The restart of a key Iraqi oil pipeline that’s been shut for over a year is being held up by disagreements over costs, the nation’s prime minister said, a setback that’s inadvertently helping the country get closer to its OPEC production limit.
Baghdad hasn’t been able to agree on how much to pay international oil companies operating in the country’s north for their production. The federal administration’s budget allows it to pay $8 for every barrel of oil produced, while contracts with the Kurdistan Regional Government give the firms $26, Iraqi Prime Minister Mohammed Shia Al-Sudani said. The impasse has hit output from the region and delayed the pipeline’s resumption.
“We have to look at how to balance those issues,” he said in an interview with Bloomberg TV in Baghdad on Sunday. “Do we look at the budget to see what we can do or do we try and look at the prices?”
The closure of the pipeline that can transport almost half a million barrels a day of oil from Kurdistan to the Turkish coast is resulting in billions of dollars of lost revenue. Yet restarting it would pose a dilemma for Iraq, which has failed to adhere to its OPEC+ output limit amid pressing financial needs, but has repeatedly said it will compensate for overproducing. The failure to meet the limits has been a point of contention with OPEC+ de facto leader Saudi Arabia.
Pipeline Closure Halted About 500,000 Barrels a Day of Iraqi Oil Flows
“We are committed to abide by the OPEC decisions and to preserve the price of oil to balance the interest of the users and the producers,” Al-Sudani said.
Pipeline Problems
Turkey halted the pipeline in March last year after an arbitration court ordered it to pay Iraq $1.5 billion in compensation for transporting oil through the link without Baghdad’s approval. Ankara, which claimed the pipe was shut because it needed repairs after two massive earthquakes in February, said in October that it was ready for operations and it was up to Iraq to resume flows.
However financial and legal issues emerged, such as remunerating companies for costs. International firms have said they also want their past dues — including $1 billion for oil produced between September 2022 and March 2023 — cleared.
With exports shut, the companies have been producing some crude and selling it locally. Iraqi officials have previously said this output caused problems in complying with quotas set by the Organization of Petroleum Exporting Countries.
Iraq has a production limit of 4 million barrels a day, but produced 4.32 million a day last month, according to data compiled by Bloomberg. The country, along with some others in OPEC+, will gradually raise these limits starting in December.
Al-Sudani is keen to increase production in the long term after years of war and internal strife hit Iraq’s industry and oil output. BP Plc in August signed an initial agreement to help boost output from the Kirkuk region. Iraq has also been rehabilitating and upgrading damaged refineries to help cut fuel imports.
“Because of wars and siege over the last four decades, Iraq was late in really using the wealth that we have in terms of gas and oil properly,” the prime minister said. “And now we’re looking at how we can really exploit what we have in terms of new wealth and also to see how can use them effectively.”
Diversifying the Economy
But he said oil’s drop in London to around $72 a barrel — near the lowest levels since 2021 — emphasized the need to diversify the economy. Iraq is OPEC’s biggest oil producer after Saudi Arabia and derives the vast bulk of its revenue from exporting the commodity. It needs prices far above where they are now to balance its budget.
The International Monetary Fund has long said the country needs to develop its private sector and that economic progress is held back by its huge public-sector wage bill, with successive governments doing little to check high pay rises.
Al-Sudani said his administration was looking to invest around 40% of petroleum revenues in Iraq to boost the non-oil sector. He added that a planned trade corridor stretching from Iraq’s southern Basra province to Turkey and then on to Europe was “a dream” for his country. He’s looking to Gulf states to help fund what’s meant to be a $17 billion project.
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