Iraq’s political travails are by no means over, Baghdad is now the tactical battlefield to have Mustafa al-Kadhimi, the head of the country’s National intelligence service, elected as the new prime minister after the previous two candidates failed to garner sufficient approval in the Parliament. Fighting coronavirus and low oil prices at the same time, the management of Iraq’s slew of problems has befallen to Oil Minister Thamir Ghadhban who has become the de facto head of government after nominal Prime Minister Adil Abdul-Mahdi went into self-imposed absence. Against this background, the federal Iraqi government has stopped all payments towards the Kurdistani Regional Government (KRG) last week. To put these numbers in context, the KRG needs around 900 million every month to ensure essential government functioning, of this, some 380 million came from the federal government in Baghdad which has pledged to take regional government officials and Peshmerga on its payroll. Even before COVID-19 struck the world and before oil prices plummeted by 60% compared to February 2020, Erbil had persistent issues with paying the salaries of people on its payroll – for instance, the money that public sector workers received this April were in fact arrears for December 2019.

The announcement of the caretaking federal government has triggered a new flurry of political activity – for the first time since January, a delegation of Kurdish officials (headed by the Kurdish Finance Minister Sheikh Janab) has travelled to Baghdad with the aim of “strengthening Erbil-Baghdad” ties. KRG has had a lot of political capital invested into not falling into the pitfall of a leaking budget. Bleeding from its heroic fight against the Islamic State, the KRG has maintained a policy of mandated austerity measures (among others the so-called “salary-saving scheme”) for 3 consecutive years since 2016 and it was only in March 2019 that the regional government could finally announce a new era, when salaries are paid in full and (supposedly) on time.

Yet what does all this mean for the oil production of Iraqi Kurdistan? First and foremost, KRG officials have explicitly stated that Erbil would join the OPEC+ agreement and that Iraq’s 23% production cut would be proportionately mirrored in Kurdish crude output. Given that October 2018 production figures are taken as the baseline for OPEC+ production curtailments, Iraq in total would need to cut 1.1mbpd in May-June 2020. This would presuppose a 0.2-0.3mbpd output cut in the next 2 months, a painful commitment for a regional government that has tacitly suggested to oil companies to postpone overdue crude marketing payments by at least 9 months, i.e. already into early 2021.

Interestingly, the crude volume to be cut by KRG is roughly equivalent with the 250kbpd that Kurdistan ought to be transferring to the federal government in exchange for Baghdad paying the regional government’s payroll. The Kurdish crude transfers are concurrently becoming an increasingly hot topic in the Iraqi federal Parliament as a group of representatives has filed an official complaint to Finance Minister Fuad Hussein, who happens to be an ethnic Kurd and has been generally seen as a dovish figure who could usher in a new era of more harmonious coexistence between Baghdad and Erbil, accusing the federal ministry of misspending $5 billion in 2019 of public money on subsidizing KRG which did not even transfer the promised 250kbpd.

Against the background of low oil prices and major discrepancies with the federal governments in Baghdad, Iraqi Kurdistan has suffered another blow with the US Treasury sanctioning the Switzerland-based Rosneft Trading (RTSA), one of the prime shippers of Kurdish crude. Thanks to a 2017 pre-financing deal with the Kurdish Regional Government, RTSA has managed to add Kirkuk into its portfolio of crude exports, however has become tangibly less visible on the market after the US sanctions. Rosneft has sold all its Venezuelan assets – the alleged reason why it found itself on the OFAC list – and is now expecting the US authorities to keep their promise of lifting the sanctions once RTSA quits Venezuela. Rosneft might have served as a way out in this case, another pre-financing deal is by no means impossible, yet this could happen only after the US sanctions issue is settled.

Were the Kurdish Regional Government to find interested partners, a pre-financing deal with world-class trading houses might be the solution to its growing woes. Until then, Erbil has to rely on the political instruments it has available, like calling for the UN to mediate between the Kurds and the Baghdad government, so far to no avail. With health workers starting a strike on April 27 and political protests remaining an enticing prospect for the incensed populace, the KRG leadership ought to safeguard the oil and gas infrastructure from any potential damage to the breakaway region’s infrastructure, as any attacks would only exacerbate the financial agony.

Oilprice.com

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