KRG Exporting But Fiscal Independence Distant

BMI View: Iraq's semi-autonomous Kurdistan region is close to completing its first sale of oil piped to the Turkish port of Ceyhan, with the SCF Altai tanker expected to unload in Israel. Despite this development, the Iraqi Kurdistan region will struggle to replace the reduced budget revenues received from Baghdad, and will remain dependent on the government for financial stability for the foreseeable future.

The first shipment of Iraqi Kurdistan oil is reportedly due to be offloaded at Ashkelon, Israel. While oil from Kurdistan has been moving across the border into Turkey by truck since 2013, this shipment marks a crucial step in the Kurdistan Regional Government's (KRG) ability to profit from the far larger pipeline export route. A pipeline from the Taq Taq field to Fishkabur on the border with Turkey was completed in late 2013, connecting a capacity of around 200,000 barrels per day (b/d) with the pipeline to Ceyhan. With insurgency in north-western Iraq keeping the Kirkuk-Ceyhan pipeline offline since March 2 2014 ( see 'Blocked Northern Route Limiting Exports', April 11), the KRG has been able to move around 120,000b/d of oil to the Turkish Port.

To date, two tankers have been loaded in Ceyhan with oil from Iraqi Kurdistan. The first tanker to be loaded - United Leadership - remains moored offshore Morocco after being refused entry to the port at Mohammedia. The second tanker - United Emblem - reportedly made a ship-to-ship cargo transfer with the SCF Altai, which is now heading towards Ashkelon. A third tanker is due to be loaded at Ceyhan, while a fourth and fifth have also reportedly been lined up for loadings before the end of the month.

BMI View: Iraq's semi-autonomous Kurdistan region is close to completing its first sale of oil piped to the Turkish port of Ceyhan, with the SCF Altai tanker expected to unload in Israel. Despite this development, the Iraqi Kurdistan region will struggle to replace the reduced budget revenues received from Baghdad, and will remain dependent on the government for financial stability for the foreseeable future.

The first shipment of Iraqi Kurdistan oil is reportedly due to be offloaded at Ashkelon, Israel. While oil from Kurdistan has been moving across the border into Turkey by truck since 2013, this shipment marks a crucial step in the Kurdistan Regional Government's (KRG) ability to profit from the far larger pipeline export route. A pipeline from the Taq Taq field to Fishkabur on the border with Turkey was completed in late 2013, connecting a capacity of around 200,000 barrels per day (b/d) with the pipeline to Ceyhan. With insurgency in north-western Iraq keeping the Kirkuk-Ceyhan pipeline offline since March 2 2014 ( see 'Blocked Northern Route Limiting Exports', April 11), the KRG has been able to move around 120,000b/d of oil to the Turkish Port.

To date, two tankers have been loaded in Ceyhan with oil from Iraqi Kurdistan. The first tanker to be loaded - United Leadership - remains moored offshore Morocco after being refused entry to the port at Mohammedia. The second tanker - United Emblem - reportedly made a ship-to-ship cargo transfer with the SCF Altai, which is now heading towards Ashkelon. A third tanker is due to be loaded at Ceyhan, while a fourth and fifth have also reportedly been lined up for loadings before the end of the month.

Challenge To Find Oil Markets

We previously noted that the KRG could face trouble selling oil produced in the region, with Baghdad threatening legal action against any buyer ( see 'Oil Revenue Sharing Issue To Endure', June 2). Baghdad also holds crude oil export contracts with a wide range of European, North American and Asia buyers that could be jeopardised if a country was to purchase from Kurdistan. Italy has been vocal in its opposition to importing oil from Iraqi Kurdistan after Reuters reported that oil trucked to Mersin, Turkey was imported at Trieste and sent to a refinery in Germany.

Israel, however, does not have a crude oil import agreement with Iraq, making the country less vulnerable to pressure from the Iraqi government. Iraq also participates in the boycott of Israel, having no economic or political ties with the country.

Even though Israel may be able to import oil from the KRG, other oil markets could be more difficult to secure. It is unlikely that major importers of oil will be willing to accept Iraqi Kurdistan deliveries unless there is an official agreement with the central government. After all Iraq's State Oil Marketing Organisation (SOMO) is internationally recognised, Kurdistan Oil Marketing Organisation (KOMO) is not.

KRG Still Needs Iraq

The KRG has made a concerted push to export oil in 2014, having claimed it has received fewer revenues from the central government than it is entitled to. Using 2013 figures, as the 2014 budget is yet to be passed, and based on a report by political party Change Movement (Gorran), the KRG is expected to receive far less from the central government in 2014 over 2013. The Iraqi government has blamed this decrease on the KRG not meeting its 400,000b/d production target.

Revenues from the central budget are crucial to the Kurdistan region, particularly as around one in five people are thought to be employed by the local government. There have been numerous reports that government officials have missed wage payments over the last six months.

Analysis from Bank of America Merrill Lynch Global Research calculates the KRG will require exports of 20 1mn barrel capacity tankers every month to supplement reduced income from the central government. This would require production and pipeline deliveries of around 660,000b/d to Ceyhan. The KRG is targeting output of 400,000b/d by the end of 2014.

While the KRG may be able to pump oil close to this level, we are sceptical as to whether the region will be able to find sufficient long-term customers to regularly sustain revenues. Furthermore, it is likely that oil from the region will have to be sold at a significant discount to attract buyers meaning more oil will have to be sold. The KRG also offered more attractive contracts to companies developing oil in the region, and will have to pay back a larger proportion of the income.

If the KRG is successful in ramping up exports, Baghdad may choose to further squeeze the allocation from the budget to put greater fiscal pressure on the region. This could further hurt the KRG as we do not believe it will be able to become fiscally independent of Iraq in the foreseeable future.

Merrill Lynch calculates fiscal independence from Iraq, or exports to cover the approximate 2014 allocated budget, would require 80 tanker loads a month. This would equate to oil production and delivery of over 2.6mn b/d. The KRG's self-imposed production target is 2mn b/d by 2020, highlighting the region will be dependent on Iraq over the long-term.

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This article is tagged to:
Sector: Country Risk, Oil & Gas
Geography: Iraq, Israel
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