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Iran Jumps Into Crucial KRG-Iraq Oil Negotiations

Simon Watkins

Iran has entered the ongoing negotiations over the on-off budget disbursements-for-oil deal between the Federal Government of Iraq (FGI) in Baghdad and the government of the semi-autonomous region of Kurdistan (KRG) in Erbil, OilPrice.com can exclusively reveal. Along with the build-out of the Common Seawater Supply Project (CSSP), Iraq’s ability to achieve its new oil production targets of 6.2 million barrels per day (bpd) by end-2020 and 9 million bpd by end-2023 is dependent on the inclusion of oil production in the Kurdistan Region of Iraq (KRI) in the north.

The longstanding framework for this was the deal struck between the two sides in November 2014 in which the KRG agreed to export up to 550,000 bpd of oil from its own fields and Kirkuk via Baghdad’s State Oil Marketing Organization (SOMO). In return, Baghdad would send 17 per cent of the federal budget after sovereign expenses per month in budget payments to the KRG. This agreement was superseded by another in October 2018 that required Baghdad to transfer sufficient funds from the budget to pay the salaries of KRG employees in exchange for the KRG handing over the export of at least 250,000 bpd of crude oil to SOMO. Since the beginning of this year, the FGI has purportedly delivered on its side but the KRG has not.

Previously, Iran played a pivotal role on the side of Baghdad in ensuring that the KRG at least partly toed the unity line. The most notable recent example of this was just after the KRG’s independence vote in September 2017 that saw over 93 per cent of the 3.3 million eligible ballots across the voting areas of the disputed region of Kirkuk and Makhmour in the north, Sinjar in the northwest, and Khanaqin in the east vote for independence from the rest of Iraq. Although the vote was not legally binding, the result understandably led to increased pressure from the KRG on Baghdad for a better deal on the budget for oil deal and increasing Kurdish unrest across the region. In response to a direct invitation from the then-Iraq prime minister, Haider al-Abadi – who had called the vote “unconstitutional” – Iran’s top general, Major General Qassem Soleimani, had moved Iranian troops into key choke points in and around the Kirkuk oil field area.

He, personally, had also “had a serious chat with [then-KRG President] Massoud Barzani about his future,” a senior source who works very closely with Iran’s Petroleum Ministry told OilPrice.com. The contents of this ‘chat’ included allegedly hard evidence of long-running bribery and corruption at the cost of his Kurdish people. In essence, Soleimani and Iran’s senior intelligence personnel said, Masoud Barzani and his son, Masrour (then de facto head of the KRG’s intelligence services and now prime minister) had stolen 28 per cent of all of the KRG’s entire oil export stock.

The resulting funds had then allegedly been ultimately deposited in an account in a bank in Northern Cyprus under the name of Masrour’s then-mistress, who, Iran said, was connected to Russia’s SVR [the Sluzhba vneshney razvedki foreign intelligence agency of Russia]. Shortly after this chat, Russian oil behemoth, Rosneft, signed a deal that basically gave it control over the KRI’s oil industry and Masoud Barzani announced that he would be stepping down as President and leaving frontline politics altogether.

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Now, though, Iran’s view has shifted to one in which it is deemed necessary for the time being to be more helpful towards the KRG and, in so doing, put pressure on the FGI in Baghdad. “In recent weeks, Baghdad has become a lot more open to the idea – at least overtly – of increased U.S. involvement in Iraq,” said the Iran source. “It may just be purely for show, of course, designed to get Exxon[Mobil] back to its previous commitment to build-out the [CSSP] and to get more money out of the U.S. for various development projects but Iran can’t afford to take any chances with its neighbour falling back into the U.S. sphere of influence, so it is using the KRG problem as leverage to keep Baghdad on side,” he added.

Iran’s other motive for this volte-face in siding with the KRG is to keep its own very sizable and vocal Kurdish population (around 9 per cent of the total) away from any broader-based move to support independence for the entire 30 million or so Kurdish population scattered across Iraq, Iran, Turkey, and Syria.

“The 2017 vote in the KRG stoked the already separatist-minded Kurds dispersed across the borders towards finally gaining their own independent state, as would have originally occurred back in 1920 with the referendum promised in the ‘Treaty of Sèvres’,” said the Iran source. “This was again promised by the U.S. as the reward for Kurdistan’s Peshmerga army taking on the boots-on-the-ground fight with Islamic State when it was clear that the voters in the U.S., U.K., and the rest of Europe had no interest in sending large numbers of their own soldiers to the Middle East again,” he added.

Turkey’s President, Recep Tayyip Erdo?an, had also viewed the KRG referendum result with a similar degree of horror at the time - around 18% of its population being Kurds in the east of the country – and threatened to invade the northern part of Iraq in which Kurdistan is situated.

As it stands, the deal that the KRG does not accept looks like a very bad one from Kurdistan’s perspective. Rather than the previous 17 per cent share of the FGI’s budget in exchange for a full quota of oil coming from the KRG, the offer from Baghdad was for just 12.67 per cent. Baghdad said this figure was more in line with the percentage population of the KRG area in Iraq’s as a whole.

In response, OilPrice.com understands from various sources in Iraqi Kurdistan, the KRG has increased the volumes of oil that it is shipping and selling illegally as far as Baghdad is concerned, although the actual legal position is debatable. According to the KRG, it has authority under Articles 112 and 115 of the Iraq Constitution to man­age oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 - the year that the Constitution was adopted by referendum. Baghdad, however, believes that under Article 111 of the Constitution, oil and gas are under the ownership of all the people of Iraq in all the regions and governorates.

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As such, privately, Baghdad has told the KRG that it may start to bring legal action against the KRG’s independent sales of oil again, much of which is sent to China and Israel, and to oil-needy Eastern European states, such as Croatia, Bosnia and Herzegovina, and Kosovo, among others, OilPrice.com understands. The last shipment of oil to leave the KRG was going East (to China, specifically), and was sold for US$69 million, OilPrice.com was told last week. Such actions are par for the course with Baghdad, particularly at times when it is looking to make a new deal with the KRG on budget payments for oil.

Back on May 23, 2014, just before the original deal was reached, SOMO filed an arbitration claim with the International Chamber of Commerce claiming: “By transporting and storing crude oil from Kurdistan, and by loading that crude oil onto a tanker in Ceyhan, all without the authorisation of the Iraqi Ministry of Oil, Turkey and [Turkey’s state owned pipeline operator] BOTAS have breached their obligations under the Iraq-Turkey Pipeline Agreement [ITP].” Baghdad also initiated proceedings against the oil tanker United Kalavrvata in respect of its Kurdish oil cargo on July 28, 2014 in the US District Court for the Southern District of Texas, whereupon an order was initially made in favour of SOMO and U.S. Marshalls were instructed to take possession of the cargo.

Under the advice of Iran, the KRG is now offering as a starting point in the new negotiations with the FGI in Baghdad that the Kurdistan area receives 40% of the revenues for the oil that it sends to the south. Also, the KRG is suggesting an additional sliding scale of further payments to compensate it for the security for the fields that will be provided by the Kurdish Peshmerga. “This would bring the total up to between 55 and 58 per cent for the KRG,” said the Iran source. “Iran has also offered to put some of its own security forces into the KRG area, along with supplying the Peshmerga with 400 Iranian artillery pieces,” he concluded.

By Simon Watkins for Oilprice.com

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