Half-Price Kurd Oil Threatens Iraq Breakup With Turkish Help Who Are Making A Killing

June 18 (Bloomberg) -- In today’s “Global Outlook,” Abhishek Deshpande, oil markets analyst at Natixis, discusses the capture of Iraq’s largest oil refinery by ISIL insurgents and how it impacts oil production in Iraq and the global oil market. He speaks on Bloomberg Television’s “The Pulse.”

A tanker containing a million barrels of crude oil is floating around the Mediterranean, and any buyer will be helping Iraq’s Kurds to win greater independence.

The oil aboard is available at half-price, an official involved in the trade told Bloomberg, an assertion denied by the Kurdish administration. It's at the center of a fight over ownership between the semi-autonomous region of Kurdistan, which pumped and shipped the crude from its territory in northern Iraq, and the central government in Baghdad, which claims the rights to all oil revenue.

Kurdish Peshmerga armed forces took control of northern Iraq’s key oil hub, Kirkuk, after militant Islamists routed the Baghdad government’s army last week. The oil dispute has raised the possibility of the Kurdish region achieving financial self-sufficiency to go with the expanding territory.

“If that tanker docks, Iraq’s Kurdistan Regional Government will take an important step toward independence,” Nihat Ali Ozcan, an analyst at the Economic Policy Research Foundation in Ankara, said by phone on June 13.

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The KRG says the oil exports are in line with the Iraqi constitution. “We do not view this issue as a path towards Kurdistan’s independence, but rather as the expression of our constitutional rights,” KRG Prime Minister Nechirvan Barzani said on June 4.

Kurdish peshmerga forces keep guard around Tal Afar of Mosul where ISIL, the Islamic State of Iraq and the Levant, took hold on June 17, 2014. Close

Kurdish peshmerga forces keep guard around Tal Afar of Mosul where ISIL, the Islamic... Read More

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Kurdish peshmerga forces keep guard around Tal Afar of Mosul where ISIL, the Islamic State of Iraq and the Levant, took hold on June 17, 2014.

Turkey’s Role

Turkey, the conduit for the Kurdish oil, also sees Kurdish crude oil exports through its Mediterranean port of Ceyhan as “entirely legitimate” and will continue as long as oil is sold, Turkey’s Energy Minister Taner Yildiz said in an interview in Moscow today. The next shipment is scheduled for June 22, he said at the World Petroleum Congress.

“At the moment, 100,000 barrels to 120,000 barrels of oil flow from northern Iraq per day,” Yildiz said. “About 2.3 million barrels of oil are stored in Ceyhan.”

Iraq’s Deputy Prime Minister Hussain al-Shahristani said on Iraqiya television on June 17 that Turkey and the KRG are mistaken if they’re calculating that the current chaos in Iraq will leave the Baghdad government unable to defend its interests.

“The Iraqi people won’t forget those who conspired against them during tough times,” al-Shahristani said. “Turkey should be aware that this is like playing with fire. This is plundering the wealth of Iraq.”

U.S. Mediation

Brett McGurk, the deputy assistant secretary of state for Near East affairs, reiterated U.S. opposition to any oil exports that aren’t approved by Baghdad. The U.S. has “informed all interested parties that any such transactions exposes them to potential legal risks,” and proposed a compromise plan to both sides, he wrote on Twitter on May 23.

Kurdish Peshmerga forces stand guard in Kirkuk. Close

Kurdish Peshmerga forces stand guard in Kirkuk.

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Kurdish Peshmerga forces stand guard in Kirkuk.

As the Kurds went ahead with pumping the oil, the Baghdad government announced it was suspending the accord under which 17 percent of all oil revenue goes to the Kurdish authorities in their regional capital, Erbil.

“The U.S. failed totally to mediate between Erbil and Baghdad on this issue,” and their standoff has now sparked “growing U.S. fears that Kurdistan is headed for independence,” David Ottaway, senior scholar in the Middle East program at the Wilson Center in Washington, said June 10.

Oil Price

The violence in Iraq since last week has amplified such concerns and pushed oil prices higher. Brent crude posted the biggest jump in almost a year last week. It rose above $115 a barrel in London today, reaching a nine-month high.

Militants of the Sunni Islamic State in Iraq and the Levant seized Mosul, the largest northern city, on June 10 and have captured other towns. As Baghdad’s armed forces fled, the Kurds advanced into Kirkuk, which they’ve long claimed should be part of their autonomous region. Exxon Mobil Corp. (XOM), BP Plc (BP/) and Turkey’s state oil company TPAO began removing employees from Iraq, OPEC’s second-largest oil producer, as the insurgents attempted to capture a major refinery.

