Iraq: Pipeline attacks worsen financial challenges for Kurdish oil producers


19 Aug 2015

Iraq: Pipeline attacks worsen financial challenges...

The sabotage of pipelines carrying Kurdish oil exports through Turkey has demonstrated the vulnerability of the Kurdistan Regional Government (KRG) to a resumption of fighting between the Kurdistan Workers’ Party (PKK) and the Turkish government. The renewed conflict has increased the complexity of the operating environment in semi-autonomous Iraqi Kurdistan, where political tensions with Baghdad and regional economic challenges have resulted in billions of dollars in debts owed to international companies (IOCs). Despite the KRG’s plans to make regular payments to IOCs from September, attacks on infrastructure and Erbil’s weak finances are likely to see debts and irregular payments persist. Moreover, the KRG’s efforts to increase exports outside of channels authorised by federal authorities could see Baghdad resume legal challenges to exports, increasing uncertainty and risk for operators.

The attacks in Turkey come as the KRG is increasingly reliant on exports via Turkish pipelines as one of its main sources of revenue. Iraqi Kurdistan has faced a growing financial crisis since early 2014 when the federal government first suspended payments for Kurdish oil exports in protest against Erbil’s attempts to export oil independently of Baghdad. This has left the KRG unable to meet both local spending requirements and repay IOCs their share of oil revenues and other debts. Operators have now not received any payments from Erbil since December 2014, resulting in more than USD 4 bn debts owed to IOCs.

To resolve the dispute with the federal government, Erbil announced in November 2014 it had signed a landmark deal in which it would transfer 250,000 barrels of oil per day (b/d) to federal authorities for export, in exchange for the resumption of budget transfers. Despite initial optimism, however, both sides have failed to meet their obligations under that agreement. In response, the KRG began ramping up exports via Turkey in June this year, bypassing federal authorities. The increasing revenues generated from these exports meant Kurdish officials felt confident enough to announce in early August that they would be able to resume monthly repayments to IOCs from September.

The recent bombings of pipeline infrastructure in Turkey, however, have increased doubts over the KRG’s ability to deliver on these plans. A suspected PKK bombing of the Kirkuk-Ceyhan, also known as the Iraq-Turkey pipeline, inside Turkish territory forced the closure of the line from 29 July to 5 August. The attack came after a two-year ceasefire between the PKK and Ankara broke down in July, leading to an escalation in fighting. Turkish gas pipelines also came under attacks on 27 July and 4 August. The threat of sabotage is exacerbated by the need for repairs along the Kirkuk-Ceyhan pipeline, which was offline for 539 hours from January – June at an estimated cost of USD 509 mn worth of lost oil sales, according to the Iraq Oil Report news site. Crime is also an important consideration; on 17 August attempted bunkering on the pipeline forced its closure for several hours.

Export disruption to worsen economic problems

Further interruption of KRG oil exports will only worsen the financial challenges facing operators. Erbil reported that the 29 July – 5 August outage had resulted in USD 250 mn in lost revenues, and continued attacks on the line will disrupt IOCs’ access to export markets and the KRG’s ability to pay them for exports. According to Bloomberg in June, the KRG owed the region’s largest producer, DNO, around USD 700 mn for exports since 2009, while Reuters reported in March that Genel, another key investor, was owed USD 233 mn by the end of 2014.

Amid a worsening financial outlook, several firms, including Gulf Keystone and Genel, have sought to boost sales to the less profitable local Kurdish market, where payments are more reliable. This has faced some resistance from Erbil, however, which has called on IOCs to prioritise the more lucrative export market. Some IOCs have also indicated they may have to scale back investment in Kurdistan. Genel has reduced its capital expenditure for 2015 by 70 percent compared to the previous year. In August, the company warned that a decision on investment to raise output at Taq Taq and other fields in the KRG would be contingent upon resolution of the debt and repayment issue.

The security and reliability of Kurdish oil exports will be shaped by the evolving conflict with the PKK and its rivals in Turkey and Erbil. Ankara has announced plans to bolster security along pipelines, not only in response to militancy but increased theft by criminals tapping lines in Mardin and Sanliurfa provinces. However, despite additional sensors and patrols, the pipeline, which runs some 640 km through Turkish territory, will be difficult to secure entirely. The PKK has rejected calls from the KRG President Massoud Barzani to resume peace talks and withdraw from their self-governed territory in Iraqi Kurdistan’s Qandil mountains after Turkish air strikes against their positions reportedly killed civilians. Already-strained relations between Barzani’s ruling Kurdistan Democratic Party (KDP) and the PKK could deteriorate further, threatening internal stability in Iraqi Kurdistan and increasing the risk of localised unrest or violence, including the potential sabotage of oil infrastructure in KRG territory by more radical PKK elements.

The political and security environment for IOCs in Iraqi Kurdistan will remain complex, and assets in the region will remain vulnerable to operational and financial disruption. Kurdistan has said increased exports of oil outside Baghdad-controlled channels will improve its ability to repay IOCs, though this strategy has not proven successful in the past. Few details have been released about how it plans to achieve its latest initiative, while competing spending requirements for security in light of the threat from Islamic State will further undermine its ability to repay the debts. Erbil’s efforts to increase independent oil sales could also lead to the formal collapse of the 2014 agreement with Baghdad. This could see federal authorities resume legal and diplomatic efforts to block Kurdish oil sales. Lawsuits and pressure from Western governments deterred some buyers and complicated efforts to sell Kurdish crude being exported independent of federal authorities in 2014. Should Baghdad resume these tactics, it could increase uncertainty for existing operators and deter potential new investors, thus undermining Erbil’s financial position and its ability to repay IOCs.

 

To reigster for free access to the PGI Risk Portal, visit riskportal.pgitl.com

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