BMI View: The contentious politics of oil in Iraq are continuing to fuel a downward spiral in Baghdad ' s relations hip with both the Kurdistan Regional Government (KRG) and Turkey , and are having knock-on effects on our long-term oil production outlook . Most recently, and i n addition to having provided ultimatums to major international oil companies (IOCs) such as ExxonMobil and Gazprom , the Iraqi federal government has also complicated its working relationship with Turkish state-owned company TPAO on the back of its deteriorating relationship with Ankara. Indeed, the Iraqi Cabinet ' s decision to expel TPAO from exploration Block 9 is symptomatic of the problems that could g row worse over time.
The Iraqi government ' s decision to award state-owned company TPAO 's interest in exploration Block 9 in Basra Province to Kuwait Energy underscores the ongoing disintegration of Baghdad's relationships with both the semi-autonomous Kurdistan Regional Government (KRG) and Turkey, its neighbour and critical trading partner. TPAO was recently expelled from the block on the back of growing ties between Ankara and the KRG, particularly as the two continue to increase the amount of Iraqi Kurdish crude oil exported directly via Turkey without the expressed approval of - or requisite payment to - the Iraqi federal government.
Growing Turkish-Kurdish Energy Trade
Reports that production from Genel Energy ' s Taq Taq oilfield in Kurdistan has been reaching markets via trucks in recent days has exacerbated tensions between Baghdad and the KRG and Ankara. This is in addition to the ongoing export of other regional production via trucks, as well as approximately 15,000 barrels per day (b/d) of condensate coming from the Khor Mor gas field. An ongoing payment dispute has already resulted in a disruption to exports being transported through the Baghdad-controlled Iraq-Turkey pipeline.
I n response to the suspen sion of exports, the KRG announced in May 2012 that it was in discussions with Ankara over the construction of a new 1mn b/d pipeline linking Kurdish oil fields with Ceyhan, an international export hub on Turkey's Mediterranean coast. KRG natural resources minister Ashti Hawrami said the pipeline could be co mpleted as early as August 2013. Such collaboration is a clear blow to Baghdad ' s authority and control over increasingly large Kurdish production volumes, signalling both a further entrenchment of the conflict as well as the realisation among the Turks and Kurds that deepening their own bilateral energy relationship s is mutually advantageous, irrespective of the political conflict s such moves perpetuate.
Politics Are Poisoning The Well
We have long been highlighting the deteriorating relationship between Baghdad and the KRG, as well as the conflict ' s knock-on effects on Baghdad ' s relationships with key foreign oil companies, including ExxonMobil , Total , Statoil , Chevron , and most recently Gazprom Neft ( see ' Gazprom Latest To Face North-South Choice, ' November 12, 2012 ). E ach of these companies has chosen to quit some of Iraq ' s most lucrative fields in favour of developing the below-ground potential in the KRG when given an ultimatum by Baghdad.
A t the heart of the conflict between Baghdad and Erbil , the capital of the KRG, are fundamental disagreement s over the jurisdiction of Iraqi federal and regional authorities, the role and rights of foreign oil companies, and the terms of a national hydrocarbons law, which has been elusive since the Iraqi Council of Representatives failed to approve one in 2007 ( see 'Progress Made In Baghdad-Erbil Dispute, But Fundamental Issues Remain Unsolved', October 2 2012 ).
However this politics-driven row between Baghdad and Erbil is having a measurable impact on the country's long-term production forecasts. Indeed, Baghdad is sustaining the negative dynamics that are encouraging major IOCs to pull out of southern Iraq, just as some remaining producers, including BP, Royal Dutch Shell and Lukoil, are announcing lower-than-expected peak production targets for some of their major fields in the country. For its part, the KRG has been emboldened by recent developments, and increasingly believes it can benefit from a more independent energy policy, making an agreement increasingly less likely in the short-term ( see 'Export Halt Highlights Persistent Tensions,' January 7 2013).
As a result of these interconnected dynamics, we have reduced our expectations for oil output in 2022 from 8mn b/d to 7.6mn b/d, as above ground issues pose a threat to ambitious production targets. We remain relatively bullish, given the country's substantial hydrocarbons potential; however, growth will remain dependent upon the fiscal terms, political developments, and infrastructure investment that will either support or constrain oil sector growth.
|Growth Continues, But Iraq Fails To Realise Potential|
|Iraqi Oil Production & % Change Year-on-Year (000b/d)|