Even without Kirkuk, the Kurdish region has crude reserves it estimates at 45 billion barrels, a quarter of Iraq’s total. Since the U.S. invasion of Iraq in 2003, the KRG has claimed the right to handle shipments from its territory.

In 2004, a year after the U.S. invasion that toppled Saddam Hussein, the KRG struck an agreement with the central government in Baghdad to share oil revenue. The deal left key questions unresolved, including the fate of Kirkuk and how to share untapped oil fields.

Turkish Storage

Since 2011, KRG has attracted four big oil companies -- Chevron Corp. (CVX), Exxon Mobil Corp., Hess Corp. (HES) and Total SA (FP) -- as well as 30 or so smaller ones. Tony Hayward, chief executive office of Genel Energy Plc (GENL), the biggest oil and gas operator in Kurdistan, was among those who risked the wrath of the Iraqi government to truck Kurdish oil to Turkey.

Trucks have been superseded since January by a new Kurdish link to the main northern pipeline, which runs from Kirkuk to Turkey’s Mediterranean oil terminal at Ceyhan. Turkey agreed to handle the shipment and store it separately from the main Iraqi crude. It allocated seven of 12 storage tanks at Ceyhan for Kurdish oil.

The Iraqi government initiated legal action against Turkey, taking the case to the International Chamber of Commerce in Paris. Asim Jihad, an Iraqi oil ministry spokesman, said a lawsuit has also been filed domestically against the KRG’s Ministry of Natural Resources.

Higher Fees

The fees Turkey collects from the Kurds are four times higher than what Baghdad pays, according to an official involved in the transactions, who asked not to be identified because the figures aren’t public.

“Turkey has nothing to do with marketing of oil from northern Iraq, its price or to which country it is sold,” Turkey’s Yildiz said. “Our responsibility is limited with shipment and we’re relaying all documents regarding it to the central government.”

On May 22, the first of two tankers filled with the disputed oil left the Ceyhan terminal with 1 million barrels for Europe.

Then it appeared to be bound for the Americas as a concerted Iraqi government effort to block its passage led to the tanker turning around on May 30 after getting almost 200 miles across the Atlantic Ocean. The tanker moored about 5 miles off Mohammedia port in Morocco on June 3.

Lower Price

As the search for a customer dragged on, the Kurds lowered the price to $56 per barrel as of June 11, according to the same official.

“The KRG would never consider exporting and selling the natural resources of Iraq at ‘half price,’ either now or in the future,” the Ministry of Natural Resources said in a statement in response to this story. “Despite all the blackmail and threats by SOMO and the Ministry of Oil in Baghdad, the KRG has been able to deliver oil to its customers under commercially viable contracts, and all payments are being made into the KRG’s account in Turkey.”

Iraq’s oil ministry and the state oil-marketing company SOMO have been urging potential buyers to shun the cargo, and threatening legal action. SOMO estimates it is losing $1.2 billion a month in revenue from Kurdish shipments.

The Iraqi government has not been able to send oil to Ceyhan since March 2, when Islamic militants sabotaged the oil pipeline outside Mosul. Last year, it managed to export 13 million tons of oil out of a 71 million-ton carrying capacity, said the official involved in the trade.

Baghdad Blacklist

Under threat of legal action from Iraq the shipping agent Boutros, and cargo inspector Saybolt, which handled the first oil cargo from northern Iraq, were not listed for handling a second tanker. The KRG found a replacement in Palmali Shipping & Agency JSC, owned by Turkish-Azeri tycoon Mubariz Mansimov Gurbanoglu.

When the second ship left Ceyhan on June 9, the Iraqi government sent another protest note to Turkish officials and blacklisted Palmali, saying it will pursue the matter in court.

“The fact is that with this much oil now flowing onto the international market from Kurdistan, with Turkey’s help, sooner or later it will find buyers,” said Ottaway.

Energy companies operating in the Kurdish region have struggled to get paid as the authority feuds with Iraq’s central government over oil revenue and contract terms. United Arab Emirates-based DANA Gas PJSC (DANA) was forced to restructure about $900 million of Islamic bonds last year after payment delays in Kurdistan and Egypt, its two main areas of production.

Two more tankers will load Kurdish oil at Ceyhan this week, Ashti Hawrami, the KRG’s natural resources minister, said at a conference in London on June 17. Kurdish exports may double to as much as 250,000 barrels a day next month, he said. “Despite all the unfair treatment and discrimination, the KRG reaches out to Iraq and is ready to cooperate, to work together to resolve these problems.”

To contact the reporters on this story: Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net; Jack Fairweather in Boston at jfairweathe3@bloomberg.net; Nayla Razzouk in Dubai at nrazzouk2@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net Ben Holland, Mark Williams