Iraqi Kurd oil deals fuelled by European corporation

Iraqi Kurd oil deals fuelled by European corporation
Trafigura, a major Swiss corporation, played a pivotal role in oil deals that Baghdad considers illegal, according to reports.
4 min read
04 December, 2014
Kurdish fighters protect the arrival of parts to develop their oil industry (Getty)
A Swiss company has been instrumental in getting oil from the semi-autonomous Kurdish region of northern Iraq onto international markets, according to the Reuters news agency.

The Baghdad government considered all exports from the region illegal, until a landmark deal was brokered with the Kurdistan Regional Government (KRG) earlier in the week.

Reuters cites a number of sources confirming that the commodities trading firm Trafigura became involved in the oil sales after the Kurds struggled to secure export deals earlier in the year.

Neither the KRG nor Trafigura responded to comment on the claims.
     This was legally disputed oil and the federal government had the upper hand.
- Luay al Khateeb, Iraq Energy Institute

"Since the Kurds started loading tankers there has been gathering momentum to the trade but it has never been transparent as to where and how the oil was being exported," explained Richard Mallinson, chief policy analyst at Energy Aspects, a London-based consultancy.

The final destination of the Kurdish oil exports was obfuscated with ship to ship transfers and temporary storage arrangements. Nonetheless, some of the tankers are known to have travelled to Israel, Croatia and the far east.

"There is lots of evidence of shipments to Israel but for obvious political reasons this was never acknowledged," said Mallison.   

Long-running dispute

Since the US-led invasion of Iraq a decade ago, the KRG has been developing its oil industry in defiance of the central government in Baghdad.

The Kurds have long maintained it is their constitutional right to sell oil as long as they share the revenue with the federal government. The Baghdad authorities insisted that only they could export the oil and threatened to sue anyone buying direct from the Kurds. 

"The problem for the Kurds was never about finding a market. It was that this was legally disputed oil and the federal government had the upper hand," said Luay al-Khateeb, founder and director of the Iraq Energy Institute.

Baghdad could apply both diplomatic and commercial pressure on potential buyers.

Many industry players were disuaded from engaging with the Kurds as they stood to lose more from disrupting business with Baghdad then there was to gain from trading with the Kurds. 

Trafigura, however, had already fallen foul of the federal authorities back in 2012 for its previous dealings with Erbil.

"If a company was already blacklisted then Baghdad wouldn't have much leverage over their decisions whether or not to deal with the KRG. The risk-reward calculation would be completely different," Energy Aspects' Mallison told al-Araby.

Reuters reports that Trafigura signed a deal with the KRG earlier in the year after a series of meetings in London and Erbil. Since then, more than 30 tankers have found buyers, all but one of which were brokered by Trafigura.

Feeling the squeeze

After the Kurds started selling their oil independently, Iraq froze its budget payments to the KRG. Kurdish government workers and Peshmerga fighters went unpaid for months.

From January to the end of October, 34.5 million barrels were exported from the regions under Kurdish control raising $2.87 billion in cash and $770 million in kind for the KRG.
     The rapprochement between Ankara and Baghdad was pivotal to the Baghdad-Erbil deal.
- Luay al-Khateeb, Iraq Energy Institute

This means the covert and circuitous manner in which they made their sales resulted in them selling at considerably below the going market rate.   

Tuesday's deal ends years of deadlock over how to manage the oil resources in the Kurdish-controlled north.  

The Baghdad government has not said whether or not it will take action over those involved in selling Kurdish oil before the pact. 

Iraq's oil minister Adel Abdel Mehdi declined to comment on the question at a press conference, saying he did not want to spoil the positive relations between the Kurds and the
new Iraqi government which took power three months ago.

"The ministry of oil is keeping quiet because the government is hoping the recent deal will pave the way for agreement on the federal budget,” reasoned Khattib.

The timing of this week's agreement is both political and economic.

There is a need to show a degree of unity amid the turmoil wracking the country now that some of the most obstinate and divisive figures have been removed from the negotiations.

Meanwhile, the recent nosedive of global oil prices has hit both Erbil and Baghdad. Revenues from free flowing oil is essential to both administrations.

Under the deal, the Kurds are to turn over 550,000 barrels of oil a day to central authorities - representing about a fifth of Iraq's current exports.

In exchange, Erbil will receive 17 percent of the national budget. An additional $1 billion will go to pay and equip the Peshmerga, which are at the forefront of the battle in the north of Iraq against the Islamic State group (IS, formerly known as ISIS).

The accord was also reportedly the product of outside pressure. The US is throwing its weight behind the new administration of Haider al-Abadi. Securing the deal with the Kurds is a milestone in trying to rebuild a semblence of unity in the government.

Turkey has also been a key player in the Kurdish north, investing heavily in the region, and is keen to see the oil industry develop there.

The rapprochement between Ankara and Baghdad was pivotal to the Baghdad-Erbil deal," said the Iraq Energy Institute's Luay al-Khateeb.

Turkey will benefit from commissions, transit fees and quite likely discount prices from oil flowing out of the Kurdish north, say analysts.