Oil & Gas

Oil companies shun Iraq-Turkey Pipeline over payment

October 23, 2023

The ITP is essential for Kurdish crude exports via Turkey, and for the provision of sour crude to Mediterranean refineries — Quarterly earnings from its Middle East and India segment grew 44 percent to $91 million in the quarter

Pipeline closed after February earthquake
Now reopened but companies refuse to use it
$1bn of arrears in question

International oil companies are refusing to sign up to using a newly reopened pipeline transporting oil from northern Iraq to the Mediterranean coast via Turkey over commercial disputes with Baghdad and Arbil.

Alpaslan Bayraktar, the Turkish energy minister, told the Adipec conference in Abu Dhabi earlier this month that logistical issues over the Iraq-Turkey Pipeline (ITP) have now been solved, and Turkey has officially declared the pipe operational.

The ITP has been closed since an earthquake hit southern Turkey in February.

Despite this, the Association of the Petroleum Industry of Kurdistan (Apikur) said its members are not signing up to start using the ITP again, as they are owed nearly $1 billion in overdue and unpaid arrears.

“Apikur members expect the governments of Iraq and Kurdistan Region to recognise and honor our oil production sharing contracts fully, and they require written agreements for future payments prior to resumption of full oil production operations,” said Apikur spokesman Myles B Caggins III.

Apikur’s members include UK-headquartered Genel Energy, London-listed Gulf Keystone Petroleum, Dallas-headquartered HKN Energy, Norway’s DNO and Canada’s ShaMaran Petroleum.

ITP has also been the focus of complex arbitration issues between Turkey and Iraq. Ankara has suspended exports in the wake of the ruling from the International Chamber of Commerce, which ordered Turkey to pay Iraq $1.5 billion in damages for unauthorised exports. Turkey is trying to reduce the fine.

“We do not see any swift resolution to the ongoing political and financial issue,” said Iman Nasseri, managing director for the Middle East at Fact Global Energy, a consultancy for the global oil, gas and natural gas liquids markets.

Agreement needed

Fact said in a note that the two parties’ current pipeline agreement is set to expire in 2026, and Turkey wants the Baghdad and Arbil administrations to hold a common position before negotiating any extension.

Caggins said Apikur members are responsible for around half of the oil supplied to the Kurdistan Regional Government (KRG), based in Arbil, and have invested more than $10 billion exploring and developing oil production in the region.

Apikur members said in July they have cut spending this year by around $400 million as they want Baghdad to account for their previous investments and adhere to existing contractual terms. Under the production sharing contract model with Iraq, foreign companies traditionally take all the financial risk.

Under the recently passed Iraqi budget for 2023-2025, the KRG is only eligible for “an ambiguous average cost of production” based upon undefined Iraqi fields, in addition to the government’s 12.67 percent of the budget, according to Apikur.

The compensation for production costs offered by the Baghdad oil ministry to the KRG’s upstream operators, rumored to be $6 per barrel, is insufficient, as the cost of oil production in the Kurdistan Region is higher than in southern Iraq, international oil companies say.

The KRG has countered by offering $31 per barrel, according to reports.

Vital route

The ITP has been an essential source of revenue for the semi-autonomous Kurdistan region and is a major source of sour crude for refineries in the Mediterranean market.

At its peak, about 400,000 barrels per day (bpd) were coming from KRG and another 75,000 bpd from Kirkuk fields by Iraq’s State Oil Marketing company SOMO.

Last year, oil exports amounted to at least 80 percent of KRG revenues.

“To reach this level, KRG will have to pay the companies what they owe,” noted Mehmet Ogutçu, former Turkish diplomat and chairman of The London Energy Club, a forum composed of global board-level industry executives, including from the Middle East.

The closure of the ITP meant the government of Iraq, KRG, and Apikur members lost $7 billion of export revenues, Caggins said.

“KRG is unable even to pay their civil service salaries or Peshmergas [Kurdish standing military],” Ogutçu added.

The closure impacted the livelihoods of the Iraqi people and local communities, who have relied on the economic impact of IOCs for many years, Caggins pointed out: “The industry employs thousands of Iraqis – nearly 80 percent of our workforce.”

Lack of urgency

Bringing back some 500,000 bpd to the global market would release tension in tight global energy markets, amid the Israel-Hamas conflict, sanctions on Russia and Opec+ decisions to reduce output.

However, the government in Baghdad may not see reopening the ITP as a matter or urgency as production from the fields it controls already meets, and even exceeds, Opec+ quotas through its southern seaborne export routes, as well as by trucking routes to Jordan, the FGE concluded.