government’s methods of acquiring additional funds.
The administration has not bargained hard enough with those offering to help fund the KRG, two people familiar with the matter said.
Industry sources said the pre-pay oil sales agreements with international oil traders have included hefty discounts on each barrel compared to benchmark global prices, something the KRG denies.
A mooted attempt to launch a $500m bond will also likely require very high borrowing rates if resurrected, those familiar with the bond issue said, leading some to ask if there are not other ways to raise funds.
Meanwhile financial transparency, revenue retention and the role of middlemen has come into focus.
“Aside from a small coterie of officials close to the president, no one has any idea about how these deals are being done,” said Shwan Zulal, a Kurdish oil industry consultant. “But the KRG has very little choice. They have to raise money fast through whichever means they can.”