Workers perform maintenance to an oil facility in the Kurdistan Region. File photo: Rudaw
The Kurdistan Region lost half of the oil it was exporting after the Iraqi government controlled Bai Hassan and Avana oilfields on October 16, 2017. That is, the amount of oil Erbil was previously exporting dropped from nearly 600,000 barrels to nearly 300,000.
This big loss has greatly endangered the Kurdistan Region’s oil sector and greatly hurt its reputation as an oil supplier in the world. Buyers of the Kurdistan Region’s oil want the amount of oil they buy from Kurdistan to be at a fixed price so that they can distribute to the refineries they have signed contracts with.
For example, if an oil refinery in Europe gets a daily supply of 50,000 oil barrels from the Kurdistan Region, it will be shocked to suddenly see that Kurdistan can no longer provide this amount.
After the KRG lost control of the Kirkuk fields, their revenues have been nearly halved. The KRG cannot pay its employees even through austerity measures like the salary saving system. So other sources other sources of revenue are needed.
The KRG gets funds in advance of exports because of the economic crunch dating back to 2014. For example in February 2016, Brent crude price fell to $26 per barrel, and the Kurdistan Region was making agreements to sell oil for just $17. Because of the drop, the KRG withheld funds from oil firms, hoping it would be able to later repay with more oil exports. The loss of Kirkuk’s fields means the KRG no longer has the oil to repay those debts.
The KRG has taken advance payment from Trafigura, Petraco, Glencore, and most notably Rosneft which has given the KRG several billion dollars within the framework of its oil and gas contracts with the KRG.
In February, September and December 2017, Rosneft gave the KRG an advance payment of $1.2-1.5 billion. Rosneft will also give the KRG $1.8 billion for buying 60 percent share of the Kurdistan-Ceyhan pipeline and raising the capacity of the pipe from 700,000 barrels to 1 million.
Rosneft will also dedicate $1 billion to establish a pipe for exporting natural gas which can export 30 billion cubic meters of natural gas annually and will recoup export expenses when the process of exportation commences. Rosneft has also declared its desire to work in the Kirkuk oilfields, although the Iraqi government has already called on BP to do technical research on these oilfields.
In October 2017, Rosneft reached an agreement with the KRG to develop five oil blocks, and according to estimates, these blocks contain 670 million barrels of oil. Rosneft has been given 80 percent of the shares of these blocks in return for 400 million USD to the KRG.
These five blocks are: Batil, Darato, Qasrok, Zawita and Harir-Bejil. They are located primarily in northwestern parts of the Kurdistan Region and controlled by different licenses. These blocks were previously inspected by oil companies but then abandoned for different reasons.
Rosneft has opened five branches in Singapore to deal with the exports of these five blocks, so Rosneft is serious to develop these blocks and its overall oil and gas projects with the KRG.
Following the loss of Bai Hassan and Avana oilfields, the development of the Kurdistan Region’s oil and gas sector depends on the success of Rosneft projects, and with Erbil and Baghdad resolving outstanding issues.
Because of damaged inflicted on Kirkuk-Ceyhan pipeline in the ISIS and other conflicts, the Iraqi government needs the Kurdistan-Ceyhan pipeline.
If the KRG and Baghdad fail to reach an agreement on how to manage the Kurdistan Region’s oil and gas fields, Rosneft cannot proceed with the establishment of a gas pipeline from Kurdistan to Turkey.
Rosneft has made efforts to bring Erbil and Baghdad closer together on the issue of oil and exporting Kirkuk oil. Following a visit by Rosneft to Baghdad and their meeting with the Iraqi oil minister in February 2018, the Iraqi oil ministry said that it has no objection for Rosneft to work on Kirkuk fields providing they coordinate with BP on this question.
Rosneft and BP have joint projects and nearly 20 percent of Rosneft shares are owned by BP. It is conceivable for these two giant companies to reach an agreement on Kirkuk oil exports.