Feature: Kurdish oil, gas lifeblood faces sovereignty challenge, as Baghdad angles to take over

Federal government seeks control over energy policy

KRG weighing response after weeks of negotiations fail

SOMO also complains about Kurdish oil price discounts

Iraq's semi-autonomous Kurdistan region has ambitions to become a net natural gas exporter and to revive fallen oil production.

But plans by federal authorities in Baghdad for a potentially hostile takeover of the region's energy sector present major uncertainties for foreign companies that the Kurdistan Regional Government are seeking to attract.

KRG officials are weighing their response to Baghdad's declared intent to assume oversight of Kurdish oil and gas development by implementing a Feb. 15 Supreme Court ruling, but say they are "optimistic" that the festering sovereignty dispute can be resolved to bolster needed investment.

The ruling said the KRG's 2007 oil and gas law was unconstitutional and ordered it to hand over its energy sector to the federal government, which has inflamed long-standing tensions over oil production and exports.

Lawk Ghafuri, the KRG's head of foreign media relations, tweeted May 9 that the region would officially respond to Baghdad's move by May 13, and KRG spokesperson Jotiar Adil separately told journalists in Erbil that authorities were currently reviewing the plan.

"They sent a proposal a few days ago, and soon we will respond," Adil said. "We have issues, but we are optimistic and we are very serious about solving these issues with Baghdad."

In March, Kurdistan produced 388,000 b/d of oil, out of Iraq 's total 4.148 million b/d, according to federal data. That is down from a peak of nearly 600,000 b/d in late 2017, before the federal government retook several Kirkuk-area oil fields the KRG had claimed when the Islamic State were driven out.

The drop in volumes has strained the KRG's finances and hampered its ability to pay international oil companies operating in the region.

Consistent policy

Federal officials say their planned takeover is aimed at harmonizing policies and not at depriving the region of its revenues.

Baghdad has also complained that the KRG has been selling its crude at price discounts that undercut federal marketer SOMO's sales of Kirkuk crude, which largely comes from the same fields.

Heavy, sour Kurdish KBT crude, which is traded on a fairly opaque market, typically sells for below SOMO's official selling prices for Kirkuk, though during periods of tighter sour crude supply in the Mediterranean, it has sometimes traded at premiums, market sources say.

KBT crude has also been impacted by fluctuations in quality, according to traders, who say different streams are sometimes added to the blend.

Platts assessed Kirkuk crude at minus $11.50/b vs the Med Dated Strip on May 10.

"The existence of two energy policies in one country is not right. The status quo cannot continue," Iraqi oil minister Ihsan Ismaael said, according to a May 7 ministry statement.

"We have affirmed repeatedly that Baghdad does not desire to control the oil activity [of Kurdistan] but Baghdad or the oil ministry wants to organize the oil sector and transform it into a real commercial activity that is clear and transparent that guarantees for all parties their rights," Ismaael said.

Adil, responding to the complaints over KBT price discounts and local claims that the KRG is selling oil to Israel, said all of the KRG's sales were commercial deals and not politically motivated.

"The KRG is not an independent state, and therefore cannot sell oil to other states," he said. "The Iraqi federal government has always tried to prevent the KRG from selling oil abroad, therefore there are a number of customers that have bought oil, and not states. And that's why the oil was sold for a cheaper price than the SOMO price."

Gas exports eyed

It is unclear how federal authorities could enforce policy in Kurdistan, when the KRG has signed its own production-sharing contracts with IOCs, and where the Iraqi army has no presence to enforce Baghdad's bidding.

Chevron, Oslo-listed DNO and the UK's Genel Energy and Gulf Keystone are among the IOCs operating in Kurdistan. KBT is also lifted and sold by independent oil traders Vitol and Trafigura.

In the past, Baghdad, which is obliged to give the KRG 17% of the national budget, has withheld some payments in response to Kurdish independent oil exports.

Adil said federal officials are under political pressure to implement the court ruling, but said it is possible to reach a deal.

"Dialogue is still going on," he said. "No country should have two policies on oil, but we can sit, talk, and prepare one policy on oil."

The KRG also produces almost 500 MMcf/d of gas and could become a net gas exporter "in the near future," Prime Minister Masrour Barzani said at an energy conference in Dubai in March.