Kurdistan Halts Oil Exports.

Re-opening a rift with the central government, the KRG has halted all crude oil exports from Kurdistan until Baghdad paid the producing IOCs. Crude oil extracted in Kurdistan can be exported only through the Iraqi government's pipeline running to Turkey, giving Baghdad a stranglehold on the crude oil produced in Kurdistan. At the same time, however, the KRG needs all the revenue it can get to pay for a host of pressing needs.

The amount of crude oil involved, about 100,000 b/d, is relatively small compared with Iraq's total output of 2.45m b/d. But with production from Kurdistan likely to increase markedly in coming years, the dispute has taken on added importance.

KRG Minister of Natural Resources Ashti Hawrami said in a letter dated Oct. 9 and posted on KRG website on Oct. 14 that the decision to stop exports had been made in concert with the two IOCs now extracting crude oil there. Dr Hawrami wrote: "We have jointly agreed that no free [crude] oil will be pumped for export, and payments have to be made. We will only resume exports with guaranteed payments".

The KRG has awarded more than 30 EPSAs to IOCs during the past few years over the objections of Baghdad, which has barred IOCs working in Kurdistan from competing for oil and gas development fee-based service contracts in the rest of Iraq. Kurdistan began signing its own IPSAs with IOCs after becoming impatient with the central government's inability to adopt a national petroleum law.

After DNO of Norway and Genel Enerji of Turkey began producing crude oil at the Tawke field in Kurdistan, Baghdad originally refused to export their production over its pipelines. The cash-poor KRG eventually relented, however, giving its approval in late May. Exports from Tawke and from a second EPSA area, the Taq Taq field, began on June 1, but Baghdad has refused to pay the companies for the crude oil because it continued to regard their EPSAs as illegal. KRG later said they could not afford to pay the IOCs because revenue from the fields went directly to Baghdad. DNO has 55% in the Tawke field; Genel Enerji owns 25%; the remainder is owned by the KRG.

Dr Hawrami, who oversees Kurdistan's petroleum sector, said the Norwegian and Turkish companies, which had invested $500m in Kurdistan, had not received a penny for their exports. Khaled Saleh, an adviser toMinister Shahristani on Oct. 12 said the government had no plans to abide by the terms of KRG's EPSAs, adding: "At this moment, the government is not willing to pay".

Dr Hawrami acknowledged in the letter a complex web of financial arrangements which the KRG had with the two companies, including secret government investments and loans of as much as $50m. The letter said the EPSAs, negotiated with the permission of Kurdistan President Mas'oud Barzani, were intended to bolster the financially strained oil companies so they could continue exploration in Kurdistan.

Baghdad had sold the crude as it promised but, given that it considered the central government the only authority allowed to sign petroleum deals, it felt under no obligation to pay these companies. The FT on Oct. 16 quoted Hawrami as saying: "Nobody [in Baghdad] would talk about the money. We thought that by now there would be follow-up and payment would be sorted out but there's been no acknowledgement, no one was interested".

The KRG's difficuties have been compounded by the furore which has engulfed DNO which was the first to enter Kurdistan after the 2003 war. The Oslo Stock Exchange released information in September suggesting that Hawrami had been a middleman in the sale in 2008 of a DNO stake to Genel Enerji. Infuriated by the claim, the KRG briefly suspended DNO's operations but has since settled its dispute with the company. A revelation that Peter Galbraith, a former US diplomat and long-time advocate of Kurdish rights, also had a role in the DNO deal, gave the story a further twist. Hawrami lashed out at what he said was an "orchestrated" attempt to damage the KRG. He said it was the KRG, and not him in a personal capacity, which had helped DNO with the sale of the shares.

The DNO affair has raised fresh concerns about business dealings in Kurdistan, long plagued by allegations of official corruption. According to Karin Lissakers, director of the US-based Revenue Watch Institute which promotes responsible management of oil and gas resources, petroleum deals in Kurdistan "do not appear to us to meet the standards of transparency with regard to the terms or to who the actual contracting parties are".

The saga and the KRG's troubled relations with Baghdad are reminders of the dangers of the impasse over the passing of a national petroleum law. The deadlock over this law is only one part of the larger tensions between Arabs and Kurds over the future of the disputed oil-rich city of Kirkuk, which now pose the greatest threat to Iraq's stability.

Hawrami is hoping that, in the run-up to the Jan. 16 legislative polls, pressure will mount on Baghdad to facilitate the export of crude oil from the north. But Joost R. Hiltermann, Middle East analyst at the International Crisis Group, says the KRG will now have to sit tight and wait for a new government in Baghdad. Then it will have to negotiate a petroleum law "that works for everyone".