Home MarketsEurope & Middle East Turkey’s run-off election paralyzes key oil exports from northern Iraq

Turkey’s run-off election paralyzes key oil exports from northern Iraq

by SuperiorInvest

A satellite image showing the center of Ceyhan port on August 18, 2015 in Turkey.

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As Ankara examines its relationship with Baghdad, analysts and market sources told CNBC that Turkey’s run-off election is increasing delays in resuming roughly 450,000 barrels per day of Iraqi oil exports.

Oil typically flows through Turkey from both the Iraqi state and the semi-autonomous Kurdistan Regional Government (KRG). More precisely, this Kirkuk oil flows through the Iraq-Turkey pipeline connecting the north of the Persian Gulf country with the Turkish port of Ceyhan in the Mediterranean Sea. But flows have been paralyzed since March 25 by a legal dispute involving federal Iraq, the KRG and Turkey.

The resolution is pending the outcome of a second presidential vote this weekend, but a longer shutdown could reduce Iraq’s oil output.

The KRG used to ship its oil exports across the border until it connected its main oil fields to the Iraq-Turkey pipeline and began shipping oil in 2014. Federal Baghdad has condemned the independent sale of Erbil oil as illegal and has threatened to ban customers from such supplies. from the purchase of larger volumes of Iraqi Basra oil.

After nine years of litigation, the Court of Arbitration of the International Chamber of Commerce in Paris found that Turkey had violated the 1973 version of the law. pipeline transit agreement between Baghdad and Ankara in 2014-2018. According to Reuters, Turkey was ordered to pay about $1.5 billion in compensation to Iraq. The second arbitration action, which relates to the date of 2018, is still pending.

The ICC verdict followed a domestic win for Baghdad after Iraq’s federal court in February 2022 declared the KRG’s oil and gas legislation unconstitutional and voided its contracts with foreign firms. This decision led to the decision of US companies to terminate contracts in Kurdistan and deterred some buyers of KRG oil from further purchases.

Iraqi Oil Minister Hayan Abdul-Ghani said on May 23 that Baghdad had informed Turkey that it was able to restore flows through Ceyhan and was awaiting Ankara’s response.

“Our colleagues in Turkey said that there are some assessment issues that they have to take into account. And that came out of the earthquake,” he said, adding that an Iraqi delegation would be sent to Turkey at an unspecified time to discuss the restart.

Kirkuk crude is exported from the Botas terminal at Ceyhan in southern Turkey, separate from the flows of Azerbaijani crude exported from the nearby Baku-Tblisi-Ceyhan port terminal. Botas resumed loading a day after the devastating February 6 earthquake that killed at least 50,000 people in Turkey and Syria combined, according to the UN. The BTC terminal suffered a longer outage.

Several trade, shipping and oil sources — who could only speak anonymously due to contractual obligations — told CNBC that Ankara was widely expected to resume Kirkuk oil exports from Ceyhan on May 13 — a day before Turkey’s presidential election — at Baghdad’s request. whose inconclusive first round on May 14 stalled the oil recovery.

Presidential powers

The sources stressed that Turkish authorities are reluctant to take responsibility for the reboot as incumbent President Recep Tayyip Erdogan battles primary rival Kemal Kilicdaroglu to extend his roughly two-decade rule.

“The main problem with the resumption of oil production through Ceyhan is the elections that are going on in Turkey. Another obstacle to the resumption of oil production is the ongoing ICC case in Paris against Turkey by Baghdad from 2018 to the present. Ankara is asking Baghdad to drop this case, but Baghdad has yet to do so.” Political analyst and former Kurdistan representative Lawk Ghafuri told CNBC.

“The ruling party in Turkey [Erdogan’s AKP] he wants to settle the election and then deal with the KRG oil with Baghdad.”

Other analysts further emphasized Turkey’s priority to avoid further legal disputes by insisting on a strict and clear agreement on the legality of oil exports between Baghdad and Erbil. The current agreements between the two counterparties are political agreements rather than legislation.

“There are still a lot of technical issues to be worked out between the KRG and Baghdad. Although there has been an initial agreement, the details have not been worked out as to how the oil [is] to export and which side has control over the revenue,” Jerevan Saeed, an Arab Gulf researcher in Washington, told CNBC by email.

Turkey's unorthodox economic policy will be hard to sustain, strategist says

In addition to deciding on marketing distribution, Baghdad and Kurdistan may also renegotiate agreements under which foreign firms advanced amounts to Erbil in exchange for oil volumes, as well as reimbursement contracts for foreign Kurdish oil producers, market sources say.

Saeed noted that Ankara may extend negotiations with Baghdad to cover water resources from the Euphrates River and Turkey’s military presence in Kurdistan and Sinjar.

Bilal Wahab, a Wagner fellow at the Washington Institute for Near East Policy, agreed that controlling Kurdish oil export flows would arm Turkey with leverage to ask Baghdad to drop its fine and second arbitration, as well as redefine the scope of Ankara’s trade relationship. with Iraq.

“This arbitration award forces a decision on Ankara: should they continue to do business with Kurdistan, where it has led to legal problems with federal Iraq, or should they use it as a bird in the hand to gain an opportunity to do business in Turkey. they won’t lose, maybe a transit fee,” he told CNBC by phone, referring to Kurdistan’s payment for transporting oil through the Iraq-Turkey pipeline.

The winner talks about everything

An Erdogan loss in the presidential battle could prolong the oil stalemate, traders warn, with Kilicdaroglu likely to demand independent negotiations with Iraq – a diplomatic item unlikely to feature prominently on the new leader’s agenda.

Third party candidate Sinan Ogan’s confirmation on Monday Erdogan has strengthened Erdogan’s position as Turks head to the polls.

Domestically, Erdogan enjoys a tumultuous relationship with Turkey’s largest ethnic minority, which typically makes up 15-20% of Turkey’s population. While Erdogan has often drawn closer to KRG Prime Minister Masrour Barzani, Wahab signals that Turkey may still prioritize securing benefits from the oil export stalemate.

“I don’t think a victorious Erdogan would have any qualms about using the KRG as leverage to get a lot out of Baghdad: favorable conditions for doing business in Iraq, canceling the fine that Turkey has to pay, or canceling some of Iraq’s water demands [from the Euphrates] and the Turkish military presence in Iraq,” he said.

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