A barrel of stumbling: in Iraq, they are arguing about the price of oil exports by companies from the Russian Federation

The federal and regional authorities of Iraq cannot overcome their differences on the issue of recognizing contracts of foreign oil companies operating in the country, including Russian ones. It depends on what price the oil produced in Iraqi Kurdistan will be exported. Deputy Minister of Foreign Relations of Kurdistan Daban Shadala told Izvestia that there is currently no consensus on the issue of compensation for production and transportation costs, which prevents the launch of a full-fledged export mechanism. Lukoil, Gazprom Neft and Rosneft operate in the region. Currently, the Kurdish oil sector is coming under the control of federal legislation, which will require the renegotiation of contracts. The central Iraqi authorities are offering a price of $16 per barrel. The Kurdish side insists on fairer conditions for foreign investors.

Disputes over oil exports from Iraqi Kurdistan

The political differences between Baghdad and Erbil over oil exports from Iraqi Kurdistan have generally been resolved, but a key obstacle remains on the way to a full-fledged resumption of supplies. As Daban Shadala, Deputy Minister of Foreign Relations of the Government of Iraqi Kurdistan, stated in an interview with Izvestia, the stumbling block was the price offered by the federal authorities to compensate foreign companies operating in the region.

— This is a technical issue. We have reached an agreement with the central government on the recognition of agreements with oil and gas companies and oil exports," he said. — But there is a problem — it's the price. The Iraqi government is offering $16 per barrel, and companies are demanding $22 to cover production costs.

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According to Daban Shadal, a political and legal settlement has already taken place: in accordance with the Iraqi Constitution, the SOMO state—owned company will export oil - it will be involved in the sale of oil produced in the Kurdish territory.

Negotiations between Baghdad and Erbil have been going on for months. At the same time, tensions between the central and regional authorities flared up with renewed vigor after Turkey suspended imports of Kurdish oil in March 2023. The decision was made after the International Court of Arbitration ordered Ankara to pay Baghdad $1.5 billion in compensation for purchases without its permission from 2014 to 2018. The pause in supplies had a negative impact on the work of Russian companies in the region. They carried out major oil and gas production projects there. In October 2023, Baghdad and Ankara agreed to resume oil supplies from Iraqi Kurdistan, while the issue of compensation has not yet been resolved.

Previously, exports from Iraqi Kurdistan to the Turkish port of Ceyhan passed through a pipeline operated by a Russian-Iraqi joint venture. Now revenues from this route have stopped, and companies are forced to sell oil mainly to local consumers, and at a serious discount.

Russian companies that continue to operate in the region include Lukoil, Gazprom Neft and Rosneft. Each of them has invested heavily in the development of deposits, but the prospects for a return on investment remain uncertain. Izvestia sent a request to the companies' press services to confirm negotiations on oil production and export prices.

In recent years, Kurdistan has independently concluded contracts with foreign companies and exported oil through Turkey, bypassing the federal center. Baghdad considers this a violation of the Constitution and demands that all exports go through the SOMO state-owned company. In addition, after the 2017 referendum, in which more than 90% of Iraqi Kurdistan's voters voted for independence, Baghdad applied harsh measures: exerted military pressure, conducted a military operation in Kirkuk, blocked the autonomy's budget and air links with Kurdistan. Although relations have since returned to normal, trust between the parties has been undermined.

Debts to Russian companies

There remains the problem of debt obligations. As Danar Mustafa, acting representative of Iraqi Kurdistan in Russia, previously told Izvestia, despite partial repayment of debts to Russian companies after the visit of Mikhail Bogdanov, Special representative of the President of the Russian Federation for the Middle East, a significant part of the debt remains unresolved.

— When the problem with the price is solved, then, I think, the debts will also be settled, — concluded Daban Shadala.

The aggravation of the situation is connected not only with the suspension of supplies, but also with the transition of the oil sector under the control of the federal government. Previously, all agreements were based on a product-sharing model, but now the Iraqi Government insists on renegotiating contracts under different rules.

The Russian Ambassador to Iraq, Elbrus Kutrashev, previously pointed out in an interview with Izvestia that companies had invested heavily in the development of Kurdish deposits, but their incomes could significantly decrease with the transition to federal regulation. According to him, this dramatically reduces profits and calls into question the economic feasibility of continuing projects.

Thus, despite the political consensus reached between Erbil and Baghdad, a full-fledged restart of the Kurdistan oil sector remains a matter of the future. The key issue — the price — has not yet been resolved, and without its settlement, export is not possible.

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The government will discuss the causes of this situation and ways to avoid fuel shortages in the domestic market.

A source familiar with the situation told Izvestia that none of the contracts with foreign operators in Kurdistan have been renegotiated yet.

— Companies, federal authorities and Kurdistan continue to confer. But the situation is complicated. The Kurds have reached an agreement with Baghdad. But not with oil producers. There are many subtleties in the legal field," the source said.

According to local experts, the delays in payments are due to the fact that the region has not received its share from the federal budget for a long time, which was the result of political differences between Baghdad and Erbil. This share was previously estimated at 17%, and then in the last three years it was adjusted to 12%, but even this part was not transferred in full, in fact, less than 8% of the total budget goes to the Kurds for oil.