Can the Iraq-Turkey pipeline logjam be cleared?

Recent indications from the Turkish government that oil may once more begin to flow along the Iraq-Turkey Pipeline after a months-long shutdown are promising. But for that to happen, a range of political and commercial issues must be resolved. So, what’s the situation and what are the obstacles that need to be overcome?

What’s the background to the pipeline’s closure?

There is a long history of conflict over the control of oil production, exports and revenues between the Iraqi national authorities and the Kurdistan Regional Government, which runs this autonomous region in northern Iraq. For the past decade, the Kirkuk-Ceyhan Oil Pipeline, also known simply as the Iraq-Turkey Pipeline, has been central to this dispute. To understand why, a little history is needed.

Agreement between Turkey and Iraq to build a pipeline from the Kirkuk fields to the Mediterranean port of Ceyhan in southern Turkey was reached in 1973. The pipeline consists of two pipes of 40-inch and 46-inch diameter, with the first pipeline commissioned in 1977 and the second a decade later. The 40-inch pipeline was later damaged and fell into disuse.

Subsequently, in 2010, an amendment to the original agreement was signed by both parties stipulating that the remaining pipeline would be used exclusively for the transport, loading and storage of Iraqi crude oil. At the same time, because the second pipeline was not operational, the agreement temporarily suspended guarantees that Iraq would send a minimum quantity of oil through the pipeline network.

Why was the pipeline shut down?

In 2013, the Kurdistan Regional Government built a spur line to the abandoned 40-inch pipeline and started exporting oil through it from the Khurmala Dome, Tawke and Shaikan fields within its control. The Federal Government of Iraq objected, arguing that Kurdistan had no right to export its oil through Turkey and that this broke the terms of the original agreement. This marked the start of a nine-year legal battle between Baghdad and Ankara.

In March 2023, the International Court of Arbitration in Paris ruled in favour of the Federal Government of Iraq. Turkey acknowledged the ruling and immediately shut down the pipeline. As a result, local storage in Kurdistan rapidly became full, and operators were forced to wind down production as the local market became saturated.

How did Kurdistan and Iraq react?

The huge drop in oil production put the Kurdistan Regional Government’s finances under unprecedented pressure. By April, it had agreed for oil from the fields under its control to be sold by Iraq’s State Organisation for Marketing of Oil (SOMO), with the proceeds deposited in a special bank account controlled by the Kurds and visible to the Iraqi federal government.

However, in June, a new law drastically reduced Kurdistan’s control over oil sales revenue and required Erbil to hand over 400,000 barrels per day (b/d) of crude to Baghdad to qualify for a share of the federal budget. The Kurdistan Regional Government reluctantly complied, albeit only partially. Initially it handed over around 50,000 b/d, which by August had increased to 200,000 b/d. In return, the Iraqi government approved limited three-month stopgap funding to the Kurdistan region of US$538 million. This was enough to pay civil servant salaries but left the core issues unresolved.

What’s the situation now?

Recent discussions between SOMO, the Kurdistan Regional Government and the Turkish state pipeline company BOTAŞ have made some progress towards reopening the pipeline. Issues addressed include pipeline fees, oil export quality and quantity, minimum throughputs, and re-export cargoes. In theory, oil can now begin to flow along the pipeline once again. But for that to happen, a number of political and commercial issues need to be resolved.

Ideally, SOMO must sign offtake agreements with oil traders that previously purchased the Kurdistan crude (although even without these in place, SOMO could still resume exports and sell spot cargoes). Secondly, the legal issues between Ankara and Baghdad must be settled and the future terms and tariffs for the pipeline agreed. And thirdly, agreement must be reached on how the Iraqi Federal Government will pay the Kurdistan Regional Government revenues from the oil exported via the pipeline.

How does this affect international oil companies in Kurdistan?

Most international oil companies (IOCs) last received a payment from the Kurdistan Regional Government in March 2023, for oil produced in September 2022. Even if the pipeline reopens, the new Iraqi law stipulates that IOCs previously operating under production sharing contracts in Kurdistan should be paid just US$6 per barrel going forward, which the Iraqi government states is the average cost of oil produced in Federal Iraq. What’s more, there are no provisions for IOCs to enjoy a share of profits, or for unpaid invoices to be settled.

The Association of the Petroleum Industry of Kurdistan (APIKUR) represents DNO, Genel Energy, Gulf Keystone Petroleum, Hunt Oil, HKN Energy and ShaMaran Petroleum in the region. It has called on both Baghdad and the Kurdistan Regional Government to honour its members’ contractual rights and provide clarity on how they will be paid, both the arrears of nearly US$1 billion for oil already sold and delivered and for future exports.  APIKUR also estimates US$7 billion were lost in export revenue since the pipeline closure in March 2023.

What happens next?

According to official sources, Turkey has lifted the force majeure invoked over technical issues and reopened the pipeline. It can therefore begin charging the Iraqi government for pipeline tariffs under the terms of the 2010 Amendment. Tariffs would total around US$25 million per month, creating a financial incentive for Baghdad to settle competing compensation claims with Turkey, resolve budget and revenue sharing issues with the Kurdistan Regional Government and restart oil exports. APIKUR estimates the Federal Government of Iraq is incurring over US$1 million per day in financial penalties for not meeting its obligations under the ITP agreement.  

We estimate the pipeline could come back onstream at almost half its January 2023 throughput of 500,000 b/d, with 130,000 b/d coming from the Khurmala Dome (operated by local company KAR Group) and another 100,000 b/d from fields operated by the North Oil Company in northern Iraq. However, IOCs will likely hold back volumes until they see clearer payment guarantees.

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