Oil pit: Iraqi Kurdistan retains debts to Russian companies

The authorities of Iraqi Kurdistan remain in debt to foreign energy companies, including Russian ones. The representative of the region in the Russian Federation, Danar Mustafa, told Izvestia about this. Lukoil, Gazprom Neft and Rosneft operate in the region. Currently, the Kurdish oil sector is coming under the control of federal legislation, which requires the renegotiation of contracts and may cast doubt on the profitability of projects. A decision on the future format of foreign investors' work in Kurdistan has not yet been made, and negotiations are ongoing. The debts are explained by the fact that the region has not received its full share from the federal budget for many years.

The Kurds have paid off part of the debt to the Russian Federation

Debts of Iraqi Kurdistan to Russian companies for oil supplies remain, although part of the debt was repaid after the visit of the special representative of the President of the Russian Federation for the Middle East and Africa, Deputy Minister of Foreign Affairs of Russia Mikhail Bogdanov to Kurdistan. But the full amount has not yet been paid, Danar Mustafa, acting representative of the Kurdistan-Iraq Region in the Russian Federation, told Izvestia.

— When Mr. Bogdanov went to Kurdistan, large debts were closed to Russian companies. Not the entire amount, but some of it was given away," he said.

Mikhail Bogdanov's visit to Kurdistan took place on February 6. According to a statement from the Ministry of Foreign Affairs, during conversations with senior Kurdish officials, joint projects in the fuel and energy sector were discussed, and the need to develop dialogue on the remaining controversial issues between the federal center in Baghdad and the Kurdish Autonomous Region was emphasized. Russian companies are widely represented in Iraqi Kurdistan, including Lukoil and Gazprom Neft, the leading Russian operators. Rosneft also operates.

At the end of March 2023, Turkey suspended oil imports from Iraqi Kurdistan. The decision was made after the International Court of Arbitration ordered Ankara to pay Baghdad $1.5 billion in compensation for purchases without its permission from 2014 to 2018. The pause in supplies had a negative impact on the work of Russian companies in the region. They carried out major oil and gas production projects there. Previously, exports from Iraqi Kurdistan to the Turkish port of Ceyhan passed through a pipeline operated by a Russian-Iraqi joint venture. Now revenues from this route have stopped, and companies are forced to sell oil locally, mainly to local consumers, and at a serious discount.

Against this background, the Association of Oil Producers in Kurdistan (an alliance of Western companies operating in the region) expressed concern about the lack of clear mechanisms for disbursing funds to companies. The organization emphasizes the need for guarantees of payment for both past and future oil supplies. According to the association's statement from March this year, the Kurdish authorities retained debts to companies in the amount of more than $1 billion owed for oil production in the period from September 2022 to March 2023.

— According to the budget law, all expenses for oil production and transportation in Kurdistan are considered the responsibility of the federal government. The center must pay these debts to the companies, as they represent the cost of oil production and transportation," Govand Sherwani, an Iraqi expert in the oil and gas sector, explained to Izvestia.

According to him, the delays in payments are explained by the fact that the region has not received its full share from the federal budget for many years. This, he stressed, was the result of political differences and an instrument of pressure from the center on Erbil. As a result, the Kurdistan Regional Government found itself in a difficult financial situation and was unable to fulfill some of its obligations to companies, especially to 11 major oil companies.

Disputes between Baghdad and Erbil

According to Danar Mustafa, oil supplies are still stopped, and despite regular meetings and promises to resolve the problem, agreements have not yet been reached. The issue now lies in the relationship between the Government of Iraq and the administration of Kurdistan. In particular, the parties cannot agree on the rules of interaction with foreign businesses, including the amount of payments.

— Now they cannot agree on how to work with foreign companies. They cannot agree on how much the authorities should pay, or how much the companies want. Previously, Kurdistan used to determine the amount on its own. Now Baghdad is doing it," Danar Mustafa explained.

Russian Ambassador to Iraq Elbrus Kutrashev previously explained in an interview with Izvestia that work in the Kurdish oil sector is returning under the wing of federal legislation, now it is necessary to renegotiate contracts with all operating foreign companies, so far they have been signed under production sharing agreements.

— It turned out that companies that invested huge amounts of money in the Kurdish oil sector at about $17 per barrel will receive $7-8 if they return it to federal legislation. Profits are sharply decreasing, and the question of profitability arises," the head of the Russian diplomatic mission noted earlier.

TrIZ Sector: oil companies ask for new tax benefits

Relief is needed for projects with hard-to-recover reserves, their share is more than 50% of the total Russian

Following the meeting of the intergovernmental commission, Russian Energy Minister Sergei Tsivilev said that all disagreements between the federal government of Iraq and Kurdistan have been resolved and Russian companies will resume work soon.

— As far as I know, no decision has been made yet. Companies, federal authorities and Kurdistan Region are still holding consultations. The Kurds have large debts to companies, including Russian ones. So the situation is complicated. The Kurds have reached an agreement with Baghdad. But no one has reached an agreement with the oil producers. And there are a lot of subtleties in the legal field, since it is necessary to re—sign contracts," a source familiar with the situation told Izvestia.

Govand Sherwani notes that the political differences between Baghdad and Erbil were caused by the delay or non-payment of the full financial share to the region within the agreed federal budget. As the expert told Izvestia, this share was previously estimated at 17%, and then in the last three years it was adjusted to 12.6%, but even this part was not transferred in full, in fact, less than 8% of the total budget goes to the Kurds for oil